The Dick Smith Group
Report to creditors pursuant to Section 439A of the Corporations Act 2001
13 July 2016 Table of contents
Table of contents ...... 1 Glossary...... 4 Listing of tables ...... 7 Listing of figures ...... 7 1 Executive summary ...... 9 2 Introduction ...... 14 2.1 Appointment of Voluntary Administrators ...... 14 2.2 Appointment of Receivers and Managers ...... 14 2.3 Objective of voluntary administration ...... 15 2.4 First meetings of creditors ...... 15 2.5 Committee of Creditors ...... 15 2.5.1 DS Holdings and DS Electronics ...... 15 2.5.2 DS NZ ...... 15 2.6 Extension of convening period ...... 15 2.7 Second meetings of creditors ...... 16 2.7.1 DS Australia and Mac 1 ...... 16 2.7.2 DS NZ ...... 16 2.8 Purpose of this report ...... 17 2.9 Context of this report ...... 17 2.10 Declaration of Independence, Relevant Relationships and Indemnities ...... 17 3 Background information ...... 19 3.1 Group structure ...... 19 3.1.1 Deed of Cross Guarantee ...... 19 3.2 Ownership and control ...... 20 3.2.1 Early history of the Dick Smith business ...... 21 3.2.2 Acquisition of the Dick Smith business by Anchorage ...... 21 3.2.3 Dick Smith becomes a public company ...... 21 3.3 Business operations ...... 23 3.3.1 Business overview ...... 23 3.3.2 Operating locations ...... 25 3.3.3 Products ...... 25 3.3.4 Employees...... 26 3.4 Shareholders ...... 27 3.5 Officers ...... 29 3.6 Secured lenders and charges ...... 30 3.7 Gift cards ...... 30 4 Financial information ...... 31 4.1 Historical profit and loss ...... 31 4.2 Historical balance sheet ...... 32 4.3 Historical cash flow...... 34 5 Management Accounts ...... 37
1 5.1 Monthly profit and loss ...... 37 5.2 Summary balance sheet ...... 38 5.3 EBITDA and cash flow to 31 December 2015 ...... 39 6 Commentary on events from October 2015 to December 2015 ...... 40 6.1 Introductory remarks...... 40 6.2 October 2015 to December 2015 ...... 40 7 Report as to Affairs and Directors’ reasons for failure ...... 43 7.1 Report as to Affairs ...... 43 7.2 Directors’ opinions as to the reasons for failure ...... 44 7.3 Conclusion ...... 44 8 Administrators’ opinion as to the reasons for failure ...... 45 8.1 Market related factors...... 45 8.2 Declining comparable sales ...... 46 8.3 Expansion strategy ...... 46 8.4 Purchasing decisions and impact on reported profitability ...... 48 8.5 Inventory management ...... 49 8.6 Product mix ...... 50 9 The Receivership ...... 51 9.1 The business at commencement of the Receivership ...... 51 9.2 The retail business sale process ...... 51 9.3 Sale of intellectual property and online business ...... 53 9.4 Managed wind-down process ...... 53 9.5 Conclusions ...... 53 10 Investigations ...... 54 10.1 Context ...... 54 10.2 ASIC ...... 54 10.3 Public examinations ...... 54 10.4 The Senate Inquiry into the Causes and Consequences of the Collapse of Listed Retailers ...... 54 10.5 Administrators investigations ...... 55 10.5.1 Director and officers’ responsibilities...... 55 10.5.2 Accounting standards...... 55 10.5.3 Dividends ...... 55 10.5.4 Insolvent trading ...... 56 10.5.5 Adequacy of books and records ...... 57 11 Voidable transactions ...... 58 11.1.1 Unfair preference payments...... 58 11.1.2 Uncommercial transactions ...... 59 11.1.3 Unfair loans ...... 59 11.1.4 Unreasonable director-related transactions ...... 59 11.1.5 Voidable transaction for creditor defeating purposes ...... 59 11.1.6 Circulating security interests ...... 59 12 Alternative courses of action ...... 60 12.1 Deed of Company Arrangement ...... 60
2 12.2 Administration to end ...... 60 12.3 The company to be wound up ...... 60 13 Outcome for creditors ...... 61 13.1 Return to creditors ...... 61 14 Creditor information on remuneration ...... 63 15 Receipts and payments ...... 64 16 Committee of Inspection ...... 64 17 Second Meetings of Creditors ...... 64 18 Contact ...... 65 19 Appendices ...... 66
Note: Glossary and Table 14: Directors and Secretaries of DSG, updated 15 July 2016
3 Glossary
Report Glossary
Term Expanded
1H First half of the financial year, being 1 July to 31 December
1Q First quarter of the financial year, being 1 July to 30 September
2H Second half of the financial year, being 1 January to 30 June
2Q Second quarter of the financial year, being 1 October to 31 December
3Q Third quarter of the financial year, being 1 January to 31 March
4Q Fourth quarter of the financial year, being 1 April to 30 June
Administrators or Joseph Hayes, Jason Preston, Jamie Harris and Matthew Caddy of McGrathNicol Australian Administrators
Anchorage Anchorage Capital Partners Pty Limited
ARITA Australian Restructuring, Insolvency and Turnaround Association
ASIC Australian Securities and Investment Commission
ASX Australian Securities Exchange
Appointment The date the External Administrators were appointed, being 4 January 2016 for DS Australia and Mac 1, and 5 January 2016 for DS NZ
BNZ Bank of New Zealand
BV Book value
CEO Nick Abboud, the Managing Director and Chief Executive Officer of DS Holdings
CFO Michael Potts, the Finance Director and Chief Financial Officer of DS Holdings
COC Committee of Creditors
COI Committee of Inspection
Deed of Cross Guarantee The Deed of Cross Guarantee dated 7 January 2014 (as amended from time to time) pursuant to ASIC Class Order CO 98/1418
Deloitte Deloitte Corporate Finance Pty Limited
DIRRI Declaration of Independence, Relevant Relationships and Indemnities
DOCA Deed of Company Arrangement
DS Australia DSG, but excluding DS HK and DS NZ
DS Electronics DSG Electronics Pty Limited (formerly known as Dick Smith Electronics Pty Limited) (Receivers and Managers Appointed) (Administrators Appointed) ACN 000 908 716
DS Franchising DSG Franchising Pty Ltd (formerly known as Dick Smith Electronics Franchising Pty Ltd) (Receivers and Managers Appointed) (Administrators Appointed) ACN 054 295 733
DS HK Dick Smith (HK), Hong Kong (not subject to external administration)
DS Holdings DSHE Holdings Limited (formerly known as Dick Smith Holdings Limited) (Receivers and Managers Appointed) (Administrators Appointed) ACN 166 237 841
DS Management DMSG Pty Ltd (formerly known as Dick Smith Management Pty Ltd) (Receivers and Managers Appointed) (Administrators Appointed) ACN 001 585 735
4 Report Glossary
DS NZ DSHNZ Limited (formerly known as DSE (NZ) Limited) (Receivers and Managers Appointed) (Administrators Appointed) NZ Company Number 37602
DS Sub-Holdings DSSH Pty Ltd (formerly known as Dick Smith Sub-Holdings Ltd) (Receivers and Managers Appointed) (Administrators Appointed) ACN 160 162 925
DS Superannuation Dick Smith Electronics Staff Superannuation Fund Pty Ltd (Administrators Appointed) ACN 059 802 470
DS Wholesale DSG Wholesale Pty Ltd (formerly known as Dick Smith (Wholesale) Pty Ltd) (Receivers and Managers Appointed) (Administrators Appointed) ACN 000 445 956
DSE Holdings DSHG Pty Limited (formerly known as DSE Holdings Pty Limited) (Receivers and Managers Appointed) (Administrators Appointed) ACN 001 456 720
DSG or “the Companies” DS Holdings, DS Sub-Holdings, DSE Holdings, DS Wholesale, DS Electronics, InterTAN, DS Franchising, DS Management, DS Superannuation, Mac 1, DS NZ and DS HK
EBITDA Earnings before interest, tax, depreciation and amortisation
ERV Estimated realisable value
First Meeting of Creditors The first meetings of creditors of DS Australia held on 14 January 2016, and of DS NZ held on 15 January 2016
FY12 Financial year ending 30 June 2012
FY13 Financial year ending 30 June 2013
FY14 Financial year ending 30 June 2014
FY15 Financial year ending 30 June 2015
FY16 Financial year ending 30 June 2016
Hilco Hilco Merchant Australia
HSBC HSBC Holdings plc
IM Information Memorandum
InterTAN INTT Pty Ltd (formerly known as Intertan Australia Pty Ltd) (Receivers and Managers Appointed) (Administrators Appointed) ACN 002 511 944
Link Market Services Link Market Services Limited Creditor Hotline: 1300 853 481 Email: [email protected]
Mac 1 A.C.N. 136 849 846 Pty Limited (formerly known as Mac 1 Pty Limited) (Administrators Appointed), ACN 136 849 584
Macquarie Macquarie Bank Limited
Management DSG’s executive management team, led by the CEO
NAB National Australia Bank Limited
NCG National Consulting Group
NZ Administrators Joseph Hayes, Jason Preston, Andrew Grenfell and Kare Johnstone of McGrathNicol
O&A rebates Over and above rebates
Opex Operating expenditure
PMSI Purchase Money Security Interest
5 Report Glossary
PPSR Personal Properties Securities Register the Prospectus The document that outlined the details the IPO of DS Holdings, issued in November 2013
RATA Report as to Affairs, Form 507
Receivers or James Stewart, Jim Sarantinos and Ryan Eagle of Ferrier Hodgson Receivers and Managers
Relation back day The date the External Administrators were appointed, being 4 January 2016 for DS Australia and Mac 1, and 5 January 2016 for DS NZ
Second Meeting of The convened second meeting of creditors of DS Australia and Mac 1, to be held on Creditors 25 July 2016
Secured Creditors or the National Australia Bank (“NAB”) and HSBC Bank (“HSBC”) Banks the Act The Corporations Act 2001 the Current Directors Directors of DS Holdings, including Nicholas Abbud, Robert Ishak, Lorna Raine, Michael Potts, Jamie Tomlinson and Robert Murray the Court Federal Court of Australia the Dick Smith business The electronics retail business operated by DSG and previous owners the Inquiry An inquiry into the Causes and Consequences of the Collapse of Listed Retailers in Australia, referred by the Senate to the Senate Economics References Committee the IPO The initial public offering of the shares of Dick Smith Holdings on the ASX the Macquarie Trade The trade finance facility provided by Macquarie documented through customer deeds Finance Facility dated 6 June 2014, 21 January 2015 and subsequence finance documents the NZ Act Companies Act 1993 the NZ Court the High Court of New Zealand the 439A Report or this Report to creditors prepared by the Administrators, pursuant to Section 439A of the Act Report
Waiver Letter A letter executed by DSG and the Banks on 23 December 2016
Watershed meeting Second meeting of creditors under the NZ Act
Woolworths Woolworths Limited
6 Listing of tables Table 1: External appointments and entities bound by Deed of Cross Guarantee ...... 20 Table 2: The sources and uses of funds of the IPO ...... 22 Table 3: Overview of the IPO ...... 22 Table 4: Overview of Dick Smith bannered stores ...... 23 Table 5: Overview of Move bannered stores ...... 23 Table 6: Overview of Move (Airport) bannered stores ...... 23 Table 7: Overview of Electronics Powered by Dick Smith (David Jones) ...... 24 Table 8: Overview of Mac 1 ...... 24 Table 9: Overview of commercial and online businesses ...... 24 Table 10: Key product categories ...... 26 Table 11: Employees ...... 26 Table 12: Shareholder categories of DS Holdings ...... 27 Table 13: Largest registered shareholders of DS Holdings ...... 28 Table 14: Directors and Secretaries of DSG ...... 29 Table 15: Directors and Secretaries of DS Holdings ...... 29 Table 16: Registered security interests ...... 30 Table 17: Summary profit and loss ...... 31 Table 18: Summary balance sheet ...... 32 Table 19: Summary cash flow ...... 34 Table 20: Summary monthly profit and loss...... 37 Table 21: Summary balance sheet ...... 38 Table 22: Report as to Affairs – DS Electronics ...... 43 Table 23: Australia & New Zealand consumer electronics industry in FY15 ...... 45 Table 24: Comparable sales for Dick Smith bannered stores ...... 46 Table 25: Growth in store network (net of closures) ...... 46 Table 26: Key dates in the sale process for the Dick Smith business ...... 52 Table 27: Key dates in the sale process for DSG's intellectual property and online business ...... 53 Table 28: Dividends paid by DS Holdings ...... 55 Table 29: Funds available for distribution ...... 61
Listing of figures Figure 1: DSG corporate structure ...... 19 Figure 2: Timeline of ownership and control ...... 20 Figure 3: Dick Smith’s Australian and New Zealand store footprint ...... 25 Figure 4: DS Holdings share price and trading volumes ...... 27 Figure 5: DSG gift card balances December 2014 to December 2015 ...... 30 Figure 6: FY13 to FY15 stock movements ...... 33 Figure 7: Cash movements from FY13 to FY15 ...... 35 Figure 8: EBITDA operating cash flow, free cash flow and inventory movements for FY15 ...... 36 Figure 9: EBITDA to cash flow bridge 1HFY16 (July to December 2015) ...... 39 Figure 10: Comparison of 2014 and 2015 revenue contribution of existing and new stores ...... 47 Figure 11: Quantum of rebates in FY15 ...... 48
7 Figure 12: Inventory balances July 2013 to November 2015 ...... 49 Figure 13: Comparison of inventory levels between October and December 2015 ...... 50
8 1 Executive summary
This section provides answers to frequently asked questions relating to the Administration of DSG that may be of assistance to all readers of this Report. These questions and answers are provided in summary form only. Full details are available throughout this Report.
Question
What is DSG? DS Holdings is an Australian Public Company.
DS Holdings is the ultimate holding company of the Dick Smith Group (“DSG”) which consists of 11 wholly owned subsidiaries.
DSG operated consumer electronics retail stores and an online consumer electronics retail business throughout Australia and New Zealand operating from in excess of 390 locations with in excess of 3,000 employees.
The majority of the network was bannered as ‘Dick Smith’ stores but also incorporated ‘Move’ bannered stores, ‘Electronics Powered by Dick Smith’ outlets in David Jones stores, and commercial and on-line businesses.
What is the purpose of The purpose of this report is to provide creditors with details this report? about the business, property, affairs and financial circumstances of DSG in preparation for the forthcoming second meetings of creditors of the Australian entities.
This report also informs creditors about the investigations undertaken by the Administrators and the Administrators’ opinion about each of the options available to creditors at the second creditors’ meeting, together with their opinion as to the course of action the Administrators recommend is in creditors’ best interests.
What is the status of On 4 January 2016, DS Holdings and its Australian subsidiaries DSG? were placed into Voluntary Administration by its Directors, and Partners of McGrathNicol were appointed Administrators (refer to section 2.1 for full details).
Following DSG being placed into Voluntary Administration, the Banks appointed Receivers and Managers to recover the assets subject to their security. Partners of Ferrier Hodgson were appointed Receivers and Managers.
Who controls DSG now? The Receivers have responsibility for the day-to-day management of the Dick Smith business, with the security held by the Banks enabling them to assume control of most of the entities in DSG. The Receivers also have the current conduct of Public Examinations of various individuals concerning the failure of DSG.
The Administrators have undertaken investigations into the affairs of DSG and the reasons for its failure.
9 Question
What is the ownership DSG was owned by Woolworths from 1982. In late 2012 it structure of DSG? was acquired by Anchorage. In late 2013 DSG was listed on the ASX. DSG remains publicly owned but subject to Administration and Receivership. Its shares are likely now of no value.
How did the Dick Smith DSG reported profitability in FY14 and FY15 of $19.4 million business trade? and $37.4 million respectively. Its net assets at FY14 and FY15 year-end were $166.9 million and $169.1 million respectively. Dividends were paid to shareholders during FY15 and FY16.
Why did DSG encounter DSG grew its store network during FY14 and FY15. This financial difficulty? required a significant investment in inventory, capital expenditure and resultant accumulation of creditors and borrowings. Although DSG reported profits, its growth required considerable financial commitment, during a period where DSG was losing market share. The competitive electronics environment resulted in tightening credit terms, the need for major inventory impairment, and significant cash pressure in late FY16. Increased borrowings and new finance facilities were required and ultimately DSG could not operate within the terms of those facilities.
DSG’s management accounts to December 2015 indicate considerable losses for the six months to 31 December 2015 of $116.7 million. Those losses are attributable to poorer than expected sales and margins, inventory write downs, lease provisions and other asset impairments.
Why do the Directors of The Directors of DSG have provided us with the following DSG believe it became reasons for its failure: insolvent? . Cash pressures were evident from late November 2015;
. DSG was issued with a breach notice by its Banking Syndicate on 31 December 2015 and was given 10 days to remedy that breach;
. DSG’s proposals to remedy the breach were not deemed acceptable to the Syndicate; and
. Accordingly, the Directors had no choice but to appoint voluntary administrators.
10 Question
Why do the The Administrators consider DSG failed because it was unable Administrators believe to make scheduled payments without breaching the terms of DSG became insolvent? its Bank facilities.
During late 2015, DSG required additional funding from its Banks as well as a facility from Macquarie Bank. Following the impairment of DSG inventory in November 2015, temporary extensions were sought to the Bank facilities in December 2015 which were granted subject to certain conditions. In late December 2015, DSG was notified it had breached those conditions by making certain payments to Macquarie Bank. Whilst Management considered the payments were not a breach of the conditions, DSG was unable to make further scheduled payments to Macquarie which were due and payable in early January 2016. After considering their financial forecast, the Board appointed the Administrators.
What were the underlying The Administrators consider the reasons DSG failed include: causes of DSG’s failure? . The consumer electronics market is highly competitive with rapid changes in consumer demand patterns;
. DSG had a store network much larger than its competitors, and so a higher cost base, with considerable exposure to and reliance on the fast moving office/computer products market;
. DSG was losing market share by experiencing declining comparable sales. Revenue growth was based on store growth and commercial sales at low margins;
. DSG’s expansion plan required considerable financial commitment, utilised all cash resources, required considerable supplier commitment and required Bank borrowings;
. Inventory decisions made in this environment were not consistent with consumer demand, and DSG was ultimately left with a considerable level of obsolete and inactive stock, requiring a major write down;
. Clearance sales did not generate sufficient sales or margin to alleviate the cash pressure;
. Inability to obtain favourable credit terms impacted on stock levels, product mix and store presentation; and
. Cash flow pressures lead to banking covenants being breached that could not be remedied.
11 Question
What was the outcome of The Receivers marketed the Dick Smith business for sale in the sale process? early 2016. Despite considerable initial interest, a buyer could not be found for the retail business as a going concern. The Receivers attribute this to:
. Considerable losses in 1HFY16, from which potential buyers considered recovery would be very difficult;
. Difficult trading conditions occasioned by major suppliers not providing new trading terms to the Receivers while existing debts were outstanding;
. Resultant inability to rectify product mix and fully stock stores with appropriate product.
Ongoing trading losses would ultimately put at risk employee entitlements, so absent a buyer for the network, the Receivers embarked on a managed wind down to realise inventory, pay employee entitlements and reduce secured debt.
Subsequently, the Receivers sold the intellectual property and on line business to Kogan.com.
Will employees be paid The majority of outstanding employee entitlements have been their outstanding paid by the Receivers. An amount of $2.1 million, relating to entitlements? historical underpayment issues remains outstanding, however will be paid by the Receivers this calendar year.
Will the Banks be repaid The Banks will be repaid a proportion of what they are owed their debt? but are likely to suffer a significant shortfall. The ultimate outcome for the Banks is largely dependent on further asset recoveries by the Receivers and the settlement of security interests with trade creditors.
Apart from employees, There is no expectation that unsecured creditors will receive a will unsecured creditors return unless very significant recoveries are made in the be paid a dividend? Liquidation process.
Will gift card holders Gift card holders are classed as unsecured creditors under receive a refund? Australian and New Zealand Corporations Law. There is currently no expectation that unsecured creditors will be paid a dividend unless very significant recoveries are made in the Liquidation process.
Will shareholders be paid? There is currently no expectation of a return to shareholders and we have advised shareholders accordingly.
12 Question
What is the total financial The total shortfall to creditors of DSG will be in excess of shortfall to creditors of $260 million. DSG? The substantial difference between the shortfall of $260 million and the book value of DSG’s assets at 30 June 2015 of $170 million, requires fuller investigation and reconciliation. However, it is largely attributable to significant trading losses in 1HFY16, losses on the wind down of inventory during the receivership, and the very significant supplier and Bank commitments.
What claims will a Whilst the Administrators have considered the underlying liquidator investigate? causes of DSG’s failure, our investigations into claims arising from those matters are at an early stage.
We have undertaken preliminary enquiries which will continue after the appointment of liquidators. In particular, we note there could be voidable transactions the liquidators will pursue.
What is the purpose of The purpose of the second meetings is for creditors to resolve the second meeting of the future of DSG. In this regard, the options available creditors? include whether DSG should be returned to their Directors; or enter into a Deed of Company Arrangement; or enter into liquidation.
What do Administrators As DSG is insolvent and no DOCA proposals have been put recommend creditors forward, the Administrators are unable to recommend that should do? DSG be returned to the Directors or that DSG enter into a DOCA. Accordingly, the Administrators’ recommendation is that creditors vote in favour of DSG being placed into liquidation.
Where I can get more If you require any further information, please review the information? McGrathNicol website and contact Link Market Services on 1300 853 481 or by email [email protected].
13 2 Introduction
This section provides information on the entities to which the Voluntary Administrators have been appointed, the objectives of the Administration, purpose of the report, meetings of creditors and our relevant relationships.
2.1 Appointment of Voluntary Administrators
Joseph Hayes, Jason Preston, Jamie Harris and Matthew Caddy (“the Administrators or the Australian Administrators”) were appointed Joint and Several Administrators of the following entities on 4 January 2016 (“Appointment”) by resolution of the Companies’ Directors, pursuant to Section 436A of the Corporations Act 2001 (“the Act”):
. DSHE Holdings Limited (formerly known as Dick Smith Holdings Limited) ACN 166 237 841 (“DS Holdings”);
. DSSH Pty Ltd (formerly known as Dick Smith Sub-Holdings Pty Limited) ACN 160 162 925 (“DS Sub-Holdings”);
. DSHG Pty Limited (formerly known as DSE Holdings Pty Limited) ACN 001 456 720 (“DSE Holdings”);
. DSG Wholesale Pty Ltd (formerly known as Dick Smith (Wholesale) Pty Ltd) ACN 000 445 956 (“DS Wholesale”);
. DSG Electronics Pty Limited (formerly known as Dick Smith Electronics Pty Limited), ACN 000 908 716 (“DS Electronics”);
. INTT Pty Ltd (formerly known as InterTAN Australia Pty Ltd), ACN 002 511 944 (“InterTAN”);
. DSG Franchising Pty Ltd (formerly known as Dick Smith Electronics Franchising Pty Ltd), ACN 054 295 733 (“DS Franchising”);
. DMSG Pty Ltd (formerly known as Dick Smith Management Pty Ltd), ACN 001 585 735 (“DS Management”); and
. Dick Smith Electronics Staff Superannuation Fund Pty Limited, ACN 059 802 470 (“DS Superannuation”).
(“collectively DS Australia”)
The Administrators were also appointed over A.C.N. 136 849 584 Pty Limited (formerly known as Mac 1 Pty Limited), ACN 136 849 584 (“Mac 1”), a subsidiary of DS Electronics. A separate report pursuant to Section 439A of the Act has been issued in relation to Mac 1.
Andrew Grenfell, Joseph Hayes, Jason Preston and Kare Johnstone (“the NZ Administrators”) were appointed Joint and Several Voluntary Administrators of DSG’s New Zealand Entity, DSHNZ Limited (formerly known as DSE (NZ) Limited), NZ company number 37602 (“DS NZ”) on 5 January 2016.
Dick Smith (HK) (“DS HK”), a subsidiary of DSE Holdings (and the only other entity within DSG), is not subject to external administration.
In this report a reference to “DSG” will refer to Dick Smith Australia, DS NZ and DS HK and the retail business operated by this group of entities. 2.2 Appointment of Receivers and Managers
Following the appointment of the Administrators on 4 January 2016, National Australia Bank (“NAB”) and HSBC Bank (“HSBC”) (“the Secured Creditors” or “the Banks”) appointed James Stewart, Jim Sarantinos and Ryan Eagle of Ferrier Hodgson as Receivers and Managers (“the Receivers” or “the Receivers and Managers”) over DS Australia (excluding DS Superannuation and Mac 1) and DS NZ.
The Receivers represent predominantly the interests of the Secured Creditors and their primary role is to collect and sell enough charged assets to repay the debt owed to the Secured Creditors. The Receivers have, under the terms of their appointment, the power to manage the trading affairs of the DSG entities they were appointed over.
The Receivers have been and remain responsible for the management and sale of the business and assets of DSG.
14 2.3 Objective of voluntary administration
In a voluntary administration, Administrators are empowered by the Act to assume control of an insolvent company, superseding the powers of the Directors and Officers, to manage the company’s affairs and deal with its assets in the interests of its creditors.
The intention of a voluntary administration is to maximise the prospects of a company continuing in existence or, if that is not possible, to achieve better returns to creditors than would be achieved by its immediate liquidation. During a voluntary administration there is a moratorium over most pre-administration creditor claims.
Administrators are also required to investigate the company’s affairs and report to creditors on the Administrator’s opinion as to which outcome of the voluntary administration process is in the creditors’ best interest, informing the creditors prior to their voting at the second meeting (refer section 2.7.1). 2.4 First meetings of creditors
Section 436E of the Act requires the Administrators to convene the first meeting of creditors within eight business days of being appointed.
The first meetings of creditors of DS Australia and Mac 1 were held on 14 January 2016 (with no nominations to appoint an alternative Administrator) and the first meeting of creditors of DS NZ was held on 15 January 2016 (with one unsuccessful nomination to appoint an alternative Administrator), (“the First Meeting of Creditors”).
Creditors resolved at the First Meeting of Creditors to appoint a Committee of Creditors (“COC”) to DS Holdings, DS Electronics and DS NZ.
Details of the members of each of the COC’s are available in the minutes of the First Meeting of Creditors. 2.5 Committee of Creditors
2.5.1 DS Holdings and DS Electronics
The first meeting of the COC for DS Holdings and DS Electronics was held on 21 January 2016. The purpose of this meeting was for the COC to meet the Administrators and the other members of the COC and be provided with an update on (and further explanation of the reasons for), the application to extend the convening period for the second meeting of creditors (refer section 2.6).
A second meeting of the DS Holdings and DS Electronics COCs was held on 1 July 2016. The purpose of this meeting was to provide the COC with a briefing on the findings of the Administrators’ investigations to date, and to seek approval for the Administrators’ remuneration.
Further information about the Administrators’ remuneration, which was approved by the COC, is included at section 14 and Appendix F.
2.5.2 DS NZ
The first meeting of the COC for DS NZ was held on 22 January 2016. At that meeting the COC was advised of the NZ Administrators’ intention to apply for a six month extension of the convening period for the second meeting of creditors, as well as the key reasons why the extension was being sought.
Subsequent to the Receivers’ announcement that a going concern sale of DSG could not be achieved, the NZ Administrators called a second COC meeting on 26 May 2016.
At this meeting the COC was advised of the implications on creditors’ claims of the Deed of Cross Guarantee (refer section 3.1.1), together with the NZ Administrators’ intention to apply to the High Court of New Zealand (“the NZ Court”) to seek orders for DS NZ to be placed into liquidation (refer section 2.6). 2.6 Extension of convening period
Section 439A of the Act requires the Administrators to convene a second meeting of creditors within the convening period, being 20 business days (or 25 under certain circumstances) of being appointed.
15 For DSG, the second meetings of creditors were due to be held on or before 2 February 2016. However, at the First Meeting of Creditors we notified the creditors present of our intention to apply to the Federal Court of Australia (“the Court”) for an extension of the convening period for up to six months.
The Administrators filed an application under section 439A and 447A of the Act for orders granting an extension of time for the convening period for the second meetings of creditors for DS Australia and Mac 1. The extension of the convening periods were sought in order to provide:
. A stable environment for the Receivers to undertake a going concern sale campaign;
. Time to properly ascertain whether the sale of Mac 1 should be run separately or concurrently with the Receivers’ sale;
. The Receivers sufficient time to complete a sale process for a large network of retail stores, including post-completion matters; and
. Scope to investigate the affairs of DSG and report to creditors on potential future recoveries, and make a recommendation regarding the future of DSG.
The Receivers were supportive of the application.
On 28 January 2016 the Court granted the requested extension of the convening periods to 2 August 2016.
A similar application was also made in New Zealand and orders were made by the NZ Court granting an extension of the convening period for the second meeting of creditors, referred to in the Companies Act 1993 (“the NZ Act”) as the Watershed Meeting, up to and including 2 August 2016. 2.7 Second meetings of creditors
2.7.1 DS Australia and Mac 1
The second meetings of creditors for DS Australia and Mac 1 have been convened to be held at the Wesley Conference Centre on Monday, 25 July 2016 at 11:00am (“the Second Meeting of Creditors”). A copy of the notice of meeting is included at Appendix D.
The purpose of the Second Meeting of Creditors is for creditors to resolve the future of each of the entities under voluntary administration. The options available (under section 439C of the Act) include whether each entity should:
a. Be returned to their Directors;
b. Enter into a Deed of Company Arrangement (“DOCA”); or
c. Enter into liquidation.
In respect of these options, there is currently no alternative but for DS Australia and Mac 1 to be placed into liquidation.
2.7.2 DS NZ
The NZ Administrators consider that it would be in the creditors’ best interest for the voluntary administration to end and DS NZ to be placed into liquidation by way of an application to the NZ Court, rather than incurring the significant costs involved in calling and holding the Watershed Meeting.
The NZ Administrators have lodged an application to the NZ Court for DS NZ to be placed into liquidation (a copy is available on the McGrathNicol website). The application will be heard at 10:45am on Friday 15 July 2016.
The NZ Administrators advise that:
. Given the circumstances noted above, the most likely outcome of a Watershed Meeting would be that DS NZ is placed into liquidation;
. The NZ Administrators’ report under Section 239U of the NZ Act as to DS NZ’s business property, affairs and financial circumstances has formed part of this wider, detailed report;
. This report has been made available to all creditors, including creditors of DS NZ, and financial information specific to DS NZ has been included for the benefit of DS NZ creditors at Appendix C;
16 . The Australian Administrators will hold the Second Meeting of Creditors, at which DS NZ’s creditors, by virtue of being contingent creditors in the Administration of DS Holdings due to a Deed of Cross Guarantee (refer section 3.1.1), will have the ability to:
attend the meeting either in person or via a webinar; and
vote as contingent creditors in the DS Australia administrations. 2.8 Purpose of this report
Section 439A(4) requires a voluntary administrator to provide a report to all creditors ahead of the Second Meeting of Creditors, containing:
. details about the business, property, affairs and financial circumstances of the entities under administration;
. the Administrators’ opinion and recommendation on each of the options available to creditors; and
. if a DOCA is proposed, the details of the DOCA.
(“the 439A Report” or “this Report”)
This Report has been prepared in respect of DSG, with the exception of Mac 1, for which a separate 439A Report has been prepared. This Report also informs creditors about the investigations undertaken by the Administrators to date. 2.9 Context of this report
In reviewing this Report, creditors should note the following:
. This Report and the statements herein are based upon our preliminary investigations to date. Any additional material issues which are identified subsequent to this Report may be the subject of a further written Report and/ or tabled at the forthcoming Second Meeting of Creditors;
. The investigations of DSG’s affairs have been prepared from available books and records, as well as information provided by DSG’s officers, key personnel where applicable, and from our own enquiries. Whilst we have no reason to doubt any information contained in this Report, we reserve the right to alter our conclusions should the underlying data prove to be inaccurate or materially change from the date of this Report;
. The statements and opinions given in this Report are given in good faith and in the belief that such statements and opinions are not false or misleading. Except where otherwise stated, we reserve the right to alter any conclusions reached on the basis of any changed or additional information which may be provided to us between the date of this Report and the date of the Second Meeting of Creditors; and
. In considering the options available to creditors and formulating our recommendation, the Administrators have necessarily made forecasts of asset realisations and total creditors. These forecasts and estimates may change as asset realisations progress and claims are received from creditors. Whilst the forecasts and estimates are the result of the Administrators’ best assessment in the circumstances, creditors should note that the outcome for creditors may differ from the information provided in this Report. 2.10 Declaration of Independence, Relevant Relationships and Indemnities
In accordance with Section 436DA of the Act and the Australian Restructuring, Insolvency & Turnaround Association (“ARITA”) Code of Professional Practice, a Declaration of Independence, Relevant Relationships and Indemnities (“DIRRI”) was enclosed with the Administrators’ first communication to creditors (and tabled at the First Meeting of Creditors).
The DIRRI disclosed information regarding the Administrators’ independence, prior personal or professional relationships with DSG or related parties and any indemnities received in relation to the appointments (in the case of DSG there were none). This assessment identified no real or potential risks to the Administrators’ independence.
Since the date of the Administrators’ appointment, the Administrators’ have continued to assess whether any potential conflict of interest issues have developed. The Administrators remain of the view that there are no real or potential risks to their professional independence.
Under the Act and the ARITA Code of Professional Practice, if circumstances change or new information is identified, the Administrators are required to update the DIRRI and provide a copy to the creditors/Committee of Creditors with their
17 next communication, as well as table a copy of the replacement DIRRI at the next meeting of the creditors/Committee of Creditors.
An updated DIRRI was provided to all creditors via the McGrathNicol website on 13 May 2016, and is also included at Appendix E. The DIRRI has been updated to reflect the Administrators having entered into a Funding Agreement with the Receivers.
The Receivers requested the Administrators take various steps in the course of the Voluntary Administration of DSG which would be of benefit to the Receivers and their appointers, NAB and HSBC. The Receivers agreed to contribute funds towards the professional time costs and disbursements incurred in:
. Maintaining the creditor and shareholder hotline and registry;
. Public relations services to manage media and other enquiries;
. Extending the convening period for the Second Meeting of Creditors for DS Australia;
. Preserving insurance policies and making relevant notifications;
. Issues relating to the Deed of Gross Guarantee; and
. Other administrative issues.
At the date of entering into the Funding Agreement, there were no funds available to the Administrators to provide for the additional professional time costs and disbursements incurred or to be incurred.
The Administrators remain of the view that there are no real or potential risks to their professional independence, including from entering into the Funding Agreement as:
. The Administrators are not required under the Funding Agreement to take any steps and/or undertake any work at the request of the Receivers, NAB or HSBC for the benefit exclusively of the Receivers, NAB or HSBC, that would be detrimental to the other creditors of DSG; and
. In respect of professional fees funded by the Receivers, the Administrators will seek approval from creditors in accordance with the Act before drawing any amounts.
18 3 Background information
This section provides creditors with information on the history of DSG and the circumstances leading up to the appointment of Administrators, details regarding the entities in DSG, its shareholders, the Directors, other statutory information and historical financial information.
3.1 Group structure
Provided below is a summary of the corporate structure of DSG:
Figure 1: DSG corporate structure
DS Holdings (ASX listed)
Listed entity
Holding Company DS Sub-Holdings
Trading entity
Employing and trading entity for the business, Dormant entity receiving substantially all of the unsecured creditor claims DSE Holdings
DS NZ DS HK DS Wholesale DS Electronics InterTAN DS Franchising DS Management
New Zealand Not subject to retail stores external administration Education, DS Superannuation Mac 1 government and corporate retailer
Key points:
. DS Holdings is the ultimate holding company of DSG, with all eleven subsidiaries wholly owned. DS Holdings is listed on the Australian Stock Exchange (“the ASX”) and is responsible for preparing the consolidated annual financial statements and reporting to shareholders;
. DS Sub-Holdings was formed as an acquisition vehicle by Anchorage to acquire the Dick Smith business from Woolworths (refer section 3.2.1), but now only serves as an intermediate private holding company;
. DS Electronics is the principal trading entity and the contracting party for employees and suppliers; and
. The remaining entities (DS Wholesale, InterTAN, DS Franchising, DS Management and DS Superannuation) are essentially dormant entities that no longer perform meaningful functions for DSG.
3.1.1 Deed of Cross Guarantee
DSG (with the exception of DS HK) entered into a Deed of Cross Guarantee on 7 January 2014 (as amended from time to time) pursuant to ASIC Class Order CO 98/1418 (“the Deed of Cross Guarantee”). This allowed DS Holdings to:
. Prepare consolidated annual financial statements, incorporating all entities (including special purpose entities) controlled by DS Holdings and subsidiaries; and
19 . Ensure that if an entity who is a party to the Deed of Cross Guarantee is wound up, the other entities who are also parties to the Deed of Cross Guarantee, guarantee the repayment of the amounts owed to the creditors of that entity.
The Deed of Cross Guarantee allows creditors who are owed amounts by one entity within DSG to participate and vote as contingent creditors of the other entities within DSG, which are parties to the Deed of Cross Guarantee.
Provided below is summary of the external appointments along with a listing of the entities that are bound by the Deed of Cross Guarantee:
Table 1: External appointments and entities bound by Deed of Cross Guarantee
DSG
Receivers Administrators Bound by Deed of Entity Appointed Appointed Cross Guarantee DS Holdings DS Sub-Holdings DSE Holdings DS Electronics DS Wholesale InterTAN DS Franchising DS Management DS Superannuation × DSE NZ DS HK × × × Mac 1 ×
Source: ASIC The Second Meeting of Creditors for DS Australia and Mac 1 will be held concurrently. Creditors will be permitted to prove as creditors for voting purposes in the entity in which they are a creditor, and as contingent creditors in all other entities. 3.2 Ownership and control
Provided below is a summary of key ownership and control milestones:
Figure 2: Timeline of ownership and control
1968 1981-1983 November 2012 November 2013 January 2016 Dick Smith Dick Smith Dick Smith Shares in Dick Administrators business business business Smith business and Receivers commenced by acquired by acquired by offered via IPO Appointed Richard “Dick” Woolworths in Anchorage Smith AO two stages
Dick Smith Woolworths Anchorage DSH a public controlled for controlled for controlled for company for 13 years 31 years 1 year 2 years
20 3.2.1 Early history of the Dick Smith business
The business was commenced in 1968 by Richard “Dick” Smith AO. The business was originally founded as “Dick Smith Car Radios”, a radio repair business in Neutral Bay NSW, which later expanded to other locations. The business broadened its offering over time and later became an electronics retailer, growing significantly (“the Dick Smith business”).
During the period 1981 to 1983, through two acquisition stages, Woolworths Limited (“Woolworths”) acquired 100% ownership of the Dick Smith business. Woolworths is a listed retailer, primarily focused on supermarkets and the retail of liquor. Woolworths continued to operate the business for 31 years as a subsidiary.
In January 2012 Woolworths announced that it had undertaken a strategic review, which resulted in a plan to close 100 of its Dick Smith stores and sell the remaining business.
3.2.2 Acquisition of the Dick Smith business by Anchorage
During 2012 Woolworths undertook a sale campaign and ultimately sold the business to Anchorage Capital Partners Pty Limited (“Anchorage”).
On 26 November 2012, DS Sub-Holdings acquired 100% ownership of DSE Holdings and subsidiaries from Woolworths. At the time of that transaction, DS Sub-Holdings was 98% owned by Anchorage and 2% by LMA Investments Pty Limited (an entity controlled by Nick Abboud, the Managing Director and CEO of DS Holdings (“the CEO”) as at Appointment).
Anchorage purchased the Dick Smith business for $94 million in a number of staged payments:
. $20 million cash payment on acquisition (26 November 2012);
. $50 million cash payment in June 2013; and
. $24 million payment paid in instalments over the course FY14.
A $21 million ‘working capital adjustment’ was also paid to Woolworths, bringing the total amount paid to Woolworths to $115 million.
Anchorage established a new executive management team lead by the CEO (“Management”). During its period of control Anchorage developed a new strategy for the Dick Smith business involving growth in the store network, developing an omni-channel offering (enabling customers to shop in-store, online, via the telephone and from mobile devices), enhancing the mobility product offering and increasing Dick Smith private label (products branded as “Dick Smith”).
Anchorage controlled the business for a period of just over one year.
3.2.3 Dick Smith becomes a public company
On 25 October 2013 DS Holdings was incorporated as an Australian Public Company with the intention of raising capital through a public offering of its shares (“the IPO”). The purpose of the IPO was to fund the acquisition of the shares of DS Sub-Holdings from Anchorage and to allow Anchorage to realise part of its investment.
A prospectus for the IPO (the document that outlined the details of the investment opportunity being offered), was prepared and then issued in November 2013 (“the Prospectus”), and fully paid ordinary shares were offered for sale by DS Holdings to the public. The Prospectus is a comprehensive document, which incorporates significant information on:
. Details regarding the investment offered to shareholders, including the price;
. Historical and forecast financial information on both a statutory and pro forma basis;
. An overview of the potential risks associated with Dick Smith’s business and the industry in which it operates; and
. The risks associated with an investment in the shares.
The professional advisers involved in the IPO included:
. Goldman Sachs and Macquarie Capital as joint lead managers;
. Minter Ellison and Minter Ellison Rudd Watts as legal advisers; and
. Deloitte Corporate Finance Pty Limited (“Deloitte”), as Investigating Accountant who prepared the Investigating Accountant’s Report and performed work in relation to due diligence enquiries.
21 The Investigating Accountant’s Report prepared by Deloitte concluded that nothing had come to Deloitte’s attention that suggested the financial information contained in the Prospectus was not presented fairly in all material aspects or that the financial forecast was unreasonable.
The Prospectus was provided to the Australian Securities and Investment Commission (“ASIC”) who did not identify any material disclosure concerns to cause it to prevent the Prospectus from being released.
The IPO was successful and significantly oversubscribed. On 4 December 2013, following settlement of the IPO, DS Holdings acquired DS Sub-Holdings and became the ultimate holding company of DSG and the Dick Smith business.
The IPO raised $345 million and Anchorage sold the majority of its shareholding in DS Sub-Holdings to the shareholders of the newly formed and publically listed DS Holdings. Anchorage ceased to control DSG from the date of the IPO.
Provided below is a summary of the IPO and how the funds raised were applied:
Table 2: The sources and uses of funds of the IPO
The sources and uses of funds of the IPO
Sources of funds $m % Uses of funds $m % Gross proceeds of the IPO 344.5 82.4% Payment to Achorage 358.1 85.6% Cash at bank 46.5 11.1% Employee awards 1.4 0.3% New Debt 27.2 6.5% Cost of the IPO 21.0 5.0% Retained cash at bank 13.0 3.1% Deferred payment to Woolworths 24.0 5.7% Establishment costs of new debt 0.7 0.2% Total sources of funds 418.2 100% Total uses of funds 418.2 100%
Source: the Prospectus Details of the IPO are provided below:
Table 3: Overview of the IPO
IPO Offer
Offer statistics Offer price $2.20 per share Total number of shares to be issued 156.6 million Number of shares held by Anchorage 47.3 million Total number of shares on issue at completion 236.5 million Market capitalisation $520.3 million Enterprise value $533.8 million Enterprise value / pro forma forecast FY14 EBITDA (times) 7.4x Indicative Price Range / pro forma forecast FY14 NPAT per share (times) 13.0x Indicative annual dividend yield 4.6% to 5.4%
Source: IPO Prospectus Anchorage initially retained a 20% shareholding in the listed entity DS Holdings. Anchorage sold this holding in September 2014, at which time the shares were trading above the IPO price.
22 3.3 Business operations
DSG’s principal activity was operating consumer electronics retail stores throughout Australia and New Zealand, as well as an online store. Dick Smith operated four physical store formats, allowing it to target different consumer segments.
3.3.1 Business overview
DSG’s core business was the ‘Dick Smith’ bannered retail stores, which made up nearly 90% of the store network by store number and generated nearly 80% of DSG’s revenue.
Table 4: Overview of Dick Smith bannered stores
Dick Smith
Logo Description No. Stores Dick Smith bannered stores offered a wide selection of leading consumer 289 locations in electronics brands. The product range focused on the mobility and office Australia and 62 categories and related accessories, with a broad range in the entertainment locations in New category. It covered low, medium and premium price tiers, with a broad Zealand demographic appeal. The average store size was approximately 500 square metres.
Source: Management In October 2013 (one month before the IPO), DSG launched its multi-banner strategy and took over the operation of 30 ‘David Jones Electronics Powered by Dick Smith’ stores, and opened the first ‘Move’ concept store.
Provided below is a brief description of each of DSG’s non-core business formats:
Table 5: Overview of Move bannered stores
Move
Logo Description No. Stores The Move concept was designed to capitalise on the trend towards mobility. 12 locations in The product range focused on products such as mobile phone handsets, Australia tablets, headphones, speakers and related accessories (including fashionable accessories). The stores offered exclusive brands not offered in Dick Smith bannered stores. The average store size was approximately 150 to 200 square metres.
Source: Management Table 6: Overview of Move (Airport) bannered stores
Move (Airport)
Logo Description No. Stores In February 2015, ‘Move by Dick Smith’ commenced operating at four Sydney 4 locations in International Airport duty-free locations. The key product categories included Australian airports mobility, office, entertainment and accessories, with accessories being the biggest selling items. The average store size was approximately 150 to 200 square metres.
Source: Management
23 Table 7: Overview of Electronics Powered by Dick Smith (David Jones)
Electronics Powered by Dick Smith (David Jones)
Logo Description No. Stores DSG operated the consumer electronics division of David Jones under the Operated under a brand ‘Electronics Powered by Dick Smith’. The product range at David Jones concession model was primarily mid to premium price aspirational consumer electronics within 27 David products, with a focus on televisions, high-end audio, computers and mobility. Jones stores in The average store size was approximately 300 square metres. Australia
Source: Management Table 8: Overview of Mac 1
Mac 1
Logo Description No. Stores Mac 1 is an Apple Reseller and authorised service provider, providing 3 stand alone integrated supply and service offerings across the education, business and locations, plus 10 government sectors, as well as retail customers. Mac 1 was purchased by DS service desks Electronics in September 2014 . within Dick Smith bannered stores Source: Management Table 9: Overview of commercial and online businesses
Commercial and online businesses
Brand Description No. Stores Commercial Commercial division was aimed at corporate customers purchasing electronics n/a in bulk quantities.
Online Online platform consisting of eight websites, mobile sites, mobile apps and in- n/a store online portals
Source: Management Collectively Move, Move (Airport), Electronics Powered by Dick Smith (David Jones), Mac 1 and the commercial and online business are referred to as DSG’s Non-Core Business. Whilst the Non-Core Business was not substantial in terms of store numbers or revenue contribution, the successful and profitable implementation and growth of the Non-Core Business was a critical part of Management’s growth strategy for DSG.
24 3.3.2 Operating locations
On Appointment, DSG operated from 394 store leasehold locations as summarised below:
Figure 3: Dick Smith’s Australian and New Zealand store footprint
Dick Smith – 351 sites
David Jones – 27 sites
Move – 12 sites
Move (airport) – 4 sites Northern 3 Territory Queensland
66 5 3 The Dick Smith Group operated from 394 store leasehold locations across Australia and New Zealand
NSW and ACT New Zealand
Western Australia 62 92 12 3 4
36 1 1
South Australia Victoria
21 3 1 64 6 4
Tasmania
7
Source: Management Note: Excludes Mac 1 as most sites were within Dick Smith bannered stores
The head office was situated in Chullora, Western Sydney. This leasehold facility housed approximately 250 employees, the Australian distribution centre and DSG’s showroom. All group corporate activities were undertaken from head office including finance, human resources, purchasing, marketing, property and IT.
DSG had a procurement and quality assurance team based in both Hong Kong and Sydney which was responsible for establishing and maintaining manufacturing partnerships and sourcing products.
DS NZ operated 62 Dick Smith branded stores located throughout New Zealand and a distribution centre located in Wiri, Auckland. DS NZ’s back office and support functions were performed by DS Electronics out of its Western Sydney head office, including all treasury and finance functions.
3.3.3 Products
As previously mentioned (refer section 3.3.1), DSG sold a wide range of products and consumer electronics brands across office, mobility, accessories, entertainment and other products and services categories. DSG also stocked a range of products under its private label brand.
25 Provided below is a summary of the key product categories of DSG:
Table 10: Key product categories
Key product categories
Office Mobility Accessories Entertainment Other 42% of sales 12% of sales 13% of sales 18% of sales 15% of sales Apple computers Mobile phone handsets Connections Televisions Fitness Data storage Mobile phone plans Power Television accessories Small appliances Networking Wearable technology Protective products Visual components Security products Printing Private label accessories Headphones Extended warranty Office equipment Speakers Delivery and installation Laptops/Notebooks Cameras Gift cards Monitors Interest free and rental Tablets and E-readers Source: Management Notes: sales based on FY15 There was a very heavy reliance on the Office category for generating sales and profitability.
3.3.4 Employees
On Appointment, DSG employed over 3,200 full-time, part-time and casual employees, including 2,778 across all states and territories in Australia and 446 in New Zealand. Provided below is a summary of employees by employment type and business unit:
Table 11: Employees
Employees
Move Location Head Office DS Aust. DS NZ David Jones Move (Airport) Total ACT - 50 - - - - 50 NSW 258 703 - 69 25 54 1,109 NT - 41 - - - - 41 QLD - 458 - 19 25 - 502 VIC - 453 - 29 26 - 508 SA - 143 - 14 8 - 165 WA - 336 - 7 8 - 351 TAS - 52 - - - - 52 NZ - - 446 - - - 446 Total 258 2,236 446 138 92 54 3,224 Employment type Casual 1 904 104 58 60 21 1,148 Permanent 248 457 136 2 11 8 862 Part time 9 875 206 78 21 25 1,214 Total 258 2,236 446 138 92 54 3,224
Source: Receivers and Management
26 3.4 Shareholders
Provided below is a graph of the share price for DS Holdings from 1 January 2015 until the date of the Administrators’ appointment:
Figure 4: DS Holdings share price
2.50
2.00
1.50
1.00 Share price ($) price Share
0.50
0.00 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15
Share Price ($)
Key points:
. DS Holdings was listed on the ASX in December 2013 and ordinary shares were offered to market at a price of $2.20 per share; and
. The shares in DS Holdings were suspended from trading on Appointment and were priced at 35.5 cents per share at that time.
Provided below is a summary of the registered shareholders of DS Holdings on Appointment:
Table 12: Shareholder categories of DS Holdings
Shareholder categories of DS Holdings
Number of shares Investors Securities Issued capital 1 to 1,000 802 489,789 0% 1,001 to 5,000 2,739 8,407,021 4% 5,001 to 10,000 1,596 12,854,114 5% 10,001 to 100,000 2,182 61,747,660 26% 100,001 and Over 177 153,012,780 65% Total 7,496 236,511,364 100%
Source: DS Holdings share register maintained by Link Market Services
27 Provided below is a list of the largest registered shareholders of DS Holdings as at Appointment:
Table 13: Largest registered shareholders of DS Holdings
Largest registered shareholders of DS holdings
Registered owner Description Securities Issued capital J P Morgan Nominees Australia Custodian 33,629,270 14% HSBC Custody Nominees Custodian 23,810,002 10% Citicorp Nominees Pty Limited Custodian 21,025,647 9% LMA Investments Pty Limited Related entity of CEO 15,330,639 6% National Nominees Limited Custodian 7,567,439 3% National Nominees Limited Custodian 3,810,505 2% HSBC Custody Nominees Custodian 1,852,496 1% ABN Amro Clearing Sydney Custodian 1,405,145 1% Withheld Individual/SMSF 1,200,000 1% Withheld Individual/SMSF 1,000,000 < 1% Withheld Individual/SMSF 1,000,000 < 1% BNP Paribas Noms Pty Ltd Custodian 901,877 < 1% Withheld Individual/SMSF 900,000 < 1% Withheld Individual/SMSF 789,357 < 1% Kogan Management Pty Ltd Custodian 750,000 < 1% Bond Street Custodians Limited Custodian 750,000 < 1% Michael Potts CFO 727,988 < 1% Brispot Nominees Pty Ltd Custodian 690,780 < 1% Withheld Individual/SMSF 630,000 < 1% Citicorp Nominees Pty Limited Custodian 582,809 < 1% Other Varied 118,157,410 50% Total 236,511,364 100%
Source: DS Holdings share register maintained by Link Market Services There is no expectation that the shares in DS Holdings will resume trading on the ASX. There is also no expectation of a distribution being made to the shareholders through the liquidation process, due to the material shortfall to the Secured Creditors and unsecured creditors of DSG.
An update to Shareholders was issued on 23 June 2016, stating that the Administrators have reasonable grounds to believe that there is no likelihood that shareholders of DS Holdings will receive any distribution in the course of the external administration of DSG. A copy of this update is available on the McGrathNicol website.
28 3.5 Officers
In preparation for DSG listing on the ASX, DS Holdings was incorporated as an Australian Public Company and a board of directors was appointed in October 2013.
Provided below is a listing of the Directors and Secretaries of DS Australia on Appointment (“the Current Directors”). For information regarding the Directors and Secretaries of DS NZ, refer Appendix A. For information regarding the Directors and Secretaries of Mac 1, refer to the separate 439A report prepared for that entity.
Table 14: Directors and Secretaries of DSG
Directors and Secretaries of DS Australia
Executive Directors Secretary Non-Executive Directors Nicholas Michael David Robert Lorna Jamie Robert Company Abboud Potts Cooke Ishak Raine Tomlinson Murray DS Holdings DS Sub-Holdings DSE Holdings DS Wholesale DS Electronics DS Superannuation InterTAN DS Franchising DS Management Source: ASIC Provided below is a historical listing of the Directors and Secretaries of DS Holdings, the listed holding company of DSG:
Table 15: Directors and Secretaries of DS Holdings
Directors and Secretaries of DS Holdings
Name Role Appointment Date Resignation Date Michael Potts Secretary (continued as Finance Director and CFO) 25 October 2013 12 August 2014 Michael Potts Finance Director and CFO 12 August 2014 n/a Phillip Cave Director and Non-Executive Chairman 25 October 2013 28 February 2015 William Wavish Independent Non-Executive Director 25 October 2013 25 March 2015 Nicholas Abboud Managing Director and Chief Executive Officer 25 October 2013 n/a Robert Ishak Independent Non-Executive Director 25 October 2013 n/a Lorna Raine Independent Non-Executive Director 25 October 2013 n/a Robert Murray Director and Non-Executive Chairman since 28 February 2015 12 August 2014 n/a David Cooke Secretary 12 August 2014 n/a Jamie Tomlinson Independent Non-Executive Director 10 April 2015 n/a
Source: ASIC and 2015 Annual Report
29 3.6 Secured lenders and charges
The Australian and New Zealand Personal Properties Securities Registers (“PPSR”) identified the following security interests over DS Holdings, DS Electronics and DS NZ as at the date of the Administrators’ appointment:
Table 16: Registered security interests
Registered secured interests
Creditor group Collateral class Secured party Number Banks All present and after-acquired property NAB 2 Motor vehicles Motor vehicles Toyota 50 Suppliers Other goods, intangibles and specific claims Various 81 Total 133
Source: AFSA and D&B searches undertaken on 14 April 2016 (DS Holdings, DS Electronics and DS NZ)
NAB and HSBC (through the security trustee) hold a charge over the whole or substantially the whole of the property of DSG (excluding DS Superannuation, DS HK and Mac 1).
The remaining security interests are held by trade suppliers (primarily providers of stock) and motor vehicle financiers. Many of these suppliers enforced their security interests which allowed them to recover the secured property, including the proceeds of sale of inventory during the external administration process.
Further details of the registered secured interests are available to creditors on request. 3.7 Gift cards
As at Appointment, the Receivers announced they were unable to honour open Dick Smith gift cards. The gift card liability is an unsecured claim against DSG. At Appointment, over 45,000 gift cards were on issue, with a balance of c. $2.5 million.
The graph below shows DSG’s gift card balance over the calendar year 2015.
Figure 5: DSG gift card balances December 2014 to December 2015
3.0
2.5
2.0
1.5
A$'m 1.0
0.5
- Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15
DS Australia DS NZ
Key point:
. The balance of gift cards at Appointment was consistent with DSG’s monthly liability generally.
30 4 Financial information
This section provides a summary of the financial performance of DSG during the financial years FY13, FY14 and FY15.
4.1 Historical profit and loss
Summary profit and loss information, based on DS Holding’s audited consolidated accounts is presented below: Table 17: Summary profit and loss
Summary profit and loss
FY13 FY14 FY15 $'m 10 mths Full year Full year Revenue 791.4 1,227.6 1,319.7 Cost of sales (607.0) (919.6) (992.8) Gross profit 184.4 308.0 326.8 Gross profit margin 23% 25% 25% Other income 146.9 1.2 1.0 Marketing and sales costs (104.7) (130.5) (112.9) Occupancy and rental expenses (46.4) (79.3) (93.3) Administration costs (35.7) (45.2) (57.3) Finance costs (2.3) (2.9) (4.1) Other expenses (3.5) (22.7) (6.8) Profit before income tax 138.7 28.7 53.4 Income tax (expense)/benefit 1.4 (8.9) (15.5) Net profit for the year 140.2 19.8 37.9 FX and hedging, net of tax 6.3 (0.4) (0.5) Total comprehensive income for the year 146.5 19.4 37.4
Source: DS Holdings 2014 Annual Report and 2015 Annual Report Key points:
. DSG achieved year-on-year revenue growth from FY13 to FY15 and reported reasonably steady gross margins. Revenue growth was underpinned by new stores and increased sales growth in the commercial and online businesses. DSG generated around 40% of its revenue from Office products in FY15;
. The Commercial business represented c. 7% of revenue in FY15 (c. $90 million), however we note that this came with little to no margin;
. The November 2012 acquisition by Anchorage resulted in a discount on acquisition of $146 million. The discount on acquisition is the difference between the fair value of net assets acquired and the consideration paid and was treated as other income in FY13;
. Occupancy and rental expenses increased from $46 million in FY13 to $93 million in FY15 primarily due to an increase in the number of stores; and
. Other expenses of $22 million associated with the IPO are included in ‘other expenses’ in the FY14 results. These costs are non-recurring and if reversed-out (on the basis that the costs of the IPO are not recurring expenses of the retail business), the FY14 reported profit would have been $42 million.
31 4.2 Historical balance sheet
Summary balance sheet information, based on DS Holding’s audited consolidated accounts is presented below: Table 18: Summary balance sheet
Summary balance sheet
$'m Jun-13 Jun-14 Jun-15 Current assets Cash and cash equivalents 46.5 29.9 29.5 Trade and other receivables 10.4 46.7 53.3 Inventories 170.8 253.8 293.0 Other current assets 13.5 5.5 14.1 Total current assets 241.2 335.9 390.0 Non-current assets Plant and equipment 60.3 78.8 92.5 Deferred tax assets 42.9 36.5 26.0 Total non-current assets 103.1 115.3 118.5 Total assets 344.3 451.2 508.5 Current liabilities Trade and other payables (153.3) (247.7) (228.4) Borrowings - - (70.5) Provisions (16.1) (13.6) (13.3) Other current liabilities (2.9) (5.5) (4.3) Total current liabilities (172.3) (266.8) (316.5) Non-current liabilities Provisions (13.9) (7.3) (6.1) Lease liabilities (1.7) (10.1) (16.8) Total non-current liabililties (15.6) (17.4) (22.8) Total liabilities (187.9) (284.2) (339.4) Net assets 156.5 166.9 169.1 Equity Issued capital 10.0 346.1 346.1 Reserves 6.3 (339.2) (339.4) Retained earnings 140.2 160.0 162.4 Total equity 156.5 166.9 169.1
Source: DS Holdings 2014 Annual Report and 2015 Annual Report Many of the balance sheet categories increased as DSG expanded its activities and opened new retail stores, for example:
. Trade and other receivables increased, primarily due to increased rebates from suppliers as inventory was purchased (predominantly to stock new stores);
. Inventory increased each year, with new store openings contributing to this, as well as the decision to carry more private label products;
. Plant and equipment increased each year due to the need for additional furniture and shop fittings as the network expanded;
. Trade and other payables increased from $153 million in FY13 to over $220 million in FY14 and FY15 as DSG sought credit from suppliers to fund the additional inventory growth;
. Borrowings increased, in part to contribute to the capital cost of establishing new stores; and
32 . Lease liabilities increased each year as new locations were added to the network.
Growth in store numbers resulted in inventory growth. The graph below breaks down the increase in inventory from FY13 to FY15 into key categories:
Figure 6: FY13 to FY15 stock movements
350 1.2 13.7 10.2 300 14.1 10.8 9.8 27.8 250 34.7 200 $'m 150 293 254 100 171 50
- FY13 New stores Normalised Private label Promo FY14 New stores Private label Growth Other FY15 stock closing stock levels stock stock for closing stock categories stock July stock
Source: Management
Key points:
. DSG held the majority of its assets in inventory and it steadily increased inventory holdings from FY13 to FY15;
. The increases are attributable to a combination of increases in the store network, the decision to stock more private label products as well as general inventory decisions to match customer demand;
. The graph above indicates the extent to which new stores contributed to the higher inventory levels; and
. While it is common for inventory to represent a large proportion of total assets in a consumer retail business, the significant increase in DSG’s inventory amplified the risk of overstatement, and therefore the risk of balance sheet impairment.
Further discussion around DSG’s inventory management practices is provided later in this report (refer section 8).
33 4.3 Historical cash flow
Summary cash flow information, based on DS Holding’s audited consolidated accounts is presented below: Table 19: Summary cash flow
Summary cash flow
FY13 FY14 FY15 $'m 10 mths Full year Full year Cash flows from operating activities Receipts from customers 890.4 1,316.4 1,446.0 Payments to suppliers and employees (772.4) (1,261.1) (1,430.9) Interest and other costs of finance paid (2.3) (2.9) (4.1) Tax paid 0.9 (0.7) (15.4) Interest received 1.1 0.5 0.4 Net cash (used in/provided by operating activities) 117.6 52.2 (3.9) Cash flows from investing activities Payments for plant and equipment (2.5) (30.5) (31.6) Proceeds on sale of plant and equipment - 0.5 - Payment for acquisition of business, net of cash acquired (78.6) (24.0) - Net cash used in investing activities (81.1) (54.0) (31.6) Cash flows from financing activities Proceeds from issue of shares 10.0 343.6 - Payment in relation to corporate reorganisation - (358.6) - Proceeds (payments) from borrowings - 57.6 122.5 Repayment of borrowings - (57.6) (52.0) Dividend paid - - (35.5) Net cash provided by/(used in) financing activities 10.0 (15.0) 35.0
Net decrease in cash and cash equivalents 46.5 (16.8) (0.5) FX - 0.2 0.1 Cash and cash equivalents at the beginning of the year - 46.5 29.9 Cash and cash equivalents at the end of the year 46.5 29.9 29.5
Source: DS Holdings 2014 Annual Report and 2015 Annual Report Key points:
. Cash flow from operating activities decreased each year from FY13 to FY15:
DSG generated materially higher cash inflows from operating activities in FY13 as a result of the ‘sale clearance’ activities undertaken following the acquisition of the Dick Smith business by Anchorage; and
the net cash outflow from operating activities in FY15 is partly attributable to payments to suppliers, connected to the inventory build-up on the balance sheet;
. Cash outflows from investing activities decreased each year from FY13 to FY15:
the payments for acquisition of the business totalling $103 million across FY13 and FY14 represent the purchase price paid by Anchorage to Woolworths (the amount is calculated as the purchase price ($115m) less cash acquired ($12m)); and
payments for plant and equipment increased each year primarily for furniture and shop fittings for new retail stores being opened over the period;
34 . Cash flow from financing activities was inconsistent each year from FY13 to FY15 as DSG’s capital structure changed. Some of the key events impacting the cash flow from financing activities include:
the proceeds from the issue of shares and the payments in relation to corporate reorganisation in FY13 and FY14 were cash flows associated with the acquisition of DSG by Anchorage and the IPO;
DSG drew down and then fully repaid $58 million in borrowings during FY14, and then drew down $123 million in FY15, repaying $55 million. DSG total borrowings as at FY15 year-end was $71 million; and
DSG paid two shareholder dividends in FY15 totalling $36 million (the FY14 final dividend the FY15 interim dividend, refer section 10.5.3).
The graph below provides further information in relation to the movement of cash balances between FY13 and FY15:
Figure 7: Cash movements from FY13 to FY15
Deferred EBITDA offset payment to by inventory Woolworths build up Borrowings used to open stores and pay 120 dividend 6.3 IPO costs 71.9 100 43.9 2.3
80 70.5
60 (30.0)
40 $'m (24.0) 46.5 (67.1) 20 (15.0) (35.5) 29.9 (7.9) 29.5 - (32.4) (20) Cash bal EBITDA WC Other Capex Deferred Net Cash bal EBITDA WC Other Capex Borrow. Divid. Cash bal FY13 operat. payment equity FY14 operat. FY15 (incl int. (incl int. & tax) & tax)
Capex primarily for new stores
Key points:
. The above graph illustrates the significant difference between the cash flow and working capital profiles of FY14 and FY15;
. FY14 is characterised by:
reported earnings of $43.9 million making a positive contribution;
an increase in cash balances via a reduction in working capital (largely due to an extension of supplier payments) of $2.3 million;
capital expenditure for new stores of $30 million;
the deferred payment to Woolworths of $24 million; and
costs associated with the IPO of $15 million;
. FY15 on the other hand is characterised by:
reported earnings of $71.9 million, again making a positive contribution;
an increase in working capital of $67.1 million to fund new inventory (almost completely offsetting the positive earnings); and
35 an increase in borrowings of $70.5 million, contributing to further capital expenditure for new stores ($32.4 million) and dividend payments ($35.5 million).
In summary, during FY15 DSG utilised its cash generated from trading and borrowed money to purchase more inventory, meet capex obligations and pay dividends to shareholders. It also periodically exceeded its facility limits.
DSG’s performance during FY15 was characterised by significant variations in profit and cash flow, which is largely a function of inventory management and store investment. A monthly comparison of EBITDA, cash and inventory movement for FY15 is set out below:
Figure 8: EBITDA operating cash flow, free cash flow and inventory movements for FY15
150
100
50
$M -
(50)
(100) Christmas trading
(150) Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15
EBITDA Operating Cash Flow Free cash flow Inventory movement
Key points:
. Operating cash flow is defined as EBITDA less working capital adjustments, interest and tax. Free cash flow is defined as operating cash flow less capex. Inventory movement represents the monthly movement in inventory (rather than the month-end balance);
. The above graph illustrates the distinctly different profiles of profit and loss and cash throughout FY15:
EBITDA in FY15 was characterised by year-on-year revenue growth generating positive profitability;
cash flow meanwhile was characterised by a deficiency from operating activities (i.e. trading) and a substantive investment cash outflow (capital expenditure for new stores); with
the difference funded by increased borrowings, from both banks and suppliers;
. The above graph illustrates how the build-up in inventory in November/December 2014 in preparation for the Christmas holiday period did not convert to cash, and inventory did not materially reduce for the remainder of FY15.
The next section of the report considers the more recent trading performance of DSG over the six-month period to 31 December 2015, immediately prior to the appointment of the Administrators.
36 5 Management Accounts
This section provides observations on the unaudited management accounts for the six months to 31 December 2015. These management accounts were prepared by Management but not approved by the Board as at the appointment of Administrators.
5.1 Monthly profit and loss
Summary profit and loss information, based on DSG’s draft management accounts for the six-months to 31 December 2015 is presented below:
Table 20: Summary monthly profit and loss
Summary monthly profit and loss
$'m Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Total Sales 97.2 93.9 131.1 89.0 85.2 200.1 696.5 Cost of sales (80.1) (77.0) (93.9) (74.1) (131.6) (186.4) (643.1) Gross profit 17.1 17.0 37.2 14.8 (46.4) 13.8 53.5 Gross profit margin 18% 18% 28% 17% (54%) 7% 8% Opex (17.3) (15.7) (32.9) (17.8) (12.7) (71.0) (167.4) EBITDA (0.2) 1.3 4.3 (3.0) (59.1) (57.3) (113.9) EBITDA margin (0%) 1% 3% (3%) (69%) (29%) (16%) Depreciation (1.3) (1.3) (1.7) (1.4) (1.4) (43.0) (50.2) Interest Expense (0.3) (0.3) (0.3) (0.3) (0.4) (0.4) (2.1) Tax 0.5 0.1 (0.7) 1.4 18.0 30.1 49.5 Net profit after tax (1.3) (0.3) 1.6 (3.4) (42.8) (70.5) (116.7)
Source: DS Holdings draft management accounts
Key points:
. EBITDA losses for the six months to 31 December 2015 were $114 million (against a half year budget of $48.5 million and full year FY16 budget of $87.5 million);
. The months of November 2015 and December 2015 reported losses of $113 million;
. The key drivers behind the reported losses during the six months to 31 December 2015 included:
DSG did not achieve the projected sales which supported its forecast (particularly in December 2015); and
Gross profit was adversely affected by increased promotional activity and an unfavourable proportion of low- margin products;
. At the October 2015 Board meeting, the Directors became concerned about the carrying value of DSG’s inventory and requested a review be completed. An independent consultant subsequently identified $180 million of inventory that was ‘inactive’, and recommended a $60 million impairment be processed;
. DSG recognised the following non-cash asset impairments:
the $60 million inventory write down was recognised in November 2015;
an onerous lease provision of $14 million was recognised in December 2015 (onerous lease provisions are recognised when estimated costs of a retail lease exceed the forecast economic benefits available under the contract); and
a non-cash PP&E impairment in the amount of $40 million was recorded in December 2015, to recognise that the carrying value of PP&E was less than the net present value of forecast future earnings (this process was
37 periodically undertaken by Management, with this particular impairment not having been approved by the Board due to it occurring as part of the December results);
. DSG was on restricted trading terms with many of its suppliers due to late payments, and had insufficient positive cash flow to purchase new and desirable (high-margin) stock. DSG’s inability to purchase new stock put further pressure on profitability. 5.2 Summary balance sheet
Summary balance sheet information, based on DSG’s draft management accounts for December 2015 is presented below, along with variance analysis to highlight the movement in assets and liabilities from June 2015 (FY15 year-end):
Table 21: Summary balance sheet
Summary balance sheet
Percentage 6-month (%) of net $'m Jun-15 Dec-15 movement assets Current assets Cash and cash equivalents 29.5 31.2 1.7 1% Trade and other receivables 53.3 51.5 (1.9) (1%) Inventories 293.0 217.3 (75.8) (45%) Other current assets 14.1 14.5 0.4 0% Total current assets 390.0 314.5 (75.5) (45%) Non-current assets Plant and equipment 92.5 63.3 (29.2) (17%) Deferred tax assets 26.0 77.7 51.7 31% Total non-current assets 118.5 141.0 22.5 13% Total assets 508.5 455.5 (53.0) (31%) Current liabilities Trade and other payables (228.4) (223.8) 4.7 3% Provisions (13.3) (20.2) (6.9) (4%) Borrowings (70.5) (127.2) (56.7) (33%) Other current liabilities (4.3) (6.6) (2.3) (1%) Total current liabilities (316.5) (377.7) (61.2) (36%) Non-current liabilities Provisions (6.1) (13.6) (7.5) (4%) Lease liabilities (16.8) (18.6) (1.8) (1%) Total non-current liabililties (22.8) (32.2) (9.3) (6%) Total liabilities (339.4) (409.9) (70.5) (42%) Net assets 169.1 45.6 (123.5) (73%) Equity Issued capital 346.1 346.1 0.0 0% Reserves (339.4) (334.5) 4.9 3% Retained earnings 162.5 34.0 (128.5) (76%) Total equity 169.1 45.6 (123.5) (73%) Source: DS Holdings 2015 Annual Report and draft management accounts
Key points
. The net assets of DSG declined by $124 million in the six-months ending 31 December 2015 driven by negative earnings and asset write-downs;
38 . Contributing to this result were the three large non-cash asset impairments discussed earlier (refer section 5.1), being the significant $60 million inventory write down, the lease provision of $14 million and the PP&E impairment of $40 million;
. These non-cash adjustments and other items had the effect of creating a deferred (non-cash) tax asset of $52 million, partially off-setting the decrease in asset values; and
. By 31 December 2015, DSG was reporting inventory valued at $217 million, total assets of $455 million and net assets of $45 million. 5.3 EBITDA and cash flow to 31 December 2015
As already discussed (refer section 5.1), DSG incurred a significant loss during 1HFY16. Provided below is a graph setting out the key sources of the loss, as well as a reconciliation of the loss to DSG’s cash position:
Figure 9: EBITDA to cash flow bridge 1HFY16 (July to December 2015)
Working capital was released as inventory was sold (or impaired) and creditors were stretched
20 57 2 - 6 2 (22) (12) (20) 21
(40) 61 2 (21) (60) (114) Debt used to fund (80) losses, capex and $'m dividend (100)
(120)
(140) 1HFY16 Inventory Receivables Payables, Other WC Other oper. Operating Capex Borrowings Dividends Cash EBITDA provisions & items (incl int. & cash flows movement accruals tax) (6 months)
Key points:
. As set out in Table 20 (refer section 5.1), DSG did not generate underlying profitability throughout 1HFY16;
. DSG processed a significant inventory write-down, and stretched suppliers beyond terms in order to stay within overdraft limits;
. Borrowings were increased by $57 million (from $71 million to $127 million) in the six-months ending 31 December 2015, primarily due to significant payments associated with inventory growth, capex commitments and the payment of a dividend to shareholders; and
. DSG incurred a net operating cash loss of $71.2 million from 1 July 2015 to 30 November 2015, reduced to $22.1 million as a result of the December 2015 clearance sale.
39 6 Commentary on events from October 2015 to December 2015
This section provides information on the issues and events relating to the months prior to Administration, including funding requirements, Bank negotiations, subsequent breaches of covenants and appointment of the Administrators and Receivers.
6.1 Introductory remarks
The analysis we have set out in Section 4 and Section 5 above point to a business under considerable pressure. Of particular note:
. Although it was reporting revenue growth and profits post IPO, DSG was not generating underlying sustainable profit. Much of its growth in revenue (particularly in FY15) was a result of growth in the store network;
. To facilitate its expansion, DSG was growing inventory rapidly, in part due to DSG’s commitment to a private label strategy. Growth in inventory resulted in a considerable increase in supplier commitments putting strain on a range of those relationships;
. New funding was also sourced from the Banks, which assisted in meeting outstanding capex requirements and paying dividends to shareholders; and
. Inventory purchasing decisions and the rate of technological change (and its subsequent impact on purchasing patterns) meant that, in many cases, stores were not stocked with product that met customer demand, requiring additional commitments to be made. When Apple declined to extend further credit to DSG, a Trade Finance Facility was obtained from Macquarie Bank Limited (“Macquarie”) to fund invoices, in particular for the purchase of popular Apple products.
The position worsened throughout 2015, as available cash resources and borrowings were directed towards capital costs that had been incurred for store openings, associated inventory growth and payment of dividends. 6.2 October 2015 to December 2015
The following points summarise key issues and events during October 2015 to December 2015:
. An initial request to the Banks for short term financial support was made in October 2015, when DSG requested a $20 million temporary increase in its overdraft facility;
. A $10 million increase on the facility limit of the trade finance facility provided by Macquarie from 6 June 2014 (“the Macquarie Trade Finance Facility”) (taking it up to $40 million) was agreed on 30 October 2015 and implemented on 13 November 2015. Payments were due from DSG to Macquarie throughout late December 2015 and early January 2016, in accordance with a schedule agreed between DSG and Macquarie;
. On 16 November 2015, the Banks advanced the requested $20 million to DSG, in order to meet pressing supplier and employee payments, increasing the total Bank facility limit from $135 million to $155 million. The $20 million advance was provided on a temporary basis and the facility limit was required to return to $135 million on 15 January 2016, following the Christmas trading period;
. On 30 November 2015, DSG filed an ASX announcement disclosing the $60 million non-cash impairment adjustment to inventory, following an independent inventory review;
. During early December 2015, the Banks and Management were discussing DSG’s short term cash flow, necessary payments to Macquarie and the FY16 forecast. DSG advised the Banks in mid-December 2015 that:
DSG would be unable to repay the $20 million temporary increase by 15 January 2016;
DSG would be unable to comply with all of the facility covenants (around borrowing limits known as the “Clean Down Undertaking” and other financial ratios) calculated at 31 December 2015; and
It required an extension of time for repayment of the $20 million temporary increase, and for other facility covenants to be waived;
40 . The cash flow suggested that DSG would exceed its $135 million limit but could potentially remain within the $155 million extended facility limit, if certain assumptions proved correct including:
the Banks extended the temporary overdraft increase of $20 million until 15 February 2016;
there was no further decline in sales;
discounted products in the clearance sales cannibalised ‘good sales’ by a rate of only 50%, i.e. the quantum of full-priced, high margin stock sales was not impacted by more than 50% as a result of the clearance sales;
the Macquarie Trade Finance Facility was made available to pay creditors on cash on delivery payment terms; and
the payment terms of certain suppliers would be stretched in the months of January, February and March 2016 (at the time the base case cash flow forecast was prepared, DSG had not entered into agreements with suppliers to extend payment terms);
. The extension was ultimately agreed by the Banks, with a waiver letter executed by DSG and the Banks on 23 December 2016 (“the Waiver Letter”). The extension granted was subject to the following conditions, inter alia:
the potential default arising from the DSG expected breach of the ‘Clean Down Undertaking’ was waived;
it was agreed that the Banks would calculate key ratios without regard to the inventory write down and compliance with those covenants as at 31 December 2015 was waived;
the temporary overdraft of $20 million was extended from an expiry of 15 January 2016, to 15 February 2016;
DSG promised that no drawdowns under the overdraft facility would be used to repay or reduce Finance Debt, including but not limited to the unsecured lines of credit provided by Macquarie; and
An independent consulting firm, satisfactory to the Banks be engaged to undertake a review of DSG and report to the Banks;
. On 23 December 2015, McGrathNicol were appointed by DSG to provide the Board with an understanding of its financial position and cash forecast, for the purposes of providing a view on the solvency position of DSG;
. On 24 December 2015, Management, McGrathNicol and National Consulting Group (“NCG”), the independent consulting firm engaged to undertake a review, met at DSG’s offices at Chullora to discuss the scope of the review, and the information required to address the scope by 8 January 2016;
. On 24 December 2015 DSG made a payment to Macquarie of $10 million. This payment was later determined by the Banks to be in breach of the Waiver Letter (discussed further below);
. McGrathNicol and NCG were not advised of this payment having been made until Wednesday, 29 December 2016, the second business day after the Boxing Day Holiday;
. A further payment (of which McGrathNicol and NCG were also initially unaware) of $1 million was made to Macquarie on 30 December 2015;
. McGrathNicol met with the Board on Tuesday, 28 December 2016 to report on cash flow, solvency and the NCG review;
. Management considered the payments to Macquarie were consistent with the terms of the Waiver Letter, as (in their view) the restrictions on repayments to Macquarie were only for the period of the additional facility extension (i.e. between 15 January and 15 February 2016;
. The Administrators do not share that view, and consider the payments were a breach of the Waiver Letter;
. There was dialogue between DSG, the Banks and Macquarie from Wednesday 29 to Friday 31 December 2015. Those discussions centred on:
the short term cash flow and the facility limits of $155 million;
the nature of the payments made to Macquarie on 24 December 2015 and whether they represented a breach of the Waiver Letter and so an event of default;
whether Macquarie would return the funds in order to correct the alleged breach;
41 whether another source of funds was available to correct the alleged breach;
whether Macquarie would delay the balance of the repayment schedule, including a payment of $8 million due on 31 December 2015; and
DSG’s financial position generally;
. Macquarie provided DSG an extension of the 31 December 2015 payment to the next business day, being Monday 4 January 2016, to facilitate those discussions;
. On Thursday, 31 December 2015 the Banks advised DSG that the 24 December 2015 and 30 December 2015 payments constituted a breach of the Waiver letter, and that a further payment to Macquarie would also constitute a breach;
. On 4 January 2016, DSG tried to further extend the Macquarie repayment schedule, to a date beyond February 2016;
. The Directors and Management were keen to obtain the extension and also address the alleged breach, because in their view, DSG had a number of restructuring opportunities open to it during January 2016 and February 2016 that would improve its prospects and financial position including:
The possible sale of the New Zealand business;
Due diligence to be undertaken by parties considering the provision of further debt finance to DSG; and
A major recapitalisation opportunity;
. However, DSG was unable to further extend or make the Macquarie payment, and therefore the Directors determined that DSG could not place further significant orders for stock, or take deliveries beyond 4 January 2016;
. The Directors concluded from these circumstances that DSG was likely to become insolvent and responded by appointing the Administrators; and
. Following that appointment, the Banks appointed the Receivers.
42 7 Report as to Affairs and Directors’ reasons for failure
This section provides a summary of the Statutory Information provided by the DSG Directors, including a summary of the Reports as to Affairs and the Directors’ stated reasons for the failure of DSG.
7.1 Report as to Affairs
The Directors have collectively prepared and lodged a Report as to Affairs (“RATA”) for each of the entities under External Administration.
A summary of each RATA and other company information is provided in Appendix B.
The vast majority of DSG’s assets and liabilities are held by DS Electronics, as the main trading and employing entity. Provided below is a summary of the RATA for DS Electronics:
Table 22: Report as to Affairs – DS Electronics
Report as to Affairs - DS Electronics
$'m BV ERV Assets Cash at Bank 0.4 0.4 Cash on Hand 0.8 0.8 Debtors 207.7 207.7 Inventory 160.8 160.8 Plant and Equipment 92.3 92.3 Assets with security interests 18.7 18.7 Subsidiaries 1.1 198.2 Prepayments 8.8 8.8 Total assets 490.7 687.7 Liabilities Employees 10.0 10.0 Secured creditors 124.9 124.9 Unsecured creditors 190.2 190.2 Contingent employee claims 1.3 1.3 Total liabilities 326.3 326.3 Surplus assets over liabilities 164.3 361.4
Source: RATA prepared by Directors Key points:
. The RATA for DS Electronics discloses a surplus of assets over liabilities on both a book value (“BV”) and estimated realisable value basis (“ERV”), suggesting there would be no shortfall to creditors on Appointment;
. In our view, there will be a significant shortfall to creditors, as:
the actual realisable value of assets during the Receivership was well below the values disclosed in the RATA; and
the amount of DS Electronics’ (and also DSG’s) liabilities increased when its operations were discontinued (discussed further below).
Further commentary regarding the value of some items listed in DS Electronics’ RATA:
. Most third party debtors were rebates owing from suppliers and are not recoverable, for reasons including:
DSG owed a greater debt for product supply to those same parties;
43 Insufficient supporting documentation is available to pursue the recorded rebate;
Suppliers disputed the existence of some rebates; and
Some rebates were contingent upon criteria (e.g. further purchases of stock, future advertising) that were unable to be fulfilled after DSG was placed into administration;
. Some debtors were related-party loans between entities within DSG and are not recoverable;
. The plant and equipment was sold on a liquidation basis (rather than a going concern basis) and therefore actual recoveries were well below the values disclosed in the RATA;
. The Directors calculated the value of subsidiaries with reference to the subsidiaries’ proportionate contribution to EBITDA and the market capitalisation of DS Holdings as at 4 January 2016;
. The individual subsidiaries however have no material value and were not sold individually by the Receivers. Note, this comment also relates to the other RATAs provided (refer Appendix B); and
. Certain claims increased or crystallised when DSG ceased trading (for example certain landlord claims crystallised and redundancies became payable to employees).
We note the surplus set out in the DS Electronics RATA (even once consolidated with the other entities, refer Appendix A) is significantly different to DSG’s management accounts, which disclosed net assets of only $45 million at 31 December 2015. 7.2 Directors’ opinions as to the reasons for failure
The Directors have provided their views on the affairs of DSG and the reasons for its failure. The Directors believe DSG failed for the following reasons:
. Cash pressures were evident from at least 24 November 2015 where sales, cash flow projections, bank facility utilisation and inventory were presented to the Board at least weekly;
. DSG was issued with a breach notice by the Banks on 31 December 2015 and was given 10 days to remedy that breach;
. DSG’s proposals to remedy the breach were not deemed acceptable by the Banks; and
. Accordingly, in the Directors’ view, the Directors had no choice but to appoint Voluntary Administrators. 7.3 Conclusion
In conclusion:
. The Directors disclosed surplus assets in the RATA on both a book value and estimated realisable value basis, suggesting there would be no shortfall to creditors at Appointment;
. However, we expect there will be a very considerable shortfall to creditors, given the outcome of the Receivership (refer section 9) and based on the creditor claims lodged with the Administrators to date;
. The reasons for failure as set out by the Directors are consistent with the chronology of events we have set out in Section 6. In the context of its cash pressures, it became necessary to appointment the Administrators when the Directors were unable to meet the Macquarie payment schedule without further breaching the terms of the Banks’ Waiver Letter; and
. However, the Directors’ conclusion does not refer to any underlying causes of DSG’s cash pressures, leading to its failure.
In the next section of this report, we provide the Administrators’ assessment of the underlying reasons for the failure of DSG.
44 8 Administrators’ opinion as to the reasons for failure
This section provides the Administrators’ view on the underlying causes contributing to the failure of DSG. Our analysis includes: broad market related factors; declining comparable sales; the expansion strategy; inventory purchasing decisions; inventory management and cash flow pressures.
8.1 Market related factors
DSG was a major retailer in the Australian and New Zealand consumer electronics market. The market is highly competitive and increasingly price-based, which has eroded the profit margins for many market participants.
Table 23: Australia & New Zealand consumer electronics industry in FY15
Australia & New Zealand consumer electronics industry in FY15
Competitor Market share No. of stores Sales ($bn) JB Hi-Fi 26% 187 3.7 The Warehouse 12% 92 1.7 The Good Guys 12% 100 1.7 Harvey Norman 11% 205 1.6 DSG 9% 394 1.3 Noel Leeming 5% 75 0.7 Kogan.com 2% - 0.2 Bing Lee 1% 40 0.2
Source: IBISWorld (Nov 2015), publically available company financial reports Key points:
. Whilst DSG represented 9% of the consumer electronics market in FY15, its store network, and therefore its overhead and funding requirement to procure those sales, was considerably larger than its competitors, and almost twice as large as the next most significant player; and
. As such, DSG’s well-resourced and effective competitors (such as JB Hi-Fi, Harvey Norman and the Good Guys) were better placed strategically to deliver more customer value through lower prices, better products or a superior experience.
We also note:
. Online shopping platforms have increasingly captured market share from ‘bricks and mortar’ retailers, by delivering broad product ranges at low prices through their lower cost bases and more responsive inventory management capabilities; and
. Market research also suggests that longer PC lifecycles, competition from mobile phones and tablets, and the launch of Windows 10 (which includes a free upgrade program) has contributed to an approximate 10% year on year demand decrease in the PC market (worldwide). This impacted DSG by way of a decline in sales in the Office product category, which made up 40% of its sales in FY15.
45 8.2 Declining comparable sales
In this environment, the Dick Smith business was losing market share. Provided below is a comparison of retail same-store sales in FY15 and FY16, in the months July to December for 2014 and 2015:
Table 24: Comparable sales for Dick Smith bannered stores
Comparable sales for Dick Smith bannered stores
$'m Month FY15 FY16 Growth % July 79.5 73.0 (8.2%) August 79.3 69.2 (12.8%) September 77.8 71.0 (8.7%) October 51.8 46.7 (9.8%) November 54.9 48.7 (11.3%) December 78.2 76.6 (2.1%) Average monthly sales/ movement 70.2 64.2 (8.8%)
Source: Receivers and Management Key points:
. Month on month sales were declining by an average of 8.8% between FY15 and FY16, suggesting that DSG was unable to respond to the competitive pressure; and
. The decline in same store sales was generally experienced across the network, in all geographical areas. 8.3 Expansion strategy
In October 2013 (one month before the IPO), DSG launched its multi-banner strategy and took over the operation of 30 ‘David Jones Electronics Powered by Dick Smith’ stores, and opened the first ‘Move’ concept store. This strategy, along with more focus on commercial and online sales, was intended to allow DSG to target different market segments and increase sales.
When DSG listed on the ASX two months later in December 2013, it operated 359 physical stores, providing it with the largest consumer electronics store network in Australia and New Zealand. At this time, Harvey Norman had 239 stores, JB Hi-Fi had 177 stores and the Good Guys had 102 stores.
DSG added a further 35 stores (net of closures) after the IPO and had grown the network to 394 stores at Appointment. Provided in the table below is a summary of the growth of the store network:
Table 25: Growth in store network (net of closures)
Growth in store network
Pre-IPO IPO VA Oct-13 to Jan-16 Store format Oct-13 Dec-13 Jan-16 Movement Dick Smith (Aus) 267 267 289 22 Dick Smith (NZ) 61 61 62 1 David Jones - 30 27 27 Move - 1 12 12 Move (airport) - - 4 4 Total 328 359 394 66
Source: Propectus and Management
46 Key points:
. DSG continued its strategy of store expansion in circumstances where same store sales were declining in its core business (the Dick Smith bannered retail stores);
. Declining comparable sales in Dick Smith bannered stores indicate that existing retail outlets were failing to compete in their local market; however
. The declining comparable same store sales were not highlighted in the financial results due to ‘new revenue’ from new stores and growth in the Non-Core business.
Provided below is a graph that bridges the sales figures for the calendar years of 2014 and 2015, for existing and new businesses (note, we have bridged calendar years in this analysis, as opposed to financial years, in order to accurately take into account seasonality factors, while including the six months leading up to Appointment):
Figure 10: Comparison of 2014 and 2015 revenue contribution of existing and new stores
Revenue down $113m for New stores and businesses established to supplement existing stores declining revenue from existing stores 1,400 84 15 9
1,200 (10) (103) (10) 1,000
800
$'m 1,281 600 1,266
400 Gross revenue across the calendar years 2014 and 2015 remained steady, driven by new store openings, with “existing store” performance declining 200
- CY2014 Aus Retail NZ Retail New Retail David Jones Commercial Online CY2015
Source: DSG management accounts and store sales data (excludes non-operating income and Mac 1)
Key points:
. Revenue from existing stores fell by a total of $113,000 (or 10% of total sales) between CY2014 and CY2015;
. This downturn was compensated for by sales from new stores (including the Non-Core business);
. DSG invested $83 million from July 2013 to December 2015 in capital expenditure, most of which was directed to new stores and much of which was funded by debt;
. The David Jones concession stores (sales of $42 million in FY15) and the commercial division (sales of $90 million in FY15) ultimately operated at a loss, with DSG having considered exiting David Jones for a number of months prior to Appointment;
. The capital cost of opening new stores did not immediately impact profitability, as the cost to establish a store and purchase inventory is capitalised on the balance sheet and funded via cash flow; therefore
. The profit impact of the expansion plan was not felt until products were sold (or written off), whereas the cash impact was immediate.
In our view, there was insufficient analysis performed on comparable sales and the investment case to support continued store expansion. In our view, better and more focused analysis on comparable sales would have identified that the core retail business was experiencing declining sales and that the store expansion plan was eroding value by reducing the return on invested capital whilst at the same time increasing DSG’s debt burden.
47 8.4 Purchasing decisions and impact on reported profitability
Retail companies such as DSG rely on supplier support in the form of rebates as a normal part of their business. Two common forms of rebates are scan rebates and over and above rebates (“O&A rebates”):
. Scan rebates result in percentage discounts for stock purchases which are funded by stock vendors. These rebates are accounted for as a reduction in the cost of sales, when the associated inventory is sold; and
. O&A rebates are a broad category of rebates and can include any non-contractual rebate. Most of DSG’s O&A rebates related to ‘promotional support’ and were accounted for as a reduction in marketing expense, with any excess then booked as a reduction in cost of sales in the month that the rebates were negotiated (i.e. potentially prior to both the sale of inventory and any receipt of the agreed support).
Rebating is a legitimate strategy to boost margin and is adopted by many retailers. It is appropriate provided:
. The rebates are genuine and claimable and are recorded appropriately in accordance with Australian Accounting Standards; and
. They are not the main driver of purchasing decisions.
In the case of DSG:
. Poor and declining performance appear to have led to Management making decisions on what stock to buy (and at what volumes) based on the rebate attached to the stock, rather than customer demand;
. Rebate-driven buying contributed to a build-up in inventory and encouraged poor product mix decisions;
. In periods of low profitability, some rebates provided a short-term incentive for Management to prefer a certain supplier and product, because the rebate increased profit in the month of purchase, rather than when the product was sold (as ordinarily would be the case);
. Purchasing decisions increasingly based on rebates ultimately leads to a slowing of inventory turnover rates, as the products are generally less popular with customers. Eventually, in the case of DSG, heavy discounts were needed to sell the rebated stock, destroying the margin uplift that the rebate sought to achieve; and,
. In some cases, the stock could not be sold at all and became obsolete.
The practices around rebates contributed to a build-up in aged inventory (discussed further in section 8.5) and ultimately the $60 million stock impairment processed in November 2015.
The graph below sets out the impact of the different types of rebates on FY15 EBITDA:
Figure 11: Quantum of rebates in FY15
100 A large proportion of ‘Other’ are actually 40 O&A rebates 50 73 72
- 53
(50) $'m (119) 25
(100)
(150) Adjusted EBITDA Advertising subsidies Other rebates Scan rebates O&A rebates Reported EBITDA excluding rebates
Whilst a large proportion of these rebates were appropriately applied, the graph gives an indication of their significance to earnings and therefore the importance of correct management of rebates. We understand that the accounting treatment of rebates was regularly tested as part of its annual audit; with the auditors identifying that rebates were deal-by-deal and therefore needed regular review to ensure they were treated properly.
48 8.5 Inventory management
Provided below is a graph of inventory balances from July 2013 to November 2015:
Figure 12: Inventory balances July 2013 to November 2015
$10m net stock reduction $75m net stock 15 Dec. to 15 Jan. reduction 15 Dec. to 15 Jan. Inventory days increased as stocked aged 400 25
20 300
15 200 10
100
5 days Inventory Carrying value ($'m) stock ($'m) value Carrying
- -
Jul-15 Jul-13 Jul-14
Jan-14 Jan-15
Jun-14 Jun-15
Oct-13 Oct-14 Oct-15
Apr-14 Apr-15
Feb-14 Feb-15
Sep-13 Sep-14 Sep-15
Dec-13 Dec-14
Mar-14 Mar-15
Aug-13 Aug-14 Aug-15
Nov-13 Nov-14 Nov-15
May-14 May-15
Active stock Non-Active Stock Inventory days Linear (Inventory days) Source: Management Note: Monthly inventory balances are averages for the month.
Key points:
. A build-up of inventory appears to have occurred in advance of the 2013 Christmas holiday period, following which there was a considerable ($75 million) reduction in inventory between 15 December 2013 and 15 January 2014;
. The following year (the 2014 Christmas holiday period) DSG only achieved a $10 million net reduction in inventory over the same time period (15 December 2014 to 15 January 2015), and DSG carried those higher inventory levels through the early months of 2015;
. There was a growing component of ‘end of life’ inventory by mid-2015 and the stock mix became increasingly aged throughout 2015 (as reflected through the steady growth in ‘inventory days’);
. In a business with tight margins and a large network of stores, gradual increases in inventory levels and inventory days, combined with unpopular changes in the product mix over time can lead to the need for material impairment if not managed effectively;
. In our view, the low net stock clearance in the Christmas 2014 holiday trading period could have triggered more assertive action in relation to inventory, including more timely write-downs and clearance sales earlier in 2015;
. By October 2015:
Management had exceeded its FY16 stock purchasing budget (only four months into the financial year);
A high proportion of stock was not actively being sold;
An independent consultant had been engaged to review DSG’s inventory, identifying $180 million of inventory that was ‘inactive’, and of that recommending $60 million be written off; noting
Internally, Management had calculated an impairment of $20 million on the same stock;
. The issues with respect to inventory were discussed at a Board meeting on 29 November 2015. On 30 November 2015, DSG announced that it had completed a review of its inventory with the assistance of external consultants. The Board determined that a non-cash impairment of $60 million (pre-tax) was required, and that DSG was unable to re- affirm the profit guidance previously provided; and
49 . The cash position of DSG at the end of November 2015 necessitated DSG taking swift action in clearing aged and excess inventory during December 2015.
The graph below compares inventory balances before and after the inventory clearance sales in December 2015, broken into five categories:
Figure 13: Comparison of inventory levels between October and December 2015
350 4 The problem The response
300 26 High volume Stock write down of stock held of $60m to 2 250 73 and around reduce book value 50% of stock of stock 12 inactive 200 33 74 Clearance sale to sell stock 35 Obselete 150 End of life - aged Active quality End of life - current 100 stock Active excess Stock carrying value ($'m) ($'m) value carrying Stock 148 154 50 Active
- October 2015 December 2015
Key point:
. Whilst undertaken with the intention of generating cash and reducing inventory, the clearance sales also had the consequence of cannibalising sales from ‘active’ high margin products. As evident from the graph, DSG saw little sales activity in its active quality stock over this period.
In summary, a build-up of inventory was caused primarily as a result of DSG losing market share, experiencing a decline in year on year same store sales, opening new stores that needed to be stocked and making purchasing decisions based on rebates instead of customer demand.
A well-managed and timely clearance sale earlier in 2015 may have been beneficial to clear inventory levels to sustainable levels. However, such a clearance sale would have likely reduced reported profitability in FY15. 8.6 Product mix
Although the December 2015 clearance sale had the result of reducing the balances of obsolete, end of life and excess stock, DSG’s inventory mix did not meet customer demand at that time of year. DSG’s poor product mix was primarily caused by:
. The significant challenges DSG had experienced with suppliers, with several key suppliers either placing DSG on stop supply or insisting on cash on delivery due to outstanding credit. DSG’s limited access to quality products (e.g. the key supplier of Apple products had DSG on cash on delivery terms);
. Cash flow deficiencies which prevented DSG from replenishing stores with in demand and high margin stock; and
. The clearance sale depleting both popular and unpopular products.
On Appointment, there were sixteen major suppliers to DSG that had implemented one or more of the following trading restrictions:
. Reduced credit limit;
. Placed on cash on delivery terms;
. Placed the account on hold until payments were received; and
. Required a bank guarantee to support the supplier account.
50 9 The Receivership
This section provides information on the conduct of the receivership, including the Receivers period of trading the business, the sale process and ultimate closure of the Dick Smith business and resultant stock clearance.
On 4 January 2016, partners of Ferrier Hodgson were appointed Receivers and Managers of DSG, after the Board had appointed the Administrators.
Once Receivers are appointed, they become responsible for the management of the business and determining the most appropriate strategy to repay or restructure DSG’s secured debts. 9.1 The business at commencement of the Receivership
Immediately following their appointment, the Receivers commenced an assessment of the financial position and viability of DSG in order to determine the strategy for the Receivership. The Receivers’ observations include:
. In the month of December 2015, the management accounts indicated that DSG incurred a trading EBITDA loss of $42 million before provisions, compared to a pro-forma budget EBITDA for December 2015 of $27 million profit;
. DSG was heavily indebted to many of its key stock suppliers on Appointment. A consequence of this was that many of these suppliers would not trade with the Receivers until such time as arrears were paid, notwithstanding that in many cases, their claims were unsecured;
. This presented challenges for rectifying the inventory mix issues at Appointment, and generating the foot traffic through the stores which was essential in stimulating activity and profitability;
. The December 2015 clearance program had impacted inventory mix and was not conducive to maximising future profitability without new funding (as discussed in section 8.6); and
. DSG was also significantly indebted to a number of essential service providers including transactional service providers, transport and logistics and telecommunications providers, all of whom demanded payment of historical arrears in order to continue to trade with the Receivers.
The combination of the above factors and others created a challenging and high risk environment for the Receivers.
With the exception of advising customers of their decision in relation to gift cards (which on appointment are an unsecured claim), the Receivers maintained a ‘business as usual’ approach, with a view to preservation of as much value as possible whilst trying to contain losses.
Their initial actions included:
. Continuing to trade the entire Dick Smith business, whilst they undertook an urgent review of its affairs;
. Continuing employment of all staff;
. Continuity of marketing and promotional activity; and
. Requesting the Administrators take steps to preserve leases and extend the second meeting convening periods to assist in preserving sale options.
The business traded at a loss while the sale of business process was underway. 9.2 The retail business sale process
The Receivers determined that a compacted sale process would give them the best chance of achieving a going concern sale, and of effectively transferring the business to new ownership. The objectives of a compacted sale process included:
. Maximising the prospects of a going concern sale or sales;
. Limiting trading losses; and
. Ensuring that employee entitlements for 3,300 staff were not compromised at any stage.
51 From 12 January 2016, a series of advertisements were placed in Australian, New Zealand and Asian newspapers calling for expressions of interest for the going concern sale of the Dick Smith business. The Receivers sought offers to sell either DSG as a whole, or individual businesses within DSG, to domestic and international buyers.
A summary of the initial sale of business timetable as communicated to interested parties, in both the advertisements and teaser document issued on 13 January 2016 is as follows:
Table 26: Key dates in the sale process for the Dick Smith business
Key dates in the sale process for the Dick Smith business
Date Milestone 12-Jan-16 Business for sale advertisements placed in Australian and New Zealand newspapers 12-Jan-16 Business marketed for sale via the Receivers' website 12-Jan-16 Business sale details issued to potential international interested parties 13-Jan-16 Business for sale advertisement placed in the Asian Wall Street Journal 20-Jan-16 Information memorandum made available to interested parties 20-Jan-16 62 executed Non-disclosure Agreements (NDAs) received 27-Jan-16 10 Non-binding Indicative Offers (NBIO) received, 2 of which were deemed credible 01-Feb-16 Dataroom access granted to shortlisted parties 05-Feb-16 Two binding expressions of interest received 12-Feb-16 Deadline for indicative binding bids 15-Feb-16 Management presentations commence 26-Feb-16 Deadline for final binding bids 29-Feb-16 Final bidder notified and signing of documentation 14-Mar-16 Target completion
Source: Receivers The Receivers have advised that:
. From 20 January 2016, a detailed Information Memorandum (“IM”) was issued to parties. In the time between the advertisements being published and the teaser document being issued, the challenges facing the business (in particular in relation to lack of support from key stock suppliers) continued;
. Consequently, the Receivers determined to compact the sale process slightly, with the timetable for indicative offers brought forward by one week;
. The sale process called for indicative offers for the business as a whole or in parts, incorporating 394 physical stores across all formats, and the online business;
. In conjunction with the preparation of the IM the Receivers completed a financial review to identify potential profit improvement initiatives for DSG, with a specific focus on reducing costs and increasing revenue both during the receivership and potentially under new ownership;
. This analysis identified 34 opportunities across seven categories that could collectively deliver an overall cash benefit of $22 million over a 12 month period. These initiatives were ultimately incorporated into financial models prepared for interested parties, which demonstrated how DSG could return to profitability;
. The Receivers ascertained that both the Commercial business and the David Jones concession stores were incurring significant losses and were not sustainable. Accordingly, from 27 January 2016, these divisions were no longer available for sale, with inventory held within David Jones reallocated to existing Dick Smith bannered stores; and
. Expressions of interest were received, resulting in two confirmed offers after a period of initial due diligence.
The Receivers engaged in negotiations with the two parties in an attempt to structure a deal for the sale of the majority of the Australian and New Zealand business. Simultaneously, separate negotiations were entered into for the sale of the Move and Move Airports businesses.
52 As negotiations with these parties progressed, the Receivers advise that the offers continued to be revised downwards as the parties completed their due diligence, and were ultimately inadequate with respect to price, timing and certainty. While the Receivers worked closely with the parties for a number of weeks in order to secure acceptable terms, the execution risk on each of the offers remained high and ultimately the Receivers considered they would have fallen well short of the estimated return in a wind-down of the entire business.
By 25 February 2016, all credible offers had been withdrawn or rejected by the Receivers. The Receivers then commenced an orderly wind down of the store network. 9.3 Sale of intellectual property and online business
Over the course of the sale process, the Receivers had received various expressions of interest from a number of parties with respect to DSG’s intellectual property and online business. Following the announcement of the wind down of the store network, the Receivers sought expressions of interest for all of the Australian and New Zealand intellectual property together with the online business.
Provided below is an overview of the key dates in this second sale process:
Table 27: Key dates in the sale process for DSG's intellectual property and online business
Key dates in the sale process for DSG's intellectual property and online business
Date Milestone 02-Mar-16 Advertisements placed in the AFR and New Zealand Herald 02-Mar-16 Information memorandum made available to interested parties 04-Mar-16 Three expressions of interest and subsequent offers received 10-Mar-16 Sale contract executed with Kogan 01-Apr-16 Completion occurred
Source: Receivers Following a negotiation with the two lead bidders, the Receivers completed a sale of these assets to Kogan.com. 9.4 Managed wind-down process
The Receivers have advised that:
. During the sale process, they were assessing the options available to wind down the business, in the event that no acceptable offers were received. As part of this, the Receivers engaged two parties to provide a proposal on the optimal process to be undertaken to maximise the realisation of the remaining stock;
. Following the unsuccessful sale process, Hilco Merchant Australia (“Hilco”) was engaged on 25 February 2016. Hilco undertook activities including determining the appropriate pricing and advertising to ensure that the stock, as well as furnishings, fixtures and fittings, were liquidated in situ, in order to maximise value and minimise costs; and
. During this period, the stock liquidation strategy was monitored by the Receivers to ensure that the stock realisations were maximised and the ongoing costs were appropriately controlled. 9.5 Conclusions
The Dick Smith business could not be sold as a going concern. The Receivers advised that, ultimately, offers received for the sale of the whole business were highly conditional, and required the Receivers to commit to the funding of future trading losses, without any certainty that a sale would be completed. In order to provide the most certain outcome, which was positive for employees and generated some return for the Secured Creditors, the Receivers decided to embark upon a managed wind down of the business.
In Section 13 of this Report, we set out the financial information provided by the Receivers and the estimated shortfall to creditors of DSG.
53 10 Investigations
This section informs creditors about the investigations undertaken by the Administrators to date, and whether there have been any potential actions uncovered that would impact the recommendation of the Administrators concerning the future of the company.
10.1 Context
There is currently no alternative but for the Administrators to recommend that DSG be placed into liquidation at the Second Meeting of Creditors.
In this context, information has been set out in this report to allow creditors to understand the circumstances surrounding the collapse of DSG but it is measured in its disclosure, to preserve the integrity of further investigations and legal actions that might take place once DSG is placed into liquidation. 10.2 ASIC
The Administrators have reported to ASIC pursuant to Section 438D of the Corporations Act. The content of any such report is confidential to ASIC. 10.3 Public examinations
The Receivers have previously issued a notice to creditors in which they explain that they have applied for and been granted summonses for the conduct of public examinations. Ten people have been summoned to appear at the public examinations including directors, former directors, officers and key former employees.
The examinations will commence on 5 September 2016 in the Supreme Court of New South Wales.
On the assumption that DSG Australia will be placed into liquidation and the current Administrators become liquidators, the Receivers and liquidators will work collaboratively in respect of these examinations.
The purpose of the examinations is to understand the reasons for the failure of DSG, and the findings are expected to assist the Administrators in their investigations. 10.4 The Senate Inquiry into the Causes and Consequences of the Collapse of Listed Retailers
On 4 February 2016, the Senate referred an inquiry into the Causes and Consequences of the Collapse of Listed Retailers in Australia to the Senate Economics References Committee (“the Inquiry”). The Inquiry was largely in response to the collapse of DSG. Refer to the Parliament of Australia’s website for further information: http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Dick_Smith
The inquiry has particular reference to:
. The conduct of private equity firms prior to, during and after corporate takeovers;
. The role of ASIC and the Australian Competition and Consumer Commission in overseeing corporate takeovers;
. The effect of the appointment of external administrators on secured and unsecured creditors, including employees and consumers of retail businesses;
. The effect of external administration on gift card holders and those who have made deposits on goods not delivered;
. The desirability of the following proposals in the event that gift card holders are unable to redeem their gift cards following the appointment of external administrators:
placing an obligation on external administrators to honor gift cards;
a requirement that funds used to purchase gift cards be kept in a separate trust account by businesses;
directors to be personally liable for the value of gift cards purchased; and
Any related matters.
54 The Inquiry was due to report by 14 September 2016. Given the recent Federal Election and status of the Senate, the standing of the Inquiry remains unclear. 10.5 Administrators investigations
10.5.1 Director and officers’ responsibilities
Sections 180 to 184 of the Act (and Sections 131 and 133 of the NZ Act) set out the duties, obligations and responsibilities imposed on Directors which are designed to promote good governance and ensure that Directors act in the interests of the company. These duties include:
. Duty of care and diligence;
. Duty of good faith;
. Duty not to make improper use of position; and
. Duty not to make improper use of information.
The investigations into the failure of DSG are at an early stage.
In the event that DSG is wound up, further investigations will be undertaken into any such breaches, including the public examinations.
Subject to any such investigation, the Liquidators will report to ASIC pursuant to Section 533 of the Act.
10.5.2 Accounting standards
The Australian Accounting Standards prescribe specific treatment for inventory. When considering the value of DSG’s inventory, some considerations include:
. The amount to be recognised and carried forward until the related revenues are recognised; and
. The extent of subjectivity, discretion and professional judgment involved in assessing the appropriate accounting treatment for rebates.
The measurement and value of inventory, and the accounting treatment of rebates are issues that will form part of the liquidators’ investigations.
10.5.3 Dividends
The table below sets out dividends paid to shareholders since the IPO:
Table 28: Dividends paid by DS Holdings
Dividends paid by DS Holdings
Declared Paid Dividend Cost ($'m) FY14 final dividend 5 September 2014 21 October 2014 8 cents per share 18.9 FY15 interim dividend 12 March 2015 30 April 2015 7 cents per share 16.6 FY15 final dividend 17 August 2015 30 September 2015 5 cents per share 11.8
Source: ASX Dividends may only be paid if:
. Assets exceed liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend;
. The payment of the dividend is fair and reasonable; and
. The payment of the dividend does not materially prejudice the ability to pay creditors.
The Liquidators will need to investigate:
. Whether, having regard to the carrying value of inventory, assets were appropriately stated before the dividends were declared;
55 . The business outlook was properly considered; and
. Whether the dividend payments reduced DSG’s capacity to pay creditors (particularly the dividend paid in October 2015, just three months before DSG was placed into voluntary administration).
10.5.4 Insolvent trading
A director may be personally liable to a company if the director fails to prevent a company from incurring a debt when at that time the director knew, or should have known, that the company was insolvent. A director’s requirement to compensate the company for insolvent trading is equal to that of the debt incurred when the company was insolvent, as long as that debt remains unpaid at the time of liquidation.
Other than in cases of fraud, the directors of a company may only be sued for insolvent trading if the company is in liquidation. Claims for insolvent trading are often difficult to prove, and directors have a number of defences available to them pursuant to Section 588H of the Act. There are no statutory defences under the NZ Act, with director defences in New Zealand being under common law and equity.
Before a Court will order that a person pay compensation in respect of insolvent trading, a Liquidator must establish that:
. The person was a director of the company at the time the company incurred the debts that are the subject of the claim;
. The company was insolvent at that time or became insolvent as a result of incurring the debt;
. At that time, there were reasonable grounds for suspecting that the company was insolvent or would become insolvent as a result of incurring the debt; and
. The debt the subject of the claim was wholly or partly unsecured and the creditors to whom debts are owed have suffered loss and damage.
10.5.4.1 Director defences
Section 588H of the Act sets out statutory defences available to directors in respect of a claim for insolvent trading. These include:
. At the time of incurring debts, the director had reasonable grounds to expect that the company was solvent;
. The director relied on information provided by a competent and reliable person, which concluded that the company was solvent at the time debts were incurred;
. The director was ill (and therefore did not take part in management) at the time the debt was incurred; and
. The director took reasonable steps to prevent the debt being incurred.
10.5.4.2 Administrators’ solvency considerations
An insolvent company is one that is unable to pay its debts when they fall due for payment. It is important to understand the timing of insolvency because it can provide opportunity for a liquidator to pursue certain claims against directors and other parties that would not otherwise be available if the company was solvent.
On 4 January 2016 the Board resolved that Dick Smith was likely to become insolvent at some future time and responded by appointing voluntary administrators.
The Administrators do not yet have a concluded position on the date of insolvency for DSG, as the issue requires further work and investigation.
In our view, DSG was insolvent at least on 23 December 2015, when it entered into an agreement with the Banks (the Waiver Letter) that prevented DSG from drawing funds from its overdraft facility to repay the Macquarie Trade Finance Facility. Macquarie was demanding immediate repayment of its debt and DSG had no available cash or other source of funding to meet Macquarie’s demand. DSG was unable to meet its obligations to both the Banks and Macquarie on the date the Waiver Letter was agreed.
We note DSG may have been insolvent for some time before 23 December 2015. Some of the relevant considerations the Liquidator will ultimately consider in forming a view on this issue will include:
56 . DSG purportedly breached its lending covenants on 30 November 2015, when it announced a material impairment of inventory (refer section 6);
. DSG incurred a net operating cash loss of $71.2 million from 1 July 2015 to 30 November 2015, reduced to $22.1 million as a result of the December 2015 clearance sale (refer section 5.3);
. DSG had increased net debt by $122.7 million from 1 January 2015 to 30 November 2015 (refer sections 4.2 and 5.2);
. Comparable store sales declined by 8.8% from FY15 to FY16 (refer section 8.2);
. Throughout the calendar year 2015, DSG was failing to pay suppliers on time (refer section 8.6);
. Throughout the calendar year 2015, more than 20 major suppliers had placed some form of trade restrictions on DSG, such as cash on demand payment terms, reduced credit limits and stop supply (refer section 8.6);
. DSG inventory was materially impaired by October 2015 and is likely to have been materially impaired much earlier in calendar year 2015 (refer section 8.5);
. DSG stock purchasing practices were potentially being used to ‘borrow’ profitability from later periods (refer section 8.4); and
. DSG secured a trade finance facility with Macquarie to allow continuity of trade with Apple, who had stopped supplying due to concern over media and markets speculation about DSG’s position (refer section 6.1).
Other relevant considerations may include:
. DSG always reported positive net assets (refer sections 4.2 and 5.2);
. DSG always reported positive current assets (except in the draft management accounts for December 2015) (refer sections 4.2 and 5.2);
. DSG reported a $37.9 million profit in FY15 (refer section 4.1); and
. DSG had the support of the Banks and access to an overdraft facility to allow it to pay creditors up until 23 December 2015 and was in continual discussions up until 4 January 2016 (refer section 6).
Establishing the date of insolvency will have a significant impact on the potential recoveries available in a liquidation from voidable transactions.
10.5.5 Adequacy of books and records
Pursuant to Section 286 of the Act (and Section 194 of the NZ Act), companies are required to maintain financial records which correctly record and explain its transactions, financial position and performance, and that would enable true and fair financial statements to be prepared and audited.
Failure to maintain books and records in accordance with Section 286 of the Act provides a presumption of insolvency. This presumption can be relied upon by a Liquidator in an application for compensation for insolvent trading and other actions for recoveries pursuant to the Act from directors and other related parties.
Based on the books and records of DSG provided, in our view, DSG’s books and records are adequate pursuant to Section 286 of the Act.
57 11 Voidable transactions
This section informs creditors about potential voidable transactions that occurred prior to the appointment of the Administrators and, where the property of DSG was disposed of or dealt with, may be recovered by the Liquidator under Part 5.7B of the Act.
In the event that DSG is wound up, certain transactions that occurred prior to the appointment of the Administrators may be investigated and potentially recovered by the Liquidator as voidable transactions. Voidable transactions include:
. Unfair preference payments;
. Uncommercial transactions;
. Unfair loans;
. Unreasonable director-related transactions;
. Creation of circulating security interests within 6 months of commencement of Administration; and
. Transactions for the purpose of defeating creditors.
Creditors are advised that, for the purposes of examining voidable transactions, the Liquidator would review transactions that occurred during the relevant time period (as prescribed under that Act for each of the transaction types listed above), looking back from the "relation back day". The relation back day for DSG is the date that the Administrators were appointed, being 4 January 2016.
ARITA has issued an “Offences, Recoverable transactions and Insolvent trading” information sheet providing general information for creditors about insolvent trading and voidable transactions. This information sheet is available from the ARITA website (www.arita.com.au).
11.1.1 Unfair preference payments
An unfair preference payment is a transaction, generally occurring in the six months prior to the relation back day, between the company and a creditor, resulting in the creditor receiving from the company, in relation to an unsecured debt owed to the creditor, a greater amount than it would have received in relation to the debt in a winding up of the company. This period is extended up to four years for transactions entered into with a related entity.
A transaction can only be considered an unfair preference if the company was insolvent at the time the transaction took place, or the company became insolvent as a result of the transaction.
There are various defences that may be available to a party that may have received the benefit of a voidable transaction.
At the date of Appointment, there were sixteen major suppliers of DSG that had implemented one or more of the following trading restrictions:
. Reduced DSG’s credit limit;
. Placed DSG on cash on delivery terms;
. Placed DSG on account hold until payments were received; and
. Required a bank guarantee to support the supplier account.
Fifteen of these suppliers received more in payments from DSG during the six months prior to our appointment, than the value of goods supplied. This indicates, prima facie, that these suppliers may have received unfair preference payments in circumstances where they were aware that DSG was not paying accounts as and when they fell due.
Unfair preference payments are voidable against a liquidator, and further investigations will be undertaken in the liquidation to determine the likelihood of action for the recovery of unfair preference payments being successful. We note that successful action for unfair preference payments includes establishing the date of insolvency, and the costs of pursuing an unfair preference payment can sometimes outweigh the potential returns. Creditors have defences available to them under Section 588FA(3) of the Act (and Section 296(3) of the NZ Act), and the recoverability of payments may be uncertain.
58 In our view, and subject to further investigation, there are strong preference claims of considerable value that may be pursued once DSG is placed into liquidation.
11.1.2 Uncommercial transactions
An uncommercial transaction is a transaction which a reasonable person in the place of the company would not have entered into, taking into account the benefits and the detriment to the company, the respective benefits to the other parties involved and any other related matters. The period for recovering uncommercial transactions is generally two years. This period is extended up to four years for transactions entered into with a related entity.
A transaction can only be considered an uncommercial transaction if the company was insolvent at the time the transaction took place, or the company became insolvent as a result of the transaction
To date we have not identified any uncommercial transactions outside of ordinary commercial decisions.
11.1.3 Unfair loans
An unfair loan is a loan agreement where the interest or charges are considered to be extortionate. Unfair loans made to the company any time prior to the appointment of the Administrator may potentially be overturned by a subsequently appointed Liquidator, whether or not the company was insolvent at the time the loan was entered into.
To date we have not identified any unfair loans provided to DSG.
11.1.4 Unreasonable director-related transactions
An unreasonable director-related transaction is a payment, conveyance or other disposition by the company of property to a director or close associate of the director. Furthermore, it is required that it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction having regards to the benefits (if any) and detriment to the company of entering into the transaction. The transaction must have been unreasonable, and entered into during the four years prior to the relation back day, regardless of the solvency at the time the transaction occurred. These can include remuneration, bonuses, loans, loan forgiveness and asset transfers to company officers with the four-year period ending on the relation-back date
Our review to date has not highlighted any unreasonable director-related transactions. We expect to perform further investigations in the event that DSG enters liquidation.
11.1.5 Voidable transaction for creditor defeating purposes
A transaction of a company is voidable where a transaction is entered into for the purpose of defeating, delaying or interfering with the rights of any or all of its creditors. The transaction must have occurred at a time when the company was insolvent, or the company must become insolvent as a result of the transaction, and have occurred within ten years of the relation back day.
Our review to date has not highlighted any voidable transaction for creditor defeating purposes. We expect to perform further investigations in the event that DSG enters liquidation.
11.1.6 Circulating security interests
A circulating security interest is voidable if the security interest was created during the six months ending on the relation- back day, and the security interest was created to secure borrowings that were advanced prior to the creation of the security interest.
The security interest of the Banks was in existence more than 6 months before the relation back day.
59 12 Alternative courses of action
This section provides creditors with a statement of our opinion about each of the courses of action in respect of which creditors are entitled to vote at the Second Meeting of Creditors.
The matters requiring our opinion are:
. Whether it would be in the creditors’ interests for the administrations to end, with control of DS Australia reverting to the Current Directors;
. Whether it would be in the creditors’ interests for DS Australia to execute a DOCA; or
. Whether it would be in the creditors’ interests for DS Australia to be wound up.
The Administrators’ statement pursuant to Section 439A(4)(b) of the Act 2001 is included at Appendix A. 12.1 Deed of Company Arrangement
A DOCA is a binding arrangement between a company and its creditors governing how the company’s affairs will be dealt with. It aims to maximise the chances of the company, or as much as possible of its business, continuing, or to provide a better return for creditors than an immediate winding up. A DOCA binds all unsecured creditors, even if they voted against the proposal.
To date, no DOCA proposal has been put forward to the Administrators for their consideration. As such, there is no DOCA proposal on which the Administrators can report or provide an opinion on, or on which creditors can vote. 12.2 Administration to end
Creditors may consider ending the administrations and returning the control of DS Australia to the Current Directors. We do not believe this to be a viable option, given that DS Australia is without funds to meet creditor liabilities and is therefore is insolvent.
In our opinion, it is not in the best interests of creditors to vote for the administrations to end. 12.3 The company to be wound up
Given that DSG is insolvent and that no DOCA has been proposed, the Administrators’ recommend that creditors vote in favour of each of the DS Australia entities being placed into liquidation.
The liquidation of DSG would involve:
. Realisation of all available assets and further enquiries with regard to potential insolvent trading and voidable transactions;
. The completion of a more detailed investigation into the affairs of DS Australia and reporting to ASIC; and
. Adjudication of creditor claims and payment of dividends if sufficient recoveries are made.
60 13 Outcome for creditors
This section provides creditors with information about the estimated financial outcome to creditors.
13.1 Return to creditors
There will be no recoveries available for unsecured creditors from the receivership process, as there are no material assets that fall outside of the Banks’ security.
The table below outlines a ‘Low’ and ‘High’ range for the estimated shortfall, after payment of employee entitlements (which are given a priority out of circulating asset recoveries) and amounts owing to the secured creditors.
Table 29: Funds available for distribution
Estimated outcome statement
$'m High Low Recoveries Net stock realisations (after trading costs and PMSI settlements) 85.2 74.2 Pre-appointment debtors 10.4 9.0 Net fixed asset realisations (after PMSI settlements) 6.0 5.6 Other recoveries Unknown Unknown Total estimated recoveries 101.6 88.7
Priority/ secured claims Employee entitlements (26.7) (26.7) Secured creditors (127.2) (127.2) Other costs Unknown Unknown Total estimated priority/ secured distributions (153.9) (153.9) Shortfall to priority/ secured creditors (52.2) (65.1)
Unsecured claims Unsecured claims (estimate) (170.0) (200.0) Contingent claims (estimate) (20.0) (10.0) Total estimated unsecured claims (190.0) (210.0) Total shortfall to creditors (242.2) (275.1)
Source: Receivers and Managers, company books and records Key points:
. The secured lenders hold an ‘all present and after acquired security interest’ in each of the appointed entities and its debt is cross-collateralised amongst the group. Accordingly, the estimated outcome statement shown in the table above has been prepared on a consolidated basis for DSG;
. A number of receivership matters, including some asset realisations, are ongoing and so may be subject to further change. ‘Other recoveries’ (unknown) may relate to proceeds from litigation or recoveries which may become available in liquidation, such as preference payments and insolvent trading;
. All pre-appointment priority employee entitlements identified At Appointment, totalling approximately NZ$1.8 million (before tax) in New Zealand and A$22.8 million (before tax) in Australia have been paid in full, with the distribution to New Zealand employees made on 3 June 2016 and the distribution to Australian employees made on 10 June 2016;
. A review of DS Electronics’ records identified an issue with respect to the historical calculation and payment of entitlements relating to weekend annual leave loading and store manager wages for certain employees covered by the General Retail Industry Award 2010. The underpayment was not intentional, but rather an incorrect application of the
61 Award. The total amount of the underpayment is approximately $2.1 million (inclusive of interest and super) and around 2,740 affected employees have been informed of their entitlement and notified that they will be paid in full in September 2016. The underpayment only related to Australian employees;
. Costs of the external administrators as well as third party costs incurred in the recovery of assets are still to be finalised, and at this stage have been excluded from the analysis; and
. The shortfall to the secured creditors is therefore estimated to be in excess of $70 million, noting the comments above regarding the potential for further recoveries and the exclusion of some costs.
The likely shortfall to creditors, including unsecured and contingent creditors, is measured at between $240 million to $275 million.
We note that employee entitlements have been paid out of funds that would ordinarily fall under the Secured Creditor’s charge. Therefore, the Banks will stand in priority for any amount recovered from the liquidation, up to the amount of the employee entitlements paid. In that regard, for purposes of illustration, net recoveries in the liquidation would need to exceed $26.7 million (i.e. the amount paid out in employee entitlements) in order to result in any dividend to unsecured creditors.
62 14 Creditor information on remuneration
An Administrator’s remuneration can only be fixed by resolution of a COC, a company’s creditors or by application to the Court. In accordance with s449E of the Act and the ARITA Code of Professional Practice, a Schedule of Remuneration Methods and Hourly Rates were provided to creditors with our initial communication and tabled at the First Meeting of Creditors.
ARITA has issued an “Approving remuneration in external administrations” information sheet providing general information for creditors on the approval of an administrator’s fees in a liquidation, a voluntary administration or a DOCA. This information sheet is available from the ARITA website (www.arita.com.au).
The Remuneration Report is provided in Appendix F to this Report and is summarised below:
Remuneration Overview
Amount Company Time period External Administration Reference (ex GST) ($) DS Holdings 4 January 2016 to 17 June 2016 Voluntary Administration 3.1 32,696 DS Holdings Forecast 18 June 2016 to second meeting of creditors 1 Voluntary Administration 3.2 34,990 DS Electronics 4 January 2016 to 17 June 2016 Voluntary Administration 3.3 557,557 DS Electronics Forecast 18 June 2016 to second meeting of creditors 1 Voluntary Administration 3.4 200,100 Total 825,343 Note 1: Future remuneration is based on an estimate of the work required between now and the second meeting of creditors. We note this is a capped amount, and will only be drawn if the work is completed. Should additional work be necessary beyond what is contemplated, further approval may be sought from creditors. The appointed COCs approved the remuneration of the Administrators for DS Holdings and DS Electronics at a meeting held on 1 July 2016.
A separate meeting of the COC for Mac 1 was held on 8 July 2016, at which time the Administrator’s fees in relation to that entity were also approved.
The remaining DSG entities are either holding entities or dormant entities, with potentially no asset realisations available. Therefore, at this stage, the Administrators do not intend to seek to have any fees approved in relation to the remaining DSG entities.
There are currently no funds in the Administration, however should recoveries be made in the liquidation, these funds may be used to pay the Administrators’ outstanding remuneration.
63 15 Receipts and payments
There are no funds in the Voluntary Administrations of DSG as there have been no asset recoveries by the Voluntary Administrators. 16 Committee of Inspection
In the event that creditors resolve that DSG be wound up, the Act provides that a Committee of Inspection (“COI”) may be formed for one or more entity.
In these circumstances, the COI would provide the Liquidator with a sounding board as to likely creditor views on any contentious issues, and may approve certain matters (for example compromises of claims and remuneration requests).
At the Second Meetings of Creditors, creditors will be invited to consider whether COIs should be formed, and if so, to nominate members.
At the First Meeting of Creditors, COCs were formed for both DS Holdings and DS Electronics. Please note that these roles do not continue past the completion of the Administrations. If current members of these COCs wish to act on the COI, they should nominate themselves to be members at the upcoming Second Meeting of Creditors. 17 Second Meetings of Creditors
The Second Meeting of Creditors has been convened to be held at the Wesley Centre, 220 Pitt Street Sydney NSW, on Monday, 25 July 2016, commencing at 11:00 am at which meeting we will present the material in this Report.
Creditors should arrive 45 minutes prior to the commencement of the meeting to facilitate registration procedures.
The Administrators propose holding the Second Meeting of Creditors for DS Australia and Mac 1 concurrently.
As outlined earlier, given that DSG is insolvent and that no DOCA has been proposed, the Administrators’ recommend that creditors vote in favour of each entity making up DS Australia being placed into liquidation.
As explained in section 2.7.2, the NZ Administrators have lodged an application with the NZ Court, seeking orders to place DS NZ into liquidation, negating the need for the Watershed Meeting. This application has been made in recognition of the fact that liquidation is the only course available to DS NZ and is expected to be heard on 15 July 2016. By virtue of the Deed of Cross Guarantee however (refer section 3.1.1), DS NZ creditors will have the ability to:
. attend the DS Australia and Mac 1 meeting either in person or via a webinar; and
. vote as contingent creditors in the DS Australia and Mac 1 administrations.
Creditors who intend to vote at the meeting are required to lodge a formal proof of debt with Link Market Services. Creditors who have already lodged a proof of debt do not need to complete a new proof. A blank proof of debt form is included at Appendix G.
Creditors may exercise their right to vote by voting at the meeting in person, by appointing a proxy or by postal vote. The proxy forms lodged by creditors for the first meeting cannot be used for the second meeting. Accordingly, creditors should ensure that a proxy form, power of attorney or evidence of appointment of a company representative is completed and lodged with Link Market Services. A blank proxy form is included at Appendix H.
Documents may be lodged with Link Market Services prior to the meeting or may be brought to the meeting. Registration for the meeting will commence at 10:00am on the day of the meeting.
Creditors who are unable to attend in person may view the meeting via a webcast subject to providing a relevant proof of debt and proxy documents in advance. Please contact Link Market Services on or before Tuesday, 19 July 2016 should you wish view the meeting via a webcast.
Furthermore, for creditors who are interstate and unable to attend, a copy of the minutes of the meetings will be made available on our website (www.mcgrathnicol.com) after the meetings.
64 18 Contact
ASIC’s “Insolvency information for directors, employees, creditors and shareholders is included at Appendix I.
For all further enquires please refer to:
McGrathNicol Website
http://www.mcgrathnicol.com/assignments/
Link Market Services
Creditor Hotline: 1300 853 481
Email: [email protected]
Dated 13 July 2016
Joseph Hayes Jason Preston Joint and Several Administrator Joint and Several Administrator
65 19 Appendices
Appendix A: Administrators’ Statement pursuant to Section 439A(4)(b) of the Corporations Act 2001
Appendix B: Statutory information
Appendix C: DS NZ financial information
Appendix D: Notice of Meeting
Appendix E: Updated Declaration of Independence, Relevant Relationships and Indemnities dated 13 May 2016
Appendix F: Remuneration Report
Appendix G: Proof of Debt form
Appendix H: Proxy form
Appendix I: ASIC “Insolvency information for directors, employees, creditors and shareholders”
66 Appendix A – Administrators’ statement
Administrators’ Statement pursuant to Section 439A(4)(b) of the Corporations Act 2001
DSHE Holdings Limited (formerly known as Dick Smith Holdings Limited) ACN 166 237 841 DSSH Pty Ltd (formerly known as Dick Smith Sub-Holdings Pty Limited) ACN 160 162 925 DSHG Pty Limited (formerly known as DSE Holdings Pty Limited) ACN 001 456 720 DSG Wholesale Pty Ltd (formerly known as Dick Smith (Wholesale) Pty Ltd) ACN 000 445 956 DSG Electronics Pty Limited (formerly known as Dick Smith Electronics Pty Limited), ACN 000 908 716 INTT Pty Ltd (formerly known as InterTAN Australia Pty Ltd), ACN 002 511 944 DSG Franchising Pty Ltd (formerly known as Dick Smith Electronics Franchising Pty Ltd), ACN 054 295 733 DMSG Pty Ltd (formerly known as Dick Smith Management Pty Ltd), ACN 001 585 735 Dick Smith Electronics Staff Superannuation Fund Pty Limited, ACN 059 802 470
(collectively “DS Australia”)
We, Joseph Hayes, Jason Preston, Jamie Harris and Matthew Caddy, provide the following statement setting out our opinion about each of the following matters and our reasons for these opinions:
(i) Whether it would be in the creditors’ interests for DS Australia to execute a Deed of Company Arrangement (“DOCA”)
For the reasons disclosed in Section 12.1 of this Report, our opinion is that it is not in creditors’ interests to resolve that DS Australia execute a DOCA.
Our reason for this opinion is that a DOCA has not been proposed by any party for consideration by creditors. Accordingly, we cannot recommend that DS Australia execute a DOCA.
(ii) Whether it would be in the creditors’ interests for the Administration to end.
For the reasons disclosed in Section 12.2 of this Report, we do not consider it to be in creditors’ interests for the Administration to end.
Our reason for this opinion is that, based on DS Australia’s financial position, DS Australia would be unable to pay its debts as and when they fell due. Accordingly, we cannot recommend that the Administration end.
(iii) Whether it would be in the creditors’ interests for DS Australia to be wound up
For the reasons disclosed in Section 12.3 of this Report, our opinion is that it would be in creditors’ best interests for DS Australia to be wound up.
Our reason for this opinion is that there is no DOCA proposal available for creditors to assess, and DS Australia requires a formal mechanism to deal with its creditors.
Dated this 13 of July 2016
Joseph Hayes Joint and Several Administrator
Appendix B – Statutory information
B.1 DSHE Holdings Limited
Statutory information
. ACN 166 237 841
. Formerly known as Dick Smith Holdings Limited
. Registered in Victoria on 25 October 2013
. Registered office: 2 Davidson Street, Chullora NSW 2190
. Type/ class: Australian listed public company, limited by shares
. Description: Parent entity, non-trading
Directors and officers
Name Role Appointment Date Resignation Date Michael Potts Secretary 25 October 2013 12 August 2014 Michael Potts Finance Director and Chief Financial Officer 12 August 2014 n/a Phillip Cave Director and Non-Executive Chairman 25 October 2013 28 February 2015 William Wavish Independent Non-Executive Director 25 October 2013 25 March 2015 Nicholas Abboud Managing Director and Chief Executive Officer 25 October 2013 n/a Robert Ishak Independent Non-Executive Director 25 October 2013 n/a Lorna Raine Independent Non-Executive Director 25 October 2013 n/a Robert Murray Director and Non-Executive Chairman since 28/02/2015 12 August 2014 n/a David Cooke Secretary 12 August 2014 n/a Jamie Tomlinson Independent Non-Executive Director 10 April 2015 n/a Source: A search of ASIC records, on 4 January 2016
Report as to Affairs
Summarised Report as to Affairs - as at 4 January 2016
Book value Estimated realisable value Assets $'000s $'000s Cash at Bank 190 190 Cash on Hand - - Debtors - - Inventory - - Plant and Equipment - - Investment in Subsidiaries 346,111 208,883 Total assets 346,301 209,073 Liabilities Employees - - ROT creditors - - Secured creditors 124,922 124,922 Unsecured creditors 59,511 59,511 Contingent liabilities (employee entitlements) - - Total liabilities 184,432 184,432 Net assets / (deficiency) 161,869 24,641
Source: The directors and offices of DS Holdings, pursuant to section 438B(2) of the Corporations Act 2001
B.2 DSSH Pty Ltd
Statutory information
. ACN 160 162 925
. Formerly known as Dick Smith Sub-Holdings Pty Ltd
. Registered in Victoria on 31 August 2012
. Registered office: 2 Davidson Street, Chullora NSW 2190
. Type/ class: Australian proprietary company, limited by shares
. Description: Holding entity, non-trading
Directors and officers
Name Role Appointment Date Resignation Date Nicholas Abboud Managing Director and Chief Executive Officer 26 November 2012 n/a Michael Potts Director 12 August 2014 n/a David Cooke Secretary 12 August 2014 n/a Source: A search of ASIC records, on 4 January 2016
Report as to Affairs
Summarised Report as to Affairs - as at 4 January 2016
Book value Estimated realisable value Assets $'000s $'000s Cash at Bank - - Cash on Hand - - Debtors 58 58 Inventory - - Plant and Equipment - - Investment in Subsidiaries 115,208 208,883 Total assets 115,266 208,941 Liabilities Employees - - ROT creditors - - Secured creditors 124,922 124,922 Unsecured creditors 108,459 108,459 Contingent liabilities (employee entitlements) - - Total liabilities 233,380 233,380 Net assets / (deficiency) (118,115) (24,440) Source: The directors and offices of DS Holdings, pursuant to section 438B(2) of the Corporations Act 2001
B.3 DSHG Pty Limited
Statutory information
. ACN 001 456 720
. Formerly known as DSE Holdings Pty Limited
. Registered in New South Wales on 20 April 1977
. Registered office: 2 Davidson Street, Chullora NSW 2190
. Type/ class: Australian proprietary company, limited by shares
. Description: Holding entity, non-trading
Directors and officers
Name Role Appointment Date Resignation Date Nicholas Abboud Managing Director and Chief Executive Officer 26 November 2012 n/a Michael Potts Director 12 August 2014 n/a David Cooke Secretary 12 August 2014 n/a Source: A search of ASIC records, on 4 January 2016
Report as to Affairs
Summarised Report as to Affairs - as at 4 January 2016
Book value Estimated realisable value Assets $'000s $'000s Cash at Bank - - Cash on Hand 118,964 118,964 Debtors - - Inventory - - Plant and Equipment - - Investment in Subsidiaries 35,022 208,883 Total assets 153,987 327,847 Liabilities Employees - - ROT creditors - - Secured creditors 124,922 124,922 Unsecured creditors 108,459 108,459 Contingent liabilities (employee entitlements) - - Total liabilities 233,380 233,380 Net assets / (deficiency) (79,394) 94,467 Source: The directors and offices of DS Holdings, pursuant to section 438B(2) of the Corporations Act 2001
B.4 DSG Wholesale Pty Ltd
Statutory information
. ACN 000 445 956
. Formerly known as Dick Smith (Wholesale) Pty Ltd
. Registered in New South Wales on 9 January 1964
. Registered office: 2 Davidson Street, Chullora NSW 2190
. Type/ class: Australian proprietary company, limited by shares
. Description: Dormant entity
Directors and officers
Name Role Appointment Date Resignation Date Nicholas Abboud Managing Director and Chief Executive Officer 26 November 2012 n/a Michael Potts Director 12 August 2014 n/a David Cooke Secretary 12 August 2014 n/a Source: A search of ASIC records, on 4 January 2016
Report as to Affairs
Summarised Report as to Affairs - as at 4 January 2016
Book value Estimated realisable value Assets $'000s $'000s Cash at Bank - - Cash on Hand - - Debtors - - Inventory - - Plant and Equipment - - Investment in Subsidiaries - - Total assets - - Liabilities Employees - - ROT creditors - - Secured creditors 124,922 124,922 Unsecured creditors - - Contingent liabilities (employee entitlements) - - Total liabilities 124,922 124,922 Net assets / (deficiency) (124,922) (124,922) Source: The directors and offices of DS Holdings, pursuant to section 438B(2) of the Corporations Act 2001
B.5 DSG Electronics Pty Limited
Statutory information
. ACN 000 908 716
. Formerly known as Dick Smith Electronics Pty Limited
. Registered in New South Wales on 21 June 1971
. Registered office: 2 Davidson Street, Chullora NSW 2190
. Type/ class: Australian proprietary company, limited by shares
. Description: Main trading and employing entity
Directors and officers
Name Role Appointment Date Resignation Date Nicholas Abboud Managing Director and Chief Executive Officer 26 November 2012 n/a Michael Potts Director 12 August 2014 n/a David Cooke Secretary 12 August 2014 n/a
Source: A search of ASIC records, on 4 January 2016
Report as to Affairs
Summarised Report as to Affairs - as at 4 January 2016
Book value Estimated realisable value Assets $'000s $'000s Cash at Bank 379 379 Cash on Hand 764 764 Debtors 207,731 207,731 Inventory 160,813 160,813 Plant and Equipment 92,281 92,281 Investment in Subsidiaries 1,108 198,151 Prepayments 8,839 8,839 Total assets 471,914 668,957 Liabilities Employees 9,978 9,978 ROT creditors 18,747 18,747 Secured creditors 124,922 124,922 Unsecured creditors 190,163 190,163 Contingent liabilities (employee entitlements) 1,270 1,270 Total liabilities 345,080 345,080 Net assets / (deficiency) 126,834 323,877
Source: The directors and offices of DS Holdings, pursuant to section 438B(2) of the Corporations Act 2001
B.6 INTT Pty Ltd
Statutory information
. ACN 002 511 944
. Formerly known as Intertan Australia Pty Ltd
. Registered in New South Wales on 17 August 1982
. Registered office: 2 Davidson Street, Chullora NSW 2190
. Type/ class: Australian proprietary company, limited by shares
. Description: Dormant entity
Directors and officers
Name Role Appointment Date Resignation Date Nicholas Abboud Managing Director and Chief Executive Officer 26 November 2012 n/a Michael Potts Director 12 August 2014 n/a David Cooke Secretary 12 August 2014 n/a Source: A search of ASIC records, on 4 January 2016
Report as to Affairs
Summarised Report as to Affairs - as at 4 January 2016
Book value Estimated realisable value Assets $'000s $'000s Cash at Bank - - Cash on Hand - - Debtors - - Inventory - - Plant and Equipment - - Investment in Subsidiaries - - Total assets - - Liabilities Employees - - ROT creditors - - Secured creditors 124,922 124,922 Unsecured creditors - - Contingent liabilities (employee entitlements) - - Total liabilities 124,922 124,922 Net assets / (deficiency) (124,922) (124,922) Source: The directors and offices of DS Holdings, pursuant to section 438B(2) of the Corporations Act 2001
B.7 DSG Franchising Pty Ltd
Statutory information
. ACN 054 295 733
. Formerly known as Dick Smith Electronics Franchising Pty Ltd
. Registered in New South Wales on 5 December 1991
. Registered office: 2 Davidson Street, Chullora NSW 2190
. Type/ class: Australian proprietary company, limited by shares
. Description: Dormant entity
Directors and officers
Name Role Appointment Date Resignation Date Nicholas Abboud Managing Director and Chief Executive Officer 26 November 2012 n/a Michael Potts Director 12 August 2014 n/a David Cooke Secretary 12 August 2014 n/a Source: A search of ASIC records, on 4 January 2016
Report as to Affairs
Summarised Report as to Affairs - as at 4 January 2016
Book value Estimated realisable value Assets $'000s $'000s Cash at Bank - - Cash on Hand - - Debtors - - Inventory - - Plant and Equipment - - Investment in Subsidiaries - - Total assets - - Liabilities Employees - - ROT creditors - - Secured creditors 124,922 124,922 Unsecured creditors - - Contingent liabilities (employee entitlements) - - Total liabilities 124,922 124,922 Net assets / (deficiency) (124,922) (124,922) Source: The directors and offices of DS Holdings, pursuant to section 438B(2) of the Corporations Act 2001
B.8 DMSG Pty Ltd
Statutory information
. ACN 001 585 735
. Formerly known as Dick Smith Management Pty Ltd
. Registered in New South Wales on 14 June 1978
. Registered office: 2 Davidson Street, Chullora NSW 2190
. Type/ class: Australian proprietary company, limited by shares
. Description: Dormant entity
Directors and officers
Name Role Appointment Date Resignation Date Nicholas Abboud Managing Director and Chief Executive Officer 26 November 2012 n/a Michael Potts Director 12 August 2014 n/a David Cooke Secretary 12 August 2014 n/a Source: A search of ASIC records, on 4 January 2016
Report as to Affairs
Summarised Report as to Affairs - as at 4 January 2016
Book value Estimated realisable value Assets $'000s $'000s Cash at Bank - - Cash on Hand - - Debtors - - Inventory - - Plant and Equipment - - Investment in Subsidiaries - - Total assets - - Liabilities Employees - - ROT creditors - - Secured creditors 124,922 124,922 Unsecured creditors - - Contingent liabilities (employee entitlements) - - Total liabilities 124,922 124,922 Net assets / (deficiency) (124,922) (124,922) Source: The directors and offices of DS Holdings, pursuant to section 438B(2) of the Corporations Act 2001
B.9 Dick Smith Electronics Staff Superannuation Fund Pty Limited
Statutory information
. ACN 059 802 470
. Registered in New South Wales on 16 April 1993
. Registered office: 2 Davidson Street, Chullora NSW 2190
. Type/ class: Australian proprietary company, limited by shares
. Description: Dormant entity
Directors and officers
Name Role Appointment Date Resignation Date Nicholas Abboud Managing Director and Chief Executive Officer 26 November 2012 n/a Michael Potts Director 12 August 2014 n/a David Cooke Secretary 12 August 2014 n/a Source: A search of ASIC records, on 4 January 2016
Report as to Affairs
Summarised Report as to Affairs - as at 4 January 2016
Book value Estimated realisable value Assets $'000s $'000s Cash at Bank - - Cash on Hand - - Debtors - - Inventory - - Plant and Equipment - - Investment in Subsidiaries - - Total assets - - Liabilities Employees - - ROT creditors - - Secured creditors 124,922 124,922 Unsecured creditors - - Contingent liabilities (employee entitlements) - - Total liabilities 124,922 124,922 Net assets / (deficiency) (124,922) (124,922) Source: The directors and offices of DS Holdings, pursuant to section 438B(2) of the Corporations Act 2001
B.10 DSE (NZ) Limited
Statutory information
. NZ 37602 or NZBN 9429040780702
. Registered in New Zealand on 8 April 1981
. Registered office: Bell Gully, Level 22, 48 Shortland Street Auckland, 1010, NZ
. Type/ class: New Zealand limited company, limited by shares
. Description: NZ trading and employing entity
Directors and officers
Name Role Appointment Date Resignation Date Nicholas Abboud Managing Director and Chief Executive Officer 26 November 2012 n/a Michael Potts Director 12 August 2014 n/a Source: A search of the New Zealand Company Office records, on 4 January 2016
Report as to Affairs
Summarised Report as to Affairs - as at 4 January 2016
Book value Estimated realisable value Assets $'000s $'000s Cash at Bank 2,737 2,737 Cash on Hand 52 52 Debtors 19,200 19,200 Inventory 28,266 28,266 Plant and Equipment 10,260 10,260 Investment in Subsidiaries - 10,732 Prepayments 1,268 1,268 Total assets 61,784 72,517 Liabilities Employees 749 749 ROT creditors 2,675 2,675 Secured creditors 124,922 124,922 Unsecured creditors 27,679 27,679 Contingent liabilities (employee entitlements) Total liabilities 156,024 156,024 Net assets / (deficiency) (94,239) (83,507) Source: The directors and offices of DS Holdings, pursuant to section 438B(2) of the Corporations Act 2001
Appendix C – DS NZ financial information
DS NZ financial information
Introduction
DS NZ operated 62 Dick Smith branded stores located throughout New Zealand and a distribution centre located in Wiri, Auckland. DS NZ’s back office and support functions were performed by DS Electronics out of its Chullora head office, including all treasury and finance functions.
On Appointment, DS NZ employed 446 full-time, part-time and casual employees.
While DS NZ had local transactional banking accounts with Bank of New Zealand (“BNZ”) and HSBC, it did not operate its own debt facilities, with all on-going funding requirements provided by DS Electronics through an inter-company current account. By way of a general security deed dated 22 June 2015, DS NZ provided the Secured Creditors with a charge over all of its present and after acquired property securing the outstanding debt of DSG. Financial information
The historical financial information for FY13, FY14 and FY15 is sourced from DS NZ’s audited accounts lodged with the New Zealand Companies Office pursuant to section 207D and 207E of the NZ Act. The financial information for the six month period from July 2015 to December 2015 is sourced from unaudited management accounts of DS NZ. Historical profit and loss
A summary of DS NZ’s historical profit and loss is provided below:
DS NZ summary profit and loss
Audited Draft mgnt NZD$'m FY13 FY14 FY15 1H16 Sales 286 199 179 94 Cost of sales (238) (148) (137) (79) Gross profit 48 51 42 15 Gross profit margin 17% 26% 23% 16% Opex (57) (44) (38) (20) Adjusted EBITDA (9) 7 4 (5) Stock obsolescence and restructuring (provisions)/write-backs (1) 5 - (9) Reported EBITDA (11) 12 4 (14) EBITDA margin (4%) 6% 2% (15%) Interest, tax, depr, amort (1) (8) (3) (1) Net profit after tax (12) 4 1 (14)
Source: FY13, FY14, FY15 audited statutory accounts, Dec 15 unaudited management accounts Key points:
. The 30.4% (NZ $87 million) decline in revenue between FY13 and FY14 was due to a reduction in store numbers (FY12 year end: 62 stores, FY13 year end: 61 stores together with higher sales in FY13 as a result of:
FY13 representing a 53 week year versus 52 weeks in FY14 and FY15;
increased promotional and inventory clearance activity undertaken by Woolworths prior to the acquisition by Anchorage in November 2012; and
significant inventory clearance activity undertaken post acquisition by Anchorage.
. In the 12 months to 30 September 2015, same store sales and gross profit declined by c.9.3% (NZ $16.9 million) and c.16.0% (NZ $6.7 million) respectively, while wage and occupancy costs increased by 3.8% (NZ $0.8 million).
. The low gross profit margin in FY13 of 17% (FY12: 23%) is attributable to the significant inventory clearance activity undertaken both pre and post Anchorage’s acquisition in November 2012.
. The low gross profit margin in 1HFY16 of 16% was due to discounting throughout the period, as DSG aggressively cleared significant aged and obsolete inventory in an effort to generate liquidity.
. The NZ $5 million write-back processed in FY14 represents the reversal of specific onerous lease provisions previously recognised following the subletting of certain leased premises. Of the AUD $60 million stock provision raised by DSG in November 2015, NZ $9.4 million related to DS NZ.
Historical balance sheet
A summary of DS NZ’s historical balance sheet is provided below:
DSE NZ summary balance sheet
Audited Mgmt NZD$'m Jun 13 Jun 14 Jun 15 Dec 15 Cash and cash equivalents 11.1 2.6 10.8 8.8 Trade and other receivables 4.5 6.2 6.0 5.9 Inventories 36.3 43.2 45.0 35.4 Other current assets 1.4 0.0 0.6 0.6 Plant and equipment 8.1 7.7 9.1 5.9 Other non-current assets 9.2 3.4 2.2 7.8 Inter-company current account 17.2 27.7 20.2 10.5 Total assets 87.8 90.8 94.0 75.1 Trade and other payables (12.0) (19.2) (23.3) (16.9) Other current liabilities (10.4) (6.5) (4.7) (6.7) Inter-company loan - DS Holdings (11.2) (11.2) (11.2) (11.2) Other non-current liabilities (6.7) (2.9) (2.2) (2.0) Total liabilities (40.2) (39.8) (41.4) (36.7) Net assets 47.6 51.0 52.5 38.4
Source: FY13, FY14, FY15 audited statutory accounts, Dec 15 unaudited management accounts Key points:
. The NZ $14.1 million (26.9%) reduction in net assets between 28 June 2015 and 27 December 2015 was primarily due to:
reduction in the book value of inventory as a result of the December 2015 Christmas trading period and an increase in the inventory obsolescence provision (as discussed previously);
NZ $5 million impairment provision raised against the book value of plant and equipment in December 2015. This represents the portion of the AUD $40 million PP&E impairment raised by DSG in December 2015 to recognise that the carrying value was less than the net present value of forecast earnings (refer section 5.1); and
a NZ $9.7 million reduction in the inter-company current account receivable from DS Electronics, made up of management fees and intercompany costs of NZ $9.1 million charged to DS NZ, and net cash transfers from DS Electronics to DS NZ of $0.6 million.
. Other non-current assets represent deferred tax assets.
Historical cash flow
The DS NZ financial accounts did not include a cash flow statement; however we make the following comments:
. The finance function for DSG was centralised in Sydney, with excess cash from DS NZ remitted to head office through ‘inter-company cash transfers’; and
. DS NZ had no external borrowings, the only debt balance being an inter-company loan from DS Holdings.
Appendix D – Notice of meeting
FORM 529A Corporations Act 2001 Subregulation 5.6.12(1) NOTICE OF SECOND MEETING OF CREDITORS OF COMPANY UNDER ADMINISTRATION
DSHE Holdings Limited (formerly Dick Smith Holdings Limited) ACN 166 237 841 DSSH Pty Ltd (formerly Dick Smith Sub-Holdings Pty Limited) ACN 160 162 925 DSHG Pty Limited (formerly DSE Holdings Pty Limited) ACN 001 456 720 DSG Wholesale Pty Ltd (formerly Dick Smith (Wholesale) Pty Ltd) ACN 000 445 956 DSG Electronics Pty Limited (formerly Dick Smith Electronics Pty Limited) ACN 000 908 716 INTT Pty Ltd (formerly InterTAN Australia Pty Ltd) ACN 002 511 944 DSG Franchising Pty Ltd (formerly Dick Smith Electronics Franchising Pty Ltd) ACN 054 295 733 DMSG Pty Ltd (formerly Dick Smith Management Pty Ltd) ACN 001 585 735 (Receivers and Managers Appointed) (Administrators Appointed)
Dick Smith Electronics Staff Superannuation Fund Pty Limited ACN 059 802 470 A.C.N. 136 849 584 Pty Limited (formerly Mac 1 Pty Limited) ACN 136 849 584 (Administrators Appointed)
(collectively referred to as “DSG”)
1 On 4 January 2016 DSG, under Section 436A of the Corporations Act 2001, appointed Jason Preston, Jamie Harris, Matthew Caddy and Joseph Hayes of McGrathNicol as Joint & Several Voluntary Administrators.
2 Notice is now given that the second meeting of the creditors of DSG will be held concurrently on Monday, 25 July 2016 at 11:00am at the Wesley Conference Centre, 220 Pitt Street, Sydney NSW 2000.
3 The agenda of the meeting is set out below.
. To consider the Administrators' report pursuant to Section 439A of the Corporations Act 2001, in relation to DSG and any other matters raised relating to DSG’s future, and then to resolve either that:
DSG execute a Deed of Company Arrangement; or
the administrations should end; or
DSG be wound up.
. In the event that DSG is wound up, consider the appointment of Committees of Inspection:
4 To discuss any other relevant business which may arise.
Dated: 13 July 2016
Joseph Hayes
Joint & Several Administrator
Appendix E – Declaration of Independence, Relevant Relationships and Indemnities
Declaration of Independence, Relevant Relationships and Indemnities
Last updated 13 May 2016
DSHE Holdings Limited (formerly known as Dick Smith Holdings Limited) (ACN 166 237 841);
DSSH Pty Ltd (formerly known as Dick Smith Sub-Holdings Pty Limited) (ACN 160 162 925);
DSHG Pty Limited (formerly known as DSE Holdings Pty Limited) (ACN 001 456 720);
DSG Wholesale Pty Ltd (formerly known as Dick Smith (Wholesale) Pty Ltd (ACN 000 445 956);
DSG Electronics Pty Limited (formerly known as Dick Smith Electronics Pty Limited) (ACN 000 908 716);
Dick Smith Electronics Staff Superannuation Fund Pty Limited (ACN 059 802 470);
INTT Pty Ltd (formerly known as InterTAN Australia Pty Ltd) (ACN 002 511 944);
DSG Franchising Pty Ltd (formerly known as Dick Smith Electronics Franchising Pty Ltd) (ACN 054 295 733);
DMSG Pty Ltd (formerly known as Dick Smith Management Pty Ltd) (ACN 001 585 735);
A.C.N. 136 849 584 Pty Limited (formerly known as Mac 1 Pty Limited) (ACN 136 849 584) (“Mac 1”); and
DSHNZ Limited (formerly known as DSE (NZ) Limited) (NZ company number 37602)
(Administrators Appointed to all) (“the Companies”)
The Corporations Act 2001 and professional standards require the Practitioner/s appointed to an insolvent entity to make a declaration as to:
1 Their independence generally;
2 Relationships, including
a. the circumstances of the appointment;
b. any relationships with the company and others within the previous 24 months;
c. any prior professional services for the company within the previous 24 months;
d. that there are no other relationships to declare; and
3 Any indemnities given or up-front payments made to the Practitioner.
This declaration is made in respect of ourselves, our partners and McGrathNicol, including but not limited to the McGrathNicol Partnership, the McGrathNicol Advisory Partnership and their related entities.
A. Independence
We, Joseph Hayes, Jason Preston, William Harris and Matthew Caddy, of the firm McGrathNicol have undertaken a proper assessment of the risks to our independence prior to accepting the appointment as administrators of the
Declaration of Independence, Relevant Relationships and Indemnities
Companies in accordance with the law and applicable professional standards. This assessment identified no real or potential risks to our independence. We are not aware of any reasons that would prevent us from accepting these appointments.
B. Declaration of Relationships
i. Circumstances of appointment
We were introduced to the Companies by Mr Michael Hughes of the firm Minter Ellison on 22 December 2015. Minter Ellison provides legal advice to the Companies and in some cases their Directors.
We have had numerous meetings with the Companies and the Directors during the period from 24 December 2015 to 4 January 2016 (“the Period”) for the purposes of:
. understanding at a high level the financial position and cash forecast of the Companies for the purposes of providing the Companies with a review of the solvency position; and,
. (latterly) preparing for our appointment as Administrators including understanding creditor and supplier information in anticipation of continuing the trading operations of the business on commencement of the Administrations.
We have also attended on several calls with the Companies' financiers (National Australia Bank, HSBC Bank and Macquarie Bank) and their advisors during the Period to enable us to advise the Companies on the solvency position of the Companies.
We have not received any payment for this advice and have confirmed to the Companies that no fee will be payable under the engagement letter entered into retaining us to provide this advice. As such, we are not creditors of the Companies.
In our opinion, these matters do not give rise to our having a conflict of interest or duty for the following reasons:
. They were limited to discussions pertaining to the solvency of the Companies and the options available to the Companies.
. They did not involve any advice to any secured or any other creditor.
. The limited nature and scope of this engagement will not influence our ability to be able to fully comply with the statutory and fiduciary obligations associated with the voluntary administrations of the Companies in an objective and impartial manner.
These meetings do not result in a conflict of interest or duty as the advice provided only related to the possible or potential insolvency of the Companies and alternative courses of action and their consequences for the Companies and, as noted in the Australian Restructuring, Insolvency & Turnaround Association (ARITA) Code of Professional Practice (CoPP), such advice does not compromise our independence.
Declaration of Independence, Relevant Relationships and Indemnities
In particular:
. It is recognised by the Courts and the ARITA Code of Professional Practice that pre-appointment advice on solvency and the insolvency process and available options is necessary and does not amount to an impediment to accepting an appointment; and
. The nature of the advice provided was such that it would not be subject to review and challenge during the course of the administration. Nor would the advice influence our ability to be able to fully comply with the statutory and fiduciary obligations associated with the administration in an objective and impartial manner.
We have provided no other information or advice to the Companies or their Directors prior to our appointments beyond that outlined in this DIRRI.
ii. Relevant Relationships (excluding Professional Services to the Companies)
We or a member of our firm, have or have had within the preceding 24 months, a relationship with:
Nature of Reasons for believing this relationship does not give rise Name relationship to a conflict of interest or duty
National Australia NAB holds a charge Each professional engagement undertaken for NAB in relation Bank Limited (“NAB”) on the whole or to a particular entity or group of entities is conducted on an substantially the entirely separate basis which has no connection with these whole of the property appointments. of the Companies. These engagements are only commenced after full regard is McGrathNicol given to potential conflicts of interest in relation to all undertakes corporate interested stakeholders. recovery and advisory work from time to McGrathNicol has not undertaken an engagement for NAB in time on instructions respect of the Companies. from NAB.
HSBC Bank (“HSBC”) HSBC is a secured Each professional engagement undertaken for HSBC in lender and through a relation to a particular entity or group of entities is conducted security trustee hold a on an entirely separate basis which has no connection with charge on the whole these appointments. or substantially the whole of the property These engagements are only commenced after full regard is of the Companies. given to potential conflicts of interest in relation to all interested stakeholders. McGrathNicol
Declaration of Independence, Relevant Relationships and Indemnities
Nature of Reasons for believing this relationship does not give rise Name relationship to a conflict of interest or duty
undertakes corporate McGrathNicol has not undertaken an engagement for HSBC recovery and advisory in respect of the Companies. work from time to time on instructions from HSBC.
{Updated Section – 13 May 2016}
Receivers and The Voluntary James Stewart, Jim Sarantinos and Ryan Eagle are the Mangers Administrators Receivers and Managers of the Companies (excluding Mac 1). entered into a funding The Receivers and Managers, requested the Voluntary agreement with the Administrators to take various steps in the course of the Receivers and Voluntary Administration of the Companies which shall be of Managers benefit to the Receivers and Managers and their appointers, NAB and HSBC.
The Voluntary Administrators entered into a funding agreement with the Receivers and Managers for the additional professional time costs and disbursements incurred in taking various steps in the course of the Voluntary Administration of the Companies which shall be of benefit to the Receivers and Managers, NAB and HSBC. At the date of entering into the funding agreement, there were no funds available to the Voluntary Administrators to provide for the additional professional time costs and disbursements incurred or to be incurred.
The Voluntary Administrators are not required under the funding agreement to take any steps and/or undertake any work at the request of the Receivers and Managers, NAB or HSBC for the benefit exclusively for the Receivers and Managers, NAB or HSBC under the funding agreement.
In respect of professional fees funded by the Receivers and Managers, Voluntary Administrators will seek approval from creditors in accordance with the Act before drawing any amounts.
Declaration of Independence, Relevant Relationships and Indemnities
Nature of Reasons for believing this relationship does not give rise Name relationship to a conflict of interest or duty
Macquarie Bank MBL is an unsecured Each professional engagement undertaken for MBL in relation Limited (“MBL”) lender to the to a particular entity or group of entities is conducted on an Companies. entirely separate basis which has no connection with these appointments. McGrathNicol undertakes corporate These engagements are only commenced after full regard is recovery and advisory given to potential conflicts of interest in relation to all work from time to interested stakeholders. time on instructions from MBL. McGrathNicol has not undertaken an engagement for MBL in respect of the Companies.
Minter Ellison Minter Ellison acts as Each professional engagement undertaken after referral by Solicitors for the and/or on instructions from Minter Ellison is conducted on an Companies and, as entirely separate basis, which has no connection with these noted above, that firm appointments. introduced us to the Companies. These engagements are only commenced after full regard is given to potential conflicts of interest in relation to all Minter Ellison interested stakeholders. periodically refers engagements to McGrathNicol has not undertaken any engagement for the McGrathNicol. Companies (other than that referred to in Part B (a) above), subject of this recent instruction, and the introduction itself is Minter Ellison also entirely unconditional. undertakes legal work from time to time on The legal work conducted by Minter Ellison on instructions various corporate from McGrathNicol is also conducted on an entirely separate advisory and recovery basis, and has no connection with this appointment, and is engagements under itself only commenced after full regard is given to potential McGrathNicol’s conflicts of interest. instructions.
Given these reasons, our independence in acting as administrators of the Companies has not been affected.
Declaration of Independence, Relevant Relationships and Indemnities
iii. Prior professional services to the Companies
We or a member of our firm, have provided the following professional services to the Companies, in the 24 months prior to acceptance of this appointment.
Nature of Professional Service Reasons
Immediately prior to our appointment as Voluntary We believe this relationship does not result in a conflict of Administrators, McGrathNicol Advisory was interest or duty because: engaged by Dick Smith Holdings Limited The work undertaken during the review engagement has We were introduced to the Companies by Mr assisted us in developing an understanding of the Michael Hughes of the firm Minter Ellison on 22 Companies and their activities. Much of the investigatory December 2015. Minter Ellison provides legal work done during the review engagement is work that advice to the Companies and in some cases their would have been done by us in order to be able to report Directors. to creditors under s439A of the Corporations Act. As such, this information will be made available to We had numerous meetings with the Companies creditors when we report to them in due course. and the Directors during the period from 24 December 2015 to 4 January 2016 (“the Period”) for The nature of the draft report provided to the Companies the purposes of: is such that it would not be subject to review and challenge during the course of the voluntary . understanding at a high level the financial administrations. The review engagement will not influence position and cash forecast of the Companies our ability to be able to fully comply with the statutory for the purposes of providing the Companies and fiduciary obligations associated with the voluntary with a review of the solvency position; and, administrations of the Companies in an objective and . (latterly) preparing for our appointment as impartial manner. Administrators including understanding creditor
and supplier information in anticipation of continuing the trading operations of the business on commencement of the Administrations.
We also attended on several calls with the Companies' financiers (National Australia Bank, HSBC Bank and Macquarie Bank) and their advisors during the Period to enable us to advise the Companies on the solvency position of the Companies.
Declaration of Independence, Relevant Relationships and Indemnities
Nature of Professional Service Reasons
We have not received any payment for this advice and have confirmed to the Companies that no fee will be payable under the engagement letter entered into retaining us to provide this advice. As such, we are not creditors of the Companies.
Prior to our appointment as Voluntary We believe this relationship does not result in a conflict of Administrators, McGrathNicol Advisory was interest or duty because: engaged by Dick Smith Holdings Limited to provide The scope of our review was narrow, concerning financial due diligence services in relation to the preparation of material to understand the business Dick acquisition by Dick Smith of Mac 1 Pty Limited. Smith was acquiring, explaining the key drivers of The engagement, undertaken in July and August profitability, sales analytics, cash and working capital and 2014, was to advise on matters that could have a balance sheet metrics. As such, much of this information material impact on or be significant in the will be made available to creditors when we report to assessment of the proposed transaction. them in due course.
McGrathNicol Advisory was paid $35,000 in respect Our report did not comment on the structural aspects of of those services. the transaction including purchase price and terms. We also note the relative immateriality of the transaction in
the context of the group.
Declaration of Independence, Relevant Relationships and Indemnities
iv. Concurrent Appointments to related parties
Nature of Professional Service Reasons
We were concurrently appointed Voluntary We believe this relationship does not result in a conflict of Administrators of the Companies, being Dick Smith interest or duty because: Holdings Limited and its wholly owned Australian The Companies collectively operate the retail and and New Zealand subsidiaries. commercial electronics business together. The nature of the business operations mean that the administrations can be conducted more efficiently by one practitioner.
Following discussions with management, we have not identified any conflicts of interests caused from real dispute as to the facts, or as to the validity of transactions between Companies.
Notwithstanding that we have made enquiries regarding threats to independence from group appointment, if a conflict does arise, we will keep creditors informed and take appropriate action to resolve the conflict.
v. No other relevant relationships to disclose
There are no other known relevant relationships, including personal, business and professional relationships, from the previous 24 months with the Companies, an associate of the Companies, a former insolvency practitioner appointed to the Companies or any person or entity that has security over the whole or substantially whole of the Companies’ property that should be disclosed.
C. Indemnities and Up-front Payments
{Updated Section – 13 May 2016}
As noted above however, the Voluntary Administrators entered into a funding agreement with the Receivers and Managers for the additional professional time costs and disbursements incurred in taking various steps in the course of the Voluntary Administration of the Companies which shall be of benefit to the Receivers and Managers, NAB and HSBC. At the date of entering into the funding agreement, there were no funds available to the Voluntary Administrators to provide for the additional professional time costs and disbursements incurred or to be incurred.
Declaration of Independence, Relevant Relationships and Indemnities
The Voluntary Administrators are not required under the funding agreement to take any steps and/or undertake any work at the request of the Receivers and Managers, NAB or HSBC for the benefit exclusively for the Receivers and Managers, NAB or HSBC under the funding agreement.
In respect of professional fees funded by the Receivers and Managers, Voluntary Administrators will seek approval from creditors in accordance with the Act before drawing any amounts.
With the exception of the funding arrangement with the Receivers and Managers, we have not been indemnified in relation to the administrations, other than any indemnities that we may be entitled to under statute and we have not received any up-front payments in respect of our remuneration or disbursements from the Directors
Dated: 7 April 2016
......
Joseph Hayes Jason Preston
......
William Harris Matthew Caddy
Note:
1 If the circumstances change or new information is identified, we are required under the Corporations Act 2001 and the ARITA Code of Professional Practice to update this Declaration and provide a copy to the
Declaration of Independence, Relevant Relationships and Indemnities
creditors/Committee with our next communication, as well as table a copy of any replacement Declaration at the next meeting of the insolvent’s creditors/Committee.
2 Any relationships, indemnities or up-front payments disclosed in the Declaration of Independence, Relevant Relationships and Indemnities (DIRRI) must not be such that the Practitioner is no longer independent. The purpose of components B and C of the DIRRI is to disclose relationships that, while they do not result in the Practitioner having a conflict of interest or duty, ensure that creditors are aware of those relationships and understand why the Practitioner nevertheless remains independent.
Please note that the presentation of the above information is in accordance with the standard format suggested by ARITA.
Appendix F – Remuneration report
Corporations Act 2001
Section 449E
REMUNERATION REQUEST APPROVAL REPORT
DSHE Holdings Limited (formerly known as Dick Smith Holdings Limited) ACN 166 237 841 (“DSH”) DSG Electronics Pty Limited (formerly known as Dick Smith Electronics Pty Limited) ACN 000 908 716 (“DSE”) both (Administrators Appointed) (Receivers and Managers Appointed) (“the Companies”)
1 Declaration
We, Joseph Hayes, Jason Preston, Jamie Harris and Matt Caddy of McGrathNicol have undertaken a proper assessment of this remuneration claim for our appointment as Administrator of the Companies in accordance with the law and applicable professional standards. We are satisfied that the remuneration claimed is in respect of necessary work, properly performed in the conduct of the Administration. 2 Executive Summary
To date no remuneration has been approved, or drawn, for the Companies.
This remuneration request approval report details the following:
Remuneration Overview
Amount Company Time period External Administration Reference (ex GST) ($) DSH 4 January 2016 to 17 June 2016 Voluntary Administration 3.1 32,696 DSH Forecast 18 June 2016 to second meeting of creditors 1 Voluntary Administration 3.2 34,990 DSE 4 January 2016 to 17 June 2016 Voluntary Administration 3.3 557,557 DSE Forecast 18 June 2016 to second meeting of creditors 1 Voluntary Administration 3.4 200,100 Total 825,343 Note 1: Future remuneration is based on an estimate of the work required between now and the second meeting of creditors. We note this is a capped amount, and will only be drawn if the work is completed. Should additional work be necessary beyond what is contemplated, further approval may be sought from creditors. Please refer to our Scale of Relevant Rates and Relevant Experience for each level of staff at Annexure A, and the Remuneration Request Approval Report section for full details of the calculation and composition of the remuneration approval sought.
3 Description of work completed / to be completed 3.1 Fee Resolution 1: Remuneration incurred for the period 4 January 2016 to 17 June 2016 for DSH
Joseph Hayes, Jason Preston, Jamie Practitioners Period from 4 January 2016 To 17 June 2016 Harris and Matt Caddy Administration Voluntary Administration Firm McGrathNicol type DSHE Holdings Limited (formerly known as Dick Smith Holdings Limited) Company (Administrators Appointed) (Receivers and Managers Appointed)
3.1.1 Description of work completed
Task area General description Includes
Shareholders ASX . Lodging updates on the ASX website. $11,046.00 (ex GST) ASIC . Corresponding with ASIC in respect of 2M Reporting Relief. 26.40 hours
Shareholders . Corresponding with shareholders. . Responding to shareholder queries. . Considering the likelihood of a return to shareholders.
Creditors Secured creditors . Meeting and liaising with the Receivers and Managers regarding $2,435.00 strategy including the extension of the convening period. (ex GST) . Negotiating a funding agreement with the secured creditors, in 5.30 hours relation to work undertaken specifically to support the realisation activities being undertaken during the Receivership.
First Meeting of . Preparing meeting notices, proxies and advertisements. Creditors . Distributing the notice of meeting to all known creditors.
. Organising a webinar presentation for those creditors who were unable to attend the meeting in person. . Preparing presentation slides and Chairperson Notes. . Preparing the logistics for meeting including room set up, the sign in process and considering responses to anticipated questions. . Maintaining and reviewing the proxy register. . Preparing the meeting file, including the agenda, certificate of postage, attendance register, lists of creditors, report to creditors, and the advertisement of meeting. . Developing a media management plan and protocols for attendance at the first meeting. . Liaising with media regarding the first creditor meeting. . Preparing and lodging the minutes of the first meeting with ASIC.
Committee of . Issuing the nominated members of the Committee of Creditors with Creditors authorisations to act and confidentiality agreements. . Holding the first meeting of the Committee of Creditors. . Issuing updates to the Committee of Creditors.
Task area General description Includes
439A Report and the . Drafting the 439A report. Second Meeting of Creditors
Investigation Conducting . Receiving company information from the Receivers and Managers in $8,970.50 investigation response to our information requests. (ex GST) . Reviewing and analysing the information provided, for the areas to be 18.30 hours included in the 439A Report.
. Reviewing updates issued by the Receivers and Managers on their work undertaken. . Reviewing and analysing management accounts, annual reports, and prospectus information, for inclusion in the 439A Report.
Statutory and Strategy and project . Preparing and maintaining task lists and checklists, and attending Administration management team meetings, to ensure the smooth running of the administration. $10,244.50 . Corresponding with our insurance broker to ensure adequate (ex GST) insurance cover is maintained. 19.70 hours . Ongoing file management.
DIRRI . Reviewing and amending the DIRRI once the funding agreement with the secured creditors was finalised.
Statutory notices . Preparing and lodging all statutory notices with ASIC including the Form 505 on appointment. . Advising other statutory authorities (e.g. the Australian Taxation Office and the Office of State Revenue) of our appointment.
Report as to Affairs . Issuing a letter to the Dick Smith Group’s directors and secretary requesting they complete a RATA. (“RATA”) . Liaising with the directors regarding the logistics of RATA lodgements, including granting an extension for its provision. . Reviewing the RATAs once received against the management accounts of the Dick Smith Group.
Books and records . Reviewing the process undertaken by the Receivers and Managers to capture the electronic data of the Dick Smith Group on appointment, and becoming satisfied that this process was sufficient. . Preparing various information requests to the Receivers and Managers.
Taxation . Lodging monthly Business Activity Statements. . Preparing letters to the Australian Taxation Office for documents in relation to accessing freedom of information.
3.1.2 Calculation of remuneration incurred
DSHE Holdings Limited Remuneration for the period 4 January 2016 to 17 June 2016 Statutory and Rate Total Shareholders Creditors Investigation Administration Employee Position $/hr hrs $ (ex GST) hrs $ (ex GST) hrs $ (ex GST) hrs $ (ex GST) hrs $ (ex GST) Joseph Hayes Partner 650 12 7,475 - - - - 7 4,225 5 3,250 Jason Preston Partner 650 9 5,525 - - 1 650 - - 8 4,875 Anne-Maree Keane Partner 650 5 3,250 - - - - 5 3,250 - - Matthew Caddy Partner 650 1 780 ------1 780 Jonathan Henry Director 1 550 9 4,675 9 4,675 ------Heather Matheson Senior Manager 500 3 1,250 3 1,250 ------Damien Pasfield Senior Manager 500 1 350 1 350 ------Louise Mann Manager 1 475 2 713 - - 2 713 - - - - Kate Versey Assistant Manager 430 8 3,354 5 2,021 2 903 1 258 0 172 Timothy Duncan Accountant 275 10 2,750 10 2,750 ------Aleksandra Pejoska Graduate 275 3 908 - - 1 138 1 193 2 578 Emmanuel Hart Undergraduate 190 7 1,235 - - - - 6 1,045 1 190 Treasury and Administration 160 3 432 - - 0 32 - - 3 400 Total (excluding GST) 70 32,696 26 11,046 5 2,435 18 8,971 20 10,245 GST 3,270 Total (including GST) 35,966 Average hourly rate 469 418 459 490 520
3.2 Fee Resolution 2: Remuneration estimated for the period 18 June 2016 to the Second Meeting of Creditors for DSH
Second Joseph Hayes, Jason Preston, Jamie Practitioners Period from 18 June 2016 To Meeting of Harris and Matt Caddy Creditors Administration Voluntary Administration Firm McGrathNicol type DSHE Holdings Limited (formerly known as Dick Smith Holdings Limited) Company (Administrators Appointed) (Receivers and Managers Appointed)
3.2.1 Description of work completed
Task area General description Includes
Shareholders ASX . Lodging updates on the ASX website. $18,130.00 (ex GST) ASIC . Corresponding with ASIC in respect of Reporting Relief. 33.00 hours
Shareholders . Corresponding with shareholders. . Responding to shareholder queries.
Creditors 439A Report and the . Finalising the 439A report. $9,225.00 Second Meeting of . Preparing meeting notices, proxies and advertisements. (ex GST) Creditors 20.00 hours . Preparing and placing an advertisement on the ASIC Insolvency Notices website in regards to the second creditors meeting. . Forwarding notice of meeting to all known creditors. . Preparing presentation slides and chairperson notes. . Attending to logistics for second creditors meeting including room set up, sign in process and anticipated questions. . Preparing meeting file, including agenda, certificate of postage, attendance register, lists of creditors, report to creditors and meeting advertisement. . Attending and chairing the second creditors meeting.
Committee of . Holding meeting of the Committee of Creditors. Creditors . Issuing updates to the Committee of Creditors if required
Secured creditors . Meeting and liaising with the Receivers and Managers regarding strategy.
Statutory and Strategy and project . Preparing and maintaining task lists and checklists, and attending Administration management team meetings, to ensure the smooth running of the administration. $7,205.00 . Ongoing file management. (ex GST) 22 hours DIRRI . Reviewing and amending the DIRRI, if required.
Task area General description Includes
Taxation . Lodging monthly Business Activity Statements.
3.2.2 Calculation of estimated remuneration
DSHE Holdings Limited Remuneration estimated for the period 18 June 2016 to the second meeting of creditors Statutory and Rate Total Shareholders Creditors Administration Employee Position $/hr hrs $ (ex GST) hrs $ (ex GST) hrs $ (ex GST) hrs $ (ex GST) Joe Hayes Partner 650 11 7,150 7 4,550 2 1,300 2 1,300 Jason Preston Partner 650 7 4,550 5 3,250 2 1,300 - - Jono Henry Director 550 10 5,500 5 2,750 5 2,750 - - Damien Pasfield Senior Manager 500 ------Heather Matheson Senior Manager 500 20 10,000 10 5,000 5 2,500 5 2,500 Kate Versey Assistant Manager 430 8 3,440 6 2,580 - - 1 430 Aleksandra Pejoska Accountant 275 10 2,750 - - 5 1,375 5 1,375 Admin 160 10 1,600 - - - - 10 1,600 Total (excluding GST) 76 34,990 33 18,130 19 9,225 23 7,205 GST 3,499 Total (including GST) 38,489 Average hourly rate 460 549 486 313
3.3 Fee Resolution 3: Remuneration incurred for the period 4 January 2016 to 17 June 2016 for DSE
Joseph Hayes, Jason Preston, Jamie Practitioners Period from 4 January 2016 To 17 June 2016 Harris and Matt Caddy Administration Voluntary Administration Firm McGrathNicol type DSG Electronics Pty Limited (formerly known as Dick Smith Electronics Pty Limited) Company (Administrators Appointed) (Receivers and Managers Appointed)
3.3.1 Description of work completed
Task area General description Includes
Creditors Secured creditors . Meeting and liaising with the Receivers and Managers regarding $370.695.50 strategy, including the extension of the convening period. (ex GST) . Negotiating a funding agreement with the secured creditors, in 757.80 hours relation to work undertaken specifically to support the realisation activities being undertaken during the Receivership.
Unsecured creditors . Obtaining a listing of unsecured trade creditors with addresses and contact details. . Drafting and issuing a Circular to Creditors on appointment, containing the notice of the first meeting of creditors. . Engaging Link Market Services and setting up a creditor/ stakeholder hotline for queries. . Receiving and following up creditor enquiries via telephone and email, as well as responding to queries escalated from Link Market Services. . Corresponding with NCAT regarding tribunal matters and the class order. . Collating an international suppliers list. . Advising creditors of the appointment of external administrators, and issuing a first circular to creditors.
Committee of . Issuing the nominated members of the Committee of Creditors with Creditors authorisations to act and confidentiality agreements. . Holding the first meeting of the Committee of Creditors. . Issuing updates to the Committee of Creditors on the progress of the administration.
Landlords . Obtaining a listing of landlords with addresses and contact details. . Notifying landlords of the Administrator’s intention not to exercise property rights.
Deed of Cross . Reviewing the Deed of Cross Guarantee and understanding the Guarantee significance and impact of it on the external administration. . Meeting with legal advisors to discuss the Deed of Cross Guarantee and its operation.
Task area General description Includes
First Meeting of . Preparing meeting notices, proxies and advertisements. Creditors . Distributing the notice of meeting to all known creditors.
. Organising a webinar presentation for those creditors who were unable to attend the meeting in person. . Preparing presentation slides and Chairperson Notes. . Preparing the logistics for meeting including room set up, the sign in process and considering responses to anticipated questions. . Maintaining and reviewing the proxy register. . Preparing the meeting file, including the agenda, certificate of postage, attendance register, lists of creditors, report to creditors, and the advertisement of meeting. . Developing a media management plan and protocols for attendance at the first meeting. . Liaising with media regarding the first creditor meeting. . Preparing and lodging the minutes of the first meeting with ASIC.
Committee of . Issuing the nominated members of the Committee of Creditors with Creditors authorisations to act and confidentiality agreements. . Holding the first meeting of the Committee of Creditors. . Issuing updates to the Committee of Creditors on the progress of the administration.
Extension of . Preparing an application to request an extension of the convening convening period period for the second meeting of creditors, in consultation with the Receivers and Managers. . Preparing the affidavit (plus supporting documentation) to support the application to extend the convening period. . Preparing an update to creditors, an update to shareholders and a press release regarding the successful application to extend the convening period.
439A Report and the . Reviewing and analysing the financial information of the Dick Smith Second Meeting of Group and investigating the reasons for failure. Creditors . Determining the content and key findings for inclusion in the 439A Report. . Preparing the financial data and analysis for presentation in the 439A Report. . Drafting the 439A report. . Preparing an application and affidavit in order to seek leave to make the 439A report available online. . Preparing the supporting documentation for the above affidavit. . Corresponding with Link Master Services regarding updated creditor information required for both the 439A report and the application to court.
McGrathNicol website . Organising McGrathNicol website to display details of the appointment. . Maintaining updated information on the website, for the benefit of stakeholders.
Task area General description Includes
Employees Entitlements . Obtaining employees details, including locations and contact details. $3,988.50 (ex GST) . Drafting and issuing a Circular to Employees on appointment. 9.10 hours . Corresponding with the Receivers and Mangers regarding employee entitlements.
Investigation Conducting . Receiving company information from the Receivers and Managers in $89,494.50 investigation response to our information requests. (ex GST) . Reviewing and analysing the information provided, for the areas to be 168.90 hours included in the 439A Report. . Reviewing updates issued by the Receivers and Managers on their work undertaken. . Reviewing and analysing management accounts, annual reports, and prospectus information, for inclusion in the 439A Report. . Conducting a store profitability analysis. . Reviewing and responding to the freedom of information request from the Australian Taxation Department.
Statutory and Strategy and project . Preparing and maintaining task lists and checklists, and attending Administration management team meetings, to ensure the smooth running of the administration. $93,378.50 . Corresponding with our insurance broker to ensure adequate (ex GST) insurance cover is maintained. 215.30 hours . Ongoing file management.
DIRRI . Reviewing and amending the DIRRI once the funding agreement with the secured creditors was finalised.
Statutory notices . Preparing and lodging all statutory notices with ASIC including the Form 505 on appointment. . Advising other statutory authorities (e.g. the Australian Taxation Office and the Office of State Revenue) of our appointment.
Report as to Affairs . Issuing a letter to the Dick Smith Group’s directors and secretary requesting they complete a RATA. (“RATA”) . Liaising with the directors regarding the logistics of RATA lodgements, including granting an extension for its provision. . Reviewing the RATAs once received against the management accounts of the Dick Smith Group.
Books and records . Reviewing the process undertaken by the Receivers and Managers to capture the electronic data of the Dick Smith Group on appointment, and becoming satisfied that this process was sufficient. . Preparing various information requests to the Receivers and Managers.
Taxation . Lodging monthly Business Activity Statements. . Preparing letters to the Australian Taxation Office for documents in relation to accessing freedom of information.
3.3.2 Calculation of remuneration incurred
DSG Electronics Pty Limited Remuneration for the period 4 January 2016 to 17 June 2016 Statutory and Rate Total Creditors Employees Investigation Administration Employee Position $/hr hrs $ (ex GST) hrs $ (ex GST) hrs $ (ex GST) hrs $ (ex GST) hrs $ (ex GST) Joseph Hayes Partner 650 159 103,350 91 58,825 - - 38 24,375 31 20,150 Jamie Harris Partner 650 15 9,815 8 5,135 1 325 0 260 6 4,095 Jason Preston Partner 650 20 13,260 8 4,940 - - 7 4,420 6 3,900 Shane Bell Director 1 595 4 2,083 - - - - 4 2,083 - - Jonathan Henry Director 1 550 253 139,150 186 102,025 2 1,100 52 28,600 14 7,425 Heather Matheson Senior Manager 500 189 94,250 156 77,750 - - 2 1,000 31 15,500 Damien Pasfield Senior Manager 500 65 32,650 26 13,100 3 1,250 12 6,100 24 12,200 Louise Mann Manager 1 475 7 3,420 1 618 - - 6 2,755 0 48 Kristen Legge Manager 1 475 4 1,900 - - - - 4 1,900 - - Andrew McEvoy Assistant Manager 430 82 35,432 57 24,338 - - 20 8,772 5 2,322 Kate Versey Assistant Manager 430 156 67,209 134 57,534 1 516 11 4,687 10 4,472 Dom Barnes Assistant Manager 430 4 1,720 4 1,720 ------Jessie Maguire Assistant Manager 430 5 2,279 2 731 - - 4 1,548 - - Thomas Colin Senior Accountant 375 3 1,125 - - - - 3 1,125 - - Timothy Duncan Accountant 275 117 32,258 48 13,090 1 303 1 303 68 18,563 Aleksandra Pejoska Graduate 275 41 11,385 20 5,610 2 495 6 1,568 14 3,713 Joshua Crick Graduate 275 4 1,210 4 1,210 ------Matthew Abraham Graduate 275 6 1,595 6 1,595 ------Paul Daryaei Graduate 275 5 1,320 5 1,320 ------Luke Tulloch Graduate 275 4 1,155 4 1,155 ------Treasury and Administration 160 6 992 ------6 992 Total (excluding GST) 1,151 557,557 758 370,696 9 3,989 169 89,495 215 93,379 GST 55,756 Total (including GST) 613,313 Average hourly rate 484 489 438 530 434
3.4 Fee Resolution 4: Remuneration estimated for the period 18 June 2016 to the Second Meeting of Creditors for DSE
Second Practitioners Joseph Hayes, Jason Preston, Jamie Period from To Meeting of Harris and Matt Caddy 18 June 2016 Creditors Administration Firm type Voluntary Administration McGrathNicol DSG Electronics Pty Limited (formerly known as Dick Smith Electronics Pty Limited) Company (Administrators Appointed) (Receivers and Managers Appointed)
3.4.1 Description of work completed
Task area General description Includes
Creditors Secured creditors . Meeting and liaising with the Receivers and Managers $141,850.00 (ex GST) 300.00 hours Unsecured creditors . Receiving and following up creditor enquiries via telephone and email, as well as responding to queries escalated from Link Market Services.
Committee of . Holding meeting of the Committee of Creditors. Creditors . Issuing updates to the Committee of Creditors if required.
439A Report and the . Finalising the 439A report. Second Meeting of . Preparing meeting notices, proxies and advertisements. Creditors . Preparing and placing an advertisement on the ASIC Insolvency Notices website in regards to the second creditors meeting. . Forwarding notice of meeting to all known creditors. . Preparing presentation slides and chairperson notes. . Attending to logistics for second creditors meeting including room set up, sign in process and anticipated questions. . Preparing meeting file, including agenda, certificate of postage, attendance register, lists of creditors, report to creditors and meeting advertisement. . Attending and chairing the second creditors meeting.
McGrathNicol website . Maintaining updated information on the website, for the benefit of stakeholders.
Investigation Conducting . Finalise investigations for 439A Report $33,750.00 investigation (ex GST) 60.00 hours
Task area General description Includes
Statutory and Strategy and project . Preparing and maintaining task lists and checklists, and attending Administration management team meetings, to ensure the smooth running of the administration. $24,500.00 . Ongoing file management. (ex GST) 68.00 hours DIRRI . Reviewing and amending the DIRRI, if required.
Statutory notices . Preparing and lodging all statutory notices with ASIC.
Taxation . Lodging monthly Business Activity Statements.
3.4.2 Calculation of estimated remuneration
DSG Electronics Pty Limited Remuneration estimated for the period 18 June 2016 to the second meeting of creditors Statutory and Rate Total Creditors Investigation Administration Employee Position $/hr hrs $ (ex GST) hrs $ (ex GST) hrs $ (ex GST) hrs $ (ex GST) Joe Hayes Partner 650 40 26,000 20 13,000 10 6,500 10 6,500 Jason Preston Partner 650 23 14,950 15 9,750 5 3,250 3 1,950 Jono Henry Director 550 55 30,250 25 13,750 30 16,500 - - Damien Pasfield Senior Manager 500 10 5,000 5 2,500 5 2,500 - - Heather Matheson Senior Manager 500 95 47,500 75 37,500 10 5,000 10 5,000 Kate Versey Assistant Manager 430 130 55,900 120 51,600 - - 10 4,300 Aleksandra Pejoska Accountant 275 60 16,500 50 13,750 - - 10 2,750 Admin 160 25 4,000 - - - - 25 4,000 Total (excluding GST) 438 200,100 310 141,850 60 33,750 68 24,500 GST 20,010 Total (including GST) 220,110 Average hourly rate 457 458 563 360
4 Statement of Claim
The following resolutions are proposed for the Company:
Fee Resolution Resolution 1 “That the remuneration of the Administration of DSHE Holdings Limited (formerly known as Dick Smith Holdings Limited) (Administrators Appointed) (Receivers and Managers Appointed) ACN 166 237 841 for the period from 4 January 2016 to 17 June 2016, calculated on hours spent by the Administrators, their partners and their staff, at the rates detailed in the Schedule of Remuneration Methods and Hourly Rates provided to creditors, in the amount of $32,696.00 (excluding GST), plus disbursements, is hereby approved for payment.” 2 “That the remuneration of the Administration of DSHE Holdings Limited (formerly known as Dick Smith Holdings Limited) (Administrators Appointed) (Receivers and Managers Appointed) ACN 166 237 841 for the period from 18 June 2016 to the second meeting of creditors, calculated on hours spent by the Administrators, their partners and their staff, at the rates detailed in the Schedule of Remuneration Methods and Hourly Rates provided to creditors, to a capped amount of $34,985.00 (exclusive of GST), plus disbursements, is hereby approved and can be drawn as required.” 3 “That the remuneration of the Administration of DSG Electronics Pty Limited (formerly known as Dick Smith Electronics Pty Limited) ACN 000 908 for the period from 4 January 2016 to 17 June 2016, calculated on hours spent by the Administrators, their partners and their staff, at the rates detailed in the Schedule of Remuneration Methods and Hourly Rates provided to creditors, in the amount of $557,557.00 (excluding GST), plus disbursements, is hereby approved for payment.” 4 “That the remuneration of the Administration of DSHE Holdings Limited (formerly known as DSG Electronics Pty Limited (formerly known as Dick Smith Electronics Pty Limited) ACN 000 for the period from 18 June 2016 to the second meeting of creditors, calculated on hours spent by the Administrators, their partners and their staff, at the rates detailed in the Schedule of Remuneration Methods and Hourly Rates provided to creditors, to a capped amount of $200,020.00 (exclusive of GST), plus disbursements, is hereby approved and can be drawn as required.”
We confirm that no remuneration has been previously determined during the Administration of the Company. 5 Remuneration recoverable from external sources
The Voluntary Administrators entered into a funding agreement with the Receivers and Managers for the additional professional time costs and disbursements incurred in taking various steps in the course of the Voluntary Administration of the Dick Smith Group which shall be of benefit to the Receivers and Managers, NAB and HSBC. At the date of entering into the funding agreement, there were no funds available to the Voluntary Administrators to provide for the additional professional time costs and disbursements incurred or to be incurred.
The Voluntary Administrators are not required under the funding agreement to take any steps and/or undertake any work at the request of the Receivers and Managers, NAB or HSBC for the benefit exclusively for the Receivers and Managers, NAB or HSBC.
In respect of professional fees funded by the Receivers and Managers, Voluntary Administrators will seek approval from creditors in accordance with the Act before drawing any amounts.
With the exception of the funding arrangement with the Receivers and Managers, we have not been indemnified in relation to the administrations, other than any indemnities that we may be entitled to under statute and we have not received any up-front payments in respect of our remuneration or disbursements from the Directors.
6 Disbursements
Disbursements are divided into three types:
. Externally provided professional services - these are recovered at cost. An example of an externally provided professional service disbursement is legal fees.
. Externally provided non-professional costs such as travel, accommodation and search fees - these are recovered at cost.
. Internal disbursements such as photocopying, printing and postage. These disbursements, if charged to the Administration, would generally be charged at cost; though some expenses such as telephone calls, photocopying and printing may be charged at a rate which recoups both variable and fixed costs. The recovery of these costs must be on a reasonable commercial basis.
While McGrathNicol has paid approximately $215,000 for costs of the first meeting of creditors and creditor management, McGrathNicol has not been reimbursed for these disbursements. Should there be sufficient realisations in the Administrations that McGrathNicol is reimbursed for this expenditure then further details of these disbursements will be provided to creditors. 6.1 Future disbursements
Future disbursements provided by my firm will be charged to the administration on the following basis:
Internal Disbursements Rate
Advertising At cost Courier At cost Postage At cost
Travel At cost 7 Receipts and Payments
We confirm that there are no funds in the Administration, and therefore no receipts and payments to report. 8 Queries
Please be advised that creditors who wish to obtain further information or details may obtain further information on request. Please contact Kate Versey on (02) 9248 9932. 9 Information Sheet
An information sheet (Info 85: Approving fees – a guide for creditors) provides creditors with general information concerning the approval remuneration in external Administrations. It may be accessed from ASIC’s website at www.asic.gov.au/insolvencyinfosheets or alternatively a creditor information sheet on approving remuneration in external administrations is available from the ARITA website at www.arita.com.au .
Dated: 27 June 2016 DSHE Holding Limited (Administrators Appointed) (Receivers and Managers Appointed) DSG Electronics Pty Limited (Administrators Appointed) (Receivers and Managers Appointed)
Joseph Hayes Joint & Several Administrator
Annexure A
Hourly rate Title Guide to qualifications and role (excl GST)
Appointee/Partner Registered liquidator, Chartered Accountant or equivalent and $650 generally degree qualified with more than twelve years of experience. Leads assignments with full accountability for strategy and execution.
Director 1 Generally, Chartered Accountant or comparable qualification and $595 degree qualified with more than ten years of experience, including four years of Director or equivalent experience. Autonomously leads complex insolvency appointments reporting to Appointee/Partner.
Director Generally, Chartered Accountant or comparable relevant $550 qualification and degree qualified with more than nine years of experience. Autonomously leads insolvency appointments reporting to Appointee/Partner.
Senior Manager Generally, Chartered Accountant or comparable relevant $500 qualification and degree qualified with more than seven years of experience. Self-sufficiently conducts small to medium insolvency appointments and leads major workstreams in larger matters.
Manager 1 Generally, Chartered Accountant or comparable relevant $490 qualification and degree qualified with more than six years of experience, including two years of Manager or equivalent experience. Self-sufficiently conducts small to medium insolvency appointments and takes a supervisory role on workstreams in larger matters.
Manager Generally, Chartered Accountant or comparable relevant $475 qualification and degree qualified with more than five years of experience. Self-sufficiently conducts small insolvency appointments and takes a supervisory role on workstreams in larger matters.
Assistant Manager Generally, Chartered Accountant or comparable relevant $430 qualification and degree qualified with more than three years of experience. Autonomously manages workstream activity within appointments.
Senior Accountant 1 Generally, degree qualified and undertaking Chartered Accountant’s $395 qualification or comparable relevant qualification with more than two years of experience, including one year of Senior Accountant or equivalent experience. Completes multiple tasks within workstreams and appointments.
Senior Accountant Generally, degree qualified and undertaking Chartered Accountant’s $375 qualification or comparable relevant qualification with more than 16 months of experience. Completes tasks within workstreams and appointments under supervision.
Accountant 1 Generally, degree qualified and undertaking Chartered Accountant’s $325 qualification or comparable relevant qualification with at least one year of Accountant or equivalent experience. Assists with tasks within workstreams and appointments under supervision.
Hourly rate Title Guide to qualifications and role (excl GST)
Accountant Generally, degree qualified and undertaking or about to undertake $275 Chartered Accountant’s qualification or comparable relevant qualification with less than one year of experience. Assists with tasks within workstreams and appointments under supervision.
Undergraduate/ Cadet Undertaking relevant degree. Assists with tasks within workstreams $190 and appointments under supervision.
Practice Services National Practice Service leaders, generally degree qualified with $580 Director more than ten years of experience and reporting directly to partners. Technical experts in their specific areas and have team management responsibilities.
Senior Practice Senior technical, professional or functional expert in national $410 Services Practice Services. Generally degree qualified with more than seven years of experience. Reports to Practice Service leader and may be responsible for team management.
Senior Client Appropriately experienced and undertakes senior level $210 Administration and administrative support activities or senior Treasury activities. May Senior Treasury be responsible for day to day management of projects or operations and may have supervisory responsibility for junior staff.
Client Administration Appropriately experienced and undertakes support activities, $160 and Treasury including but not limited to Client administration, Treasury and document management functions.
Appendix G – Proof of Debt Form
LINK INSOLVENCY SOLUTIONS – PROOF OF DEBT (POD) OR CLAIM FORM
All forms returned to: Link Market Services Limited PO Box 3184 Rhodes NSW 2138 Facsimile: +61 2 9287 0309 Client Code: DSHI Email: [email protected] Creditor Queries: +61 1300 853 481
CREDITOR DETAILS Full Name of Company or Individual Contact Telephone Number
Registered Address Email Address
PROOF OF DEBT (POD) OR CLAIM FORM 535 CORPORATIONS ACT (SUB REGULATION 5.6.49(2))
I am an employee of the indebted company I am a creditor
A INDEBTED COMPANY DETAILS Please tick one box ONLY. If you are a creditor of more than one Indebted Company, you must copy and provide a POD form for each company. The indebted amount must be completed.
1. DSHE Holdings Limited (formerly Dick Smith Holdings Limited) 6. Dick Smith Electronics Staff Superannuation Fund Pty Limited ACN 166 237 841 ACN 059 802 470
2. DSSH Pty Ltd (formerly Dick Smith Sub-Holdings Pty Limited) 7. INTT Pty Ltd (formerly InterTAN Australia Pty Ltd) ACN 160 162 925 ACN 002 511 944
3. DSHG Pty Limited (formerly DSE Holdings Pty Limited) 8. DSG Franchising Pty Ltd (formerly Dick Smith Electronics ACN 001 456 720 Franchising Pty Ltd) ACN 054 295 733
4. DSG Wholesale Pty Ltd (formerly Dick Smith (Wholesale) Pty Ltd) 9. DMSG Pty Ltd (formerly Dick Smith Management Pty Ltd) ACN 000 445 956 ACN 001 585 735
5. DSG Electronics Pty Limited (formerly Dick Smith Electronics Pty 10. A.C.N. 136 849 584 Pty Limited (formerly Mac 1 Pty Limited) Limited) ACN 000 908 716 ACN 136 849 584
Pursuant to Regulation 5.6.11A of the Corporations Regulations 2001, creditors may elect to receive notices and documents prescribed by the Corporations Act 2001 by electronic means. I hereby authorise Link to send all communications electronically including notices, reports and any statements. Email Address
Total indebted amount (this must be completed): A$ , , , .
B SIGN HERE (All Creditor(s) must sign) Creditor 1 (Individual)/Agent 1 Creditor 2 (Individual)/Agent 2 Date / /
I am in the employment of the creditors and duly authorised in writing by the creditor to make this statement and it is within my knowledge that the debt was incurred for the consideration stated and that the debt, to the best of my knowledge and belief, still remains unpaid and unsatisfied. I am the creditor’s agent duly authorised in writing to make this statement in writing and it is within my knowledge that the debt was incurred and for the consideration
stated and that debt, to the best of my knowledge and belief, still remains unpaid and unsatisfied. DSHI POD002
Note 1: If returning the forms by post, please always consider using the appropriate postage stamp on your reply/return envelope to ensure that the forms are received by Link in a timely manner. Note 2: For further details about Link Group’s personal information handling practices, visit our website at www.linkmarketservices.com.au for a copy of the Link Group condensed privacy statement. Note 3: Supporting documentation for the above debt(s) must be included with this submission.
All material copyright © 2016 Link Market Services Limited Appendix H – Proxy Form
LINK INSOLVENCY SOLUTIONS – APPOINTMENT OF PROXY
All forms returned to: Link Market Services Limited PO Box 3184 Rhodes NSW 2138 Facsimile: +61 2 9287 0309 Client Code: DSHI Email: [email protected] Creditor Queries: +61 1300 853 481
CREDITOR DETAILS Full Name of Company or Individual Contact Telephone Number
Registered Address Email Address
FORM 532 (CORPORATIONS ACT 2001) APPOINTMENT OF PROXY (REGULATION 5.6.29)
STEP 1 INDEBTED COMPANY DETAILS
1. DSHE Holdings Limited (formerly Dick Smith Holdings 7. INTT Pty Ltd (formerly InterTAN Australia Pty Ltd) Limited) ACN 166 237 841 ACN 002 511 944 2. DSSH Pty Ltd (formerly Dick Smith Sub-Holdings Pty 8. DSG Franchising Pty Ltd (formerly Dick Smith Electronics Limited) ACN 160 162 925 Franchising Pty Ltd) ACN 054 295 733 3. DSHG Pty Limited (formerly DSE Holdings Pty Limited) 9. DMSG Pty Ltd (formerly Dick Smith Management Pty Ltd) ACN 001 456 720 ACN 001 585 735 4. DSG Wholesale Pty Ltd (formerly Dick Smith (Wholesale) 10. A.C.N. 136 849 584 Pty Limited (formerly Mac 1 Pty Pty Ltd) ACN 000 445 956 Limited) ACN 136 849 584 5. DSG Electronics Pty Limited (formerly Dick Smith 11. DSHNZ Limited (formerly DSE (NZ) Limited) Electronics Pty Limited) ACN 000 908 716 Company Number: 37602 6. Dick Smith Electronics Staff Superannuation Fund Pty Limited ACN 059 802 470
STEP 2 APPOINT A PROXY the Chairman OR if you are NOT appointing the Chairman of the Meeting as your of the Meeting proxy, please write the name of the person or body corporate (excluding (mark box) the registered creditor) you are appointing as your general/special proxy
to vote on your behalf at the Meetings of Creditors of the Company to be held at 11:00am (AEST) on Monday, 25 July 2016, at Wesley Conference Centre, 220 Pitt Street, Sydney NSW 2000 and at any adjournment or postponement of the meeting.
Proxies will only be valid and accepted by the Company if they are signed and received no later than 4:00pm (AEST) on Thursday, 21 July 2016. Please read the voting instructions overleaf before marking any boxes with an X .
STEP 3 VOTING DIRECTIONS Resolutions For Against Abstain 1 That the meetings be held concurrently *DSHI PRX1604N* 2 For creditors to consider the options available and to resolve for each company either that: a. Execute a Deed of Company Arrangement; or ‘For’ should only be selected for b. The Administration should end; or one of the options in Resolution 2 c. The company be wound up.
3 That a Committee of Inspection be appointed
STEP 4 SIGNATURE OF CREDITORS – THIS MUST BE COMPLETED
Creditor 1 (Individual)/Agent 1 Creditor 2 (Individual)/Agent 2 Creditor 3 (Individual)/Agent 3
This form should be signed by the creditor. If signed by the creditor’s attorney, the power of attorney must have been previously noted by the registry or a certified copy attached to this form. If executed by a company, the form must be executed in accordance with the company’s constitution and the Corporations Act 2001 (Cth). All material copyright © 2016 Link Market Services Limited DSHI PRX1604N HOW TO COMPLETE THIS PROXY FORM
Appointment of a Proxy Signing Instructions If you wish to appoint the Chairman of the Meeting as your You must sign this form as follows in the spaces provided: proxy, mark the box in Step 2. If the person you wish to appoint as your proxy is someone other than the Chairman of the Individual: where the holding is in one name, the holder must Meeting please write the name of that person in Step 2. A proxy sign. need not be a creditor of the company. A proxy may be an Joint Holding: where the holding is in more than one name, individual or a body corporate. either creditor may sign. Note: The proxy nomination will be deemed invalid if you do Power of Attorney: to sign under Power of Attorney, you must not complete this step. lodge the Power of Attorney with the registry. If you have not previously lodged this document for notation, please attach a Votes on Items of Business – Proxy Appointment certified photocopy of the Power of Attorney to this form when Directed Votes you return it. You may direct your proxy how to vote by placing a mark in Companies: where the company has a Sole Director who is one of the boxes opposite each item of business. All your also the Sole Company Secretary, this form must be signed by entitlements will be voted in accordance with such a direction. that person. If the company (pursuant to section 204A of the If you mark more than one box on an item your vote on that Corporations Act 2001) does not have a Company Secretary, a item will be invalid. Sole Director can also sign alone. Otherwise this form must be signed by a Director jointly with either another Director or a General (open) Votes Company Secretary. Please indicate the office held by signing If you do not mark any of the boxes on an item of business, in the appropriate place. your proxy may vote as he or she chooses.
Notes 1. If the creditor is a sole trader, sign in accordance with the following example: “A.B., proprietor”. 2. If the creditor is a partnership, sign in accordance with the following example: “A.B., a partner of the said firm”. 3. If the creditor is a company, then the form of proxy must be under its Common Seal or under the hand of some officer duly authorised in that capacity, and the fact that the officer is so authorised must be stated in accordance with the following example: “for the company, A.B.” (duly authorised under the Seal of the Company).
Lodgement of a Proxy Form This Proxy Form (and any Power of Attorney under which it is signed) must be received at an address given below by 4:00pm (AEST) on Thursday, 21 July 2016. Any Proxy Form received after that time will not be valid for the scheduled meeting.
Proxy Forms may be lodged:
by mail: Att: Dick Smith Holdings Limited (Administrators Appointed) (Receivers and Managers Appointed) C/- Link Market Services Limited PO Box 3184 Rhodes NSW 2138 Australia
by email: scan and email to [email protected] by fax: +61 2 9287 0309 by hand*: delivering it to Link Market Services Limited, 1A Homebush Bay Drive, Rhodes NSW 2138. Att: Dick Smith Holdings Limited (Administrators Appointed) (Receivers and Managers Appointed)
* During business hours (Monday to Friday, 9:00am–5:00pm)
If you would like to attend and vote at the Meeting of Creditors, please bring this form with you. This will assist in registering your attendance. Appendix I – ASIC “Insolvency information for directors, employees, creditors and shareholders”
Insolvency information for directors, employees, creditors and shareholders ASIC has 11 insolvency information sheets to assist you if you’re affected by a company’s insolvency and have little or no knowledge of what’s involved. These plain language information sheets give directors, employees, creditors and shareholders a basic understanding of the three most common company insolvency procedures—liquidation, voluntary administration and receivership. There is an information sheet on the independence of external administrators and one that explains the process for approving the fees of external administrators. A glossary of commonly used insolvency terms is also provided. The Insolvency Practitioners Association (IPA), the leading professional organisation in Australia for insolvency practitioners, endorses these publications and encourages its members to make their availability known to affected people. List of information sheets • INFO 41 Insolvency: a glossary of terms • INFO 74 Voluntary administration: a guide for creditors • INFO 75 Voluntary administration: a guide for employees • INFO 45 Liquidation: a guide for creditors • INFO 46 Liquidation: a guide for employees • INFO 54 Receivership: a guide for creditors • INFO 55 Receivership: a guide for employees • INFO 43 Insolvency: a guide for shareholders • INFO 42 Insolvency: a guide for directors • INFO 84 Independence of external administrators: a guide for creditors • INFO 85 Approving fees: a guide for creditors Getting copies of the information sheets To get copies of the information sheets, visit ASIC’s website at www.asic.gov.au/insolvencyinfosheets. The information sheets are also available from the IPA website at www.ipaa.com.au. The IPA website also contains the IPA’s Code of Professional Practice for Insolvency Professionals, which applies to IPA members.
Important note: The information sheets contain a summary of basic information on the topic. It is not a substitute for legal advice. Some provisions of the law referred to may have important exceptions or qualifications. These documents may not contain all of the information about the law or the exceptions and qualifications that are relevant to your circumstances. You will need a qualified professional adviser to take into account your particular circumstances and to tell you how the law applies to you.
© Australian Securities & Investments Commission, December 2008 Page 1 of 1