Dickson & Dickson Healthcare Pty Limited ACN CG Realisations Pty Limited ACN (formerly Claveguard Pty Ltd) DP Logistics Pty

Transcription

1 Dickson & Dickson Healthcare Pty Limited ACN CG Realisations Pty Limited ACN (formerly Claveguard Pty Ltd) DP Logistics Pty Limited ACN Prius Healthcare Solutions Pty Limited ACN TCS Pty Limited ACN (All Administrators Appointed) Report to creditors pursuant to Section 439A of the Corporations Act 14 October 2016

2 Table of Contents Section Page Statement by Administrators Executive summary Introduction Background information Historical financial information Report as to affairs and director s reasons for failure Trading by Administrators Sale of business / assets Administrator s investigations Offences and voidable transactions Return to creditors Administrator s opinion Further information and enquiries Glossary of terms Annexure A B C D E Notice of meeting Appointment of proxy form Proof of debt form Remuneration approval request report ARITA creditor information sheet \B09 14 October 2016

3 Statement by Administrators In reviewing this Report, creditors should note: This Report is based upon our preliminary investigations to date. Any additional material issues that are identified subsequent to the issue of this Report may be the subject of a further written report and/or tabled at the Second Meeting. 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. We reserve the right to alter any conclusions reached based on any changed or additional information which may be provided to us between the date of this Report and the date of the Second Meeting (except where otherwise stated). In considering the options available to creditors and formulating our opinion and recommendation, we have necessarily made forecasts of asset realisations and total creditors claims based on our best assessment in the circumstances. These forecasts and estimates may change as asset realisations progress and we receive creditor claims and consequently the outcome for creditors might differ from the information provided in this Report. Creditors should consider seeking their own independent legal advice as to their rights and the options available to them at the Second Meeting \B09 14 October 2016 Page 1

4 1 Executive summary The executive summary aims to provide creditors with basic information with respect to the administration of the D&D Group. Further details are provided throughout this Report. Question What is the D&D Group? What is the purpose of this report? What is the status of D&D Group? What is the ownership structure of D&D Group? How did the D&D Group business trade? The D&D Group was established in 2008 and consists of five companies within a broader group providing products and services to the medical industry. As at the date of appointment the D&D Group largely consisted of three key operating businesses, being: Total Compression Solutions supplier and service provider of compression pumps and garments to hospitals Claveguard delivery and installation of integrated theatres into hospitals DP Logistics provision of strategic sourcing of medical consumables to Healthscope The purpose of this report is to provide creditors with details about the business, property, affairs, and financial circumstances of the D&D Group in preparation for the forthcoming Second Meeting of Creditors. This report also informs creditors about the investigations undertaken to date together with the Administrators opinion as to each option available to creditors at the second creditors meeting. Jim Sarantinos and Peter Gothard were appointed Administrators of the following entities on 19 September 2016: Dickson and Dickson Healthcare Pty Ltd (D&D) CG Realisations Pty Ltd (Formerly Claveguard Pty Ltd) (Claveguard) DP Logistics Pty Ltd (DPL) Prius Healthcare Solutions Pty Ltd (Prius) TCS Pty Ltd (TCSPL) Following their appointment, the Administrators have day-to-day responsibility for the management of the D&D Group. The Administrators are continuing to trade certain divisions with the group in the short term whilst they evaluate and progress certain business and asset sales. On 24 November 2015, OXC Bidco acquired the shares in D&D and Dickson & Dickson Healthcare NZ Limited. D&D is the parent entity of each of the other Companies in the D&D Group. OXC Bidco is a subsidiary of Obex Medical Holdings Pty Ltd. Representatives of OXC Bidco were appointed as directors to the D&D Group on 22 April 2016, shortly following the former directors / owners ceasing to hold office. Detailed information with respect to the historical financial performance of each Company can be found in Section 4. On or around May 2016, the new board of directors became concerned that certain accounting entries may have been misstated in the accounts prepared for FY14, FY15 and FY16. An investigation was undertaken into a wide range of issues potentially impacting the accounts. The outcome of that review was that a range of accounting adjustments were identified which have since been processed by the D&D Group in order to re-state the accounts. We have not conducted an audit or review of the Original or Restated accounts and cannot attest to their accuracy. Given the \A01_B09 14 October 2016 Page 2

5 Question extent to which the accounts have been adjusted and the general state of the D&D Group s books and records, we would caution any reliance on the figures presented for both the D&D Group and each individual Company. Why do the Directors of D&D Group believe it became insolvent? The Directors of the D&D Group have provided the following reasons for its failure: Generally, the directors have indicated that the accounting irregularities referred to above masked the true performance of the D&D Group, noting that once the accounts had been re-stated, the Group was in fact lossmaking and had a net asset deficiency. Further, the directors make the following observations with respect to each Company: D&D High cost structure of the business Insufficient revenue and poor margins Management s lack of controls over expenses combined with the Poor financial condition of its subsidiaries Claveguard Poor expense control by management Lower than expected realised margins on projects Product quality issues leading to delays, re-work and warranty work DPL DPL s contract for the sourcing and sale of medical consumables to Healthscope was unprofitable: - Product margins were very low. - Margins were impacted by adverse FX movements. - The significant volume of stock held required a large warehouse facility which impacted the costs of storage of the products. - The Customer service model of picking, packing and delivering products daily to individual hospital wards resulted in very high freight & transport costs. Poor cost control by management resulted in a cost base that was not commensurate with the earnings. Inventory management issues resulted in an overstatement of assets and understatement of costs. Prius Sales of hospital beds which were at low margins with long warranty periods. Quality issues led to significant costs to service and replace the installed fleet, impacting the reputation of Prius in the market. High cost base, notably in the division selling beds and mattress rental. Sales were not sufficient to support the associated costs. Significant freight costs associated with movement of stock from suppliers and to/from customers. Cancelation of DVT and compression garments and stockings contracts with Ramsay Healthcare. Sales of these products declined over 2016 as a result. TCSPL TCSPL had an intercompany loan and was a guarantor of the D&D Group s secured debt facilities. These liabilities became payable when other entities in the D&D Group were placed into administration. This became apparent when it was likely other entities in D&D Group would be placed in administration \A01_B09 14 October 2016 Page 3

6 Question When do the Administrators of the D&D Group believe it became insolvent? The Administrators are of the opinion that all the entities within the D&D Group may have been insolvent from at least 16 September 2016, being the date of an investment committee meeting which resulted in the shareholders declining to provide further funding to the D&D Group. Due to the intermingled nature of the D&D Group s operations and on the basis that certain companies within the D&D Group were funded by the operations of others, our preliminary view is that it is difficult to determine a specific date of insolvency on a company by company basis. We note that the D&D Group may have been insolvent for some time before 16 September Some of the relevant considerations the Liquidator will ultimately consider in forming a view on this issue with respect to each company will include: Net asset deficiency position which became apparent as early as FY15; Significant operating losses incurred in both FY15 and FY16; Significant ageing of trade creditors; Significant working capital shortage reflected by the requirement for additional funding of $7m from November 2015 (and possibly earlier); and Entering into repayment arrangements with the ATO from as early as June Other relevant considerations may include: The D&D Group had the support of its shareholder until 16 September What were the underlying causes of the D&D Group s failure? What was the outcome of the sale process? Will employees be paid their outstanding entitlements? The Administrators preliminary view is that they agree with the comments provided by the Directors as to why the D&D Group became insolvent. The Administrators believe a further contributing factor was that the D&D Group suffered due to the co-mingling of assets, employees, customer and supplier contracts and infrastructure throughout the D&D Group entities which led to significant, and unnecessary, complexities and inefficiencies throughout the business. Poor record keeping and accounting practices also appear to have impacted the performance of the D&D Group. The Administrators have conducted a sale of business process for the Total Compression Solutions business with a contract of sale expected to be signed imminently. On 30 September, the Administrators completed a sale of certain assets of the Claveguard business for $101k. This facilitated continuing employment for six staff. The Administrators are continuing to investigate options available for the realisation of the remaining assets of the D&D Group, in particular, substantial amounts of inventory. The preliminary estimated range of returns to employees of each Company are as follows: D&D - NIL Claveguard NIL 25% DPL 90% - 100% Prius 50% - 100% TCSPL N/A Should realisations be insufficient to pay employee entitlements in respect of annual leave, long service leave, pay in lieu of notice and \A01_B09 14 October 2016 Page 4

7 Question redundancy then employees will be able to make a claim to the Federal Entitlements Guarantee scheme (FEG) up to certain limits. Section 10 of this Report provides an estimated outcome for each company within the D&D Group. Will the secured creditor be repaid its debt? Apart from employees, will unsecured creditors be paid a dividend? What claims will a liquidator investigate? What is the purpose of the second meeting of creditors? What do the Administrators recommend creditors should do? Where can I get more information? Each of the five Companies within the D&D Group is a guarantor for the ANZ Bank secured facilities. As at the date of appointment, ANZ was owed approximately $15.3m. D&D Group s secured creditors may be repaid a proportion of their debt depending on the level of asset realisations although it is expected that there will be a significant shortfall. On the basis that there is expected to be a significant shortfall to the ANZ Bank based on total D&D Group realisations, there is no expectation that unsecured creditors of any Company will receive a return unless significant recoveries are made in the liquidation process. Our present understanding is that total unsecured creditors across the D&D Group is in excess of $20 million, excluding intercompany and related party balances. Whilst the Administrators have considered the underlying reasons for failure of the D&D Group our investigations remain at an early stage. A liquidator has the power to void certain transactions which are either not beneficial, or are detrimental, to a company. At the Second Meetings, creditors will decide the future of each company by voting on one of the following options: That the administration should end and control of the company revert to its directors; or, That the company should be wound up; or, That the company execute a DOCA. Given no DOCA proposal has been received to date the Administrators recommend that creditors vote to place each Company into Liquidation. Should you have any enquiries, please contact Marcela Landeka on or by at dndhealthcare@fh.com.au \A01_B09 14 October 2016 Page 5

8 2 Introduction This section provides information on the entities subject to the voluntary administration process, the objectives of the Administration, the purpose of this Report, meetings of creditors, and a summary of the Administrator s remuneration 2.1 Appointment of voluntary administrators Jim Sarantinos and Peter Gothard (the Administrators) were appointed Joint and Several Administrators of the following entities on 19 September 2016 (Appointment) by resolution of the Companies Directors, pursuant to Section 436A of the Corporations Act 2001 (the Act): Dickson and Dickson Healthcare Pty Ltd (D&D) CG Realisations Pty Ltd (Formerly Claveguard Pty Ltd) (Claveguard) DP Logistics Pty Ltd (DPL) Prius Healthcare Solutions Pty Ltd (Prius) Total Compression Solutions Pty Ltd (TCSPL) Due to the interdependent relationship of the entities within the D&D Group, we have prepared this Report on a consolidated basis, this enables stakeholders to fully appreciate the business, operations, financial affairs and our preliminary investigations of the D&D Group as a whole. 2.2 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 11). 2.3 Purpose and basis of report Section 439A(4) requires a voluntary administrator to provide a report (the 439A Report or this Report) to all creditors ahead of the Second Meeting of Creditors, outlining: Details regarding the business, property, affairs and financial circumstances of the entities under administration; The Administrator s opinion and recommendation on each of the options available to creditors; and If a Deed of Company Arrangements (DOCA) is proposed, the details of the DOCA This Report also informs creditors about the preliminary investigations undertaken by the Administrators to date. Accordingly, the views formed in this Report are not final and may be subject to change. Any additional material issues that are identified subsequent to this Report may be subject to a further written report and/or tables at the forthcoming Second Meetings. This Report has been prepared primarily from information obtained from the D&D Group s books and records and discussions with the Directors. Although the Administrators have conducted certain investigations of the affairs of the D&D Group, there may be matters which we are unaware of as an audit of the D&D Group has not been undertaken. In order to complete our Report, we have utilised information from: The ASIC; The PPSR; The D&D Group s book and records; Discussions with the Directors of the D&D Group; \A01_B09 14 October 2016 Page 6

9 Discussions with key employees of the D&D Group Discussions with the secured creditors of the D&D Group; Discussions with unsecured creditors of the D&D Group; and Other public databases. While the report addresses the administration of each of the five companies within the D&D Group, creditors have been issued with a customised report, which only encloses the annexures which relate to the Company of which they are a creditor. 2.4 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 Meetings of Creditors). The DIRRI disclosed information regarding the Administrators independence, prior personal or professional relationships with the D&D Group or related parties and any indemnities received in relation to the appointments (in the case of the D&D Group there were none). This assessment identified no real or potential risks to the Administrators independence. There has been no change in the declaration since that time. 2.5 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 the companies were held on 29 September 2016 (the First Meetings of Creditors). Creditors resolved at the First Meetings of Creditors to appoint a Committee of Creditors (COC) to each company other than TCSPL. Details of the members of each of the COC s are available in the minutes of the First Meetings of Creditors. 2.6 Committee of Creditors The COC has been kept appraised by the Administrators in relation to: The sale process for the Total Compression Solutions business via a written update circulated on 13 October The sale of certain assets of Claveguard via a written update circulated on 13 October Second Meetings of Creditors Pursuant to Section 439A of the Act, the Second Meetings of Creditors are convened for Tuesday the 25 th of October 2016 at The Grace Hotel, 77 York Street, Sydney at 10:00am. At the Second Meetings, creditors will decide the future of each company by voting on one of the following options: That the administration should end and control of the company revert to its directors; or, That the company should be wound up; or, That the company execute a DOCA. The Notice of Meetings of Creditors (Form 529) is attached at Annexure A along with an appointment of proxy form (Annexure B) and a proof of debt or claim form (Annexure C) Creditors have the opportunity to adjourn the Second Meetings for up to a period of 45 business days to enable further investigations to be undertaken. In respect of these options there is currently no alternative but for each company to be placed in liquidation \A01_B09 14 October 2016 Page 7

10 2.8 Remuneration An Administrator s remuneration can only be fixed by resolution of a COC, or the 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 Meetings 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 ( The Remuneration Report is provided in Appendix D to this Report which provides details of the key tasks undertaken throughout the course of the administration along with a summary of the receipts and payments to date. At the Second Meetings, we will be seeking approval for our remuneration for the companies as follows (GST exclusive): Company Actual Voluntary Administration 19 September 2016 to 11 October 2016 Estimated Voluntary Administration 12 October 2016 to 25 October 2016 Amount (ex GST) D&D $55, $20, $75, Claveguard $69, $29, $99, DPL $164, $85, $249, Prius $96, $55, $151, TCSPL $11, $9, $20, Total $397, $199, $597, Non-disclosure of certain information There are sections of this Report where we have considered it not to be in the creditors interests to disclose certain information to creditors. We recognise the need to provide creditors with complete disclosure of all necessary information relating to the D&D Group. However, we believe this information is commercially sensitive and it is not in creditors interests for us to disclose the information publicly at this stage. Such information includes: Valuations and estimated realisations of specific assets Valuation and estimated realisations of certain parts of the business Details of offers received during the sale process Commercially sensitive prospective financial information (for example, projections / forecasts) \A01_B09 14 October 2016 Page 8

11 3 Background information This section provides creditors with information on the history of the D&D Group and the circumstances leading up to the appointment of Administrators, details regarding the entities within the D&D Group including statutory information, and an overview of the operating businesses within the D&D Group. 3.1 Group structure Provided below is the corporate structure of the broader D&D Group: Key points to note are as follows: Claveguard, DPL and Prius are the primary trading entities within the administration group of entities, however, the business operations of the D&D Group are significantly intertwined. This is detailed further in section 3.4. With the exception of TCSPL, each of the entities within the D&D Group employed staff and / or were contracting parties with suppliers / customers. On 24 November 2015, OXC Bidco acquired the shares in D&D and Dickson and Dickson Healthcare NZ Limited. The NZ operations are quarantined from the Voluntary Administration process. Claveguard SA, Dickson & Dickson Healthcare (US) Inc and Dickson & Dickson Healthcare UK are all in the process of being wound-up or de-registered by the directors of those entities. Any recoveries with respect to intercompany loans due by these entities to the D&D Group will be subject to the outcome of each wind down process. Claveguard Projects Pty Ltd was incorporated on 9 August 2016, however did not undertake any business activities and is in the process of being struck-off Deed of cross guarantee Note 10 of the 2014 audited financial statements and Note 11a of the 2015 audited financial statements of D&D include a comment that The Group is subject to a fixed and floating charge over the assets and liabilities of the Group. All entities in the Group are covered by a deed of cross guarantee. Based on our investigation of the Group s records and enquiries made of various stakeholders, including the former auditor, we are not aware of any deed of cross guarantee between the entities within the D&D Group. Note that each entity within the group has provided a guarantee in favour of the secured creditors of the D&D Group, being HSBC as at June 2014 and June 2015, and ANZ Bank as at the date of appointment but this does not result in a cross guarantee of all liabilities within the D&D Group \A01_B09 14 October 2016 Page 9

12 Further, our investigations have not revealed that a deed of cross guarantee has ever been lodged with ASIC. Accordingly, creditors will only be entitled to claim in the administration of the company of which they are a creditor. 3.2 Statutory information Statutory details for each company extracted from ASIC s national database at the time of our appointment, are summarised below. D&D ACN Incorporation date 8 October 2008 Shareholder OXC Bidco Pty Ltd Registered address / principal place of business 11B Grand Avenue, Camellia NSW 2142 Directors Matosantos, Jose Manuel (appointed 22 April 2016) Secretary St John, Adam (appointed 22 April 2016) Radford, David (appointed 22 April 2016) N/A Claveguard ACN Incorporation date 4 September 2009 Shareholder Dickson & Dickson Healthcare Pty Ltd Registered address / principal place of business 11B Grand Avenue, Camellia NSW 2142 Directors Matosantos, Jose Manuel (appointed 22 April 2016) St John, Adam (appointed 22 April 2016) Radford, David (appointed 22 April 2016) Secretary N/A DPL ACN Incorporation date 22 May 2013 Shareholder Dickson & Dickson Healthcare Pty Ltd Registered address / principal place of business 11B Grand Avenue, Camellia NSW 2142 Directors Matosantos, Jose Manuel (appointed 22 April 2016) St John, Adam (appointed 22 April 2016) Radford, David (appointed 22 April 2016) Secretary N/A \A01_B09 14 October 2016 Page 10

13 Prius ACN Incorporation date 26 November 2008 Shareholder Dickson & Dickson Healthcare Pty Ltd Registered address / principal place of business 11B Grand Avenue, Camellia NSW 2142 Directors Matosantos, Jose Manuel (appointed 22 April 2016) St John, Adam (appointed 22 April 2016) Radford, David (appointed 22 April 2016) Secretary N/A TCSPL ACN Incorporation date 29 August 2012 Shareholder Dickson & Dickson Healthcare Pty Ltd Registered address / principal place of business 11B Grand Avenue, Camellia NSW 2142 Directors Matosantos, Jose Manuel (appointed 22 April 2016) St John, Adam (appointed 22 April 2016) Radford, David (appointed 22 April 2016) Secretary N/A 3.3 Company history Year Key event 2008 Prius Healthcare Solutions established, business principally focused on hospital beds and Australian private hospital sector 2010 Expands operations into NZ. Business branded as Claveguard NZ 2011 Business expands into DVT and compression garments and expands into South Africa 2013 Strategic sourcing for Healthscope commences. Agreement signed in 2014 Dickson and Dickson expands into the provision of integrated theatre equipment 2014 Dickson & Dickson expands into the US focused on stockings and socks via online sales and conferences Warehouse operations transferred to Camellia in Western Sydney, NSW 2015 Further extensions of new products into theatre sales and aged care using Surgiguard and Sirius Care brands November Business operations D&D Group acquired by OXC Bidco, a subsidiary of Obex The D&D Group operated several distinct business units, and a number of less distinct legacy operations and ancillary services. The three core business units were: Total Compression Solutions; DP Logistics; and Claveguard. Notwithstanding that the above are the names of three of the Group s corporate entities, various assets and employees from across the D&D Group were utilised by these business operations. For example: \A01_B09 14 October 2016 Page 11

14 There are employees in D&D who are employed for the benefit of the businesses; The major customer and supplier contracts for Total Compression Solutions are held with D&D, Prius and DPL; and The remanufacturing assets which supported the Total Compression Solutions business are owned by Claveguard. The above are just several examples of the intermingling of business units across the corporate entities. The complications caused by this include an inability to accurately demonstrate the financial performance of the distinct business units. Business Total Compression Solutions DP Logistics Claveguard Description TCS distributes a range of compression solutions to hospitals and healthcare groups around Australia for the treatment of prevention of Deep Venous Thrombosis. The products in the category include: Compression pumps and garments; Graduated compression stockings; and Non-slip socks. In addition, TCS provides range of compression socks to the consumer market, primarily aimed at nursing professionals and athletes. These are mostly sold through a website direct to consumers. The core business of DP Logistics is the strategic sourcing of consumables for Healthscope Limited. The business sourced products from third party suppliers on behalf of Healthscope and provided the logistics services from its warehouse. The logistics support included the importation and warehousing of bulk orders, and picking and shipping of orders for individual wards. DP Logistics also provided logistics and transport for activities for a number of other third parties. The core service offered was warehousing of inventory. Claveguard s core business is the delivery and sales of integrated theatres. Claveguard consults with hospitals on projects for new theatres to assist with the design and installation process. The business sourced and installed capital equipment into hospital theatres, and provided support for equipment following the completion of the project. The D&D Group also has a number of smaller, discontinued or legacy business operations. These include: Private label medical consumables; Ezy Access contractor management system (discontinued business); Mattress sales and rental (discontinued business); and Sale and servicing of beds and theatre tables (discontinued business). The Administrators have not actively traded any of these businesses. The three discontinued businesses were exited prior to the appointment of Administrators, however a number of legacy agreements and assets remain with the D&D Group or in situ with customers. For example, a number of beds owned by the D&D Group remain in hospitals. In respect to Ezy Access, the Administrators are aware of potential intellectual property issues with the asset / business and are making further inquiries prior to pursuing a realisation strategy. The Administrators are actively exploring options to realise the other assets and business. On appointment, the D&D Group employed 76 employees. Provided below is a summary of employees by employment type and company \A01_B09 14 October 2016 Page 12

15 Company FTE PT Casual Total D&D Claveguard DPL Prius TCSPL Total Registered security interests Under the PPSA legislation that took effect on 30 January 2012, security over property (except land and certain other asset categories) must be registered as a security interest on the PPSR. Briefly, the concept of fixed and floating charges was replaced under the PPSA by security interests over noncirculating assets and security interests over circulating assets respectively. In the case of inventory, title to any inventory will require registration as a PMSI on the PPSR. A PMSI is similar to a ROT provision in terms of trade. Unless a supplier (including a ROT supplier) registers a PMSI as a security interest on the PPSR, the goods under the ROT clause may become property of the companies and amount to a windfall to the companies and its creditors. The Australian and New Zealand Personal Properties Securities Registers ( PPSR ) identified 46 security interests over the D&D Group as at the date of the Administrators appointment: Creditor group Collateral class Secured party D&D CG DPL Prius TCSPL Banks APAAP ANZ Bank Motor vehicles Motor vehicles Various Suppliers Other goods, intangibles Various Total ANZ Bank holds a charge over the whole or substantially the whole of the property of the D&D Group. Debts owing to the ANZ Bank are cross-collateralised and therefore are jointly and severally payable by each Company within the D&D Group. The remaining security interests are held by financiers of equipment (including motor vehicles and other leased assets) and trade suppliers. The Administrators completed a detailed assessment of the registered security interests above and any further PPSA claims that were received. Where suppliers held valid security interests, their goods on hand were either returned or alternatively, if the goods were used in the ordinary course of business, the Administrators have paid for those goods. Further details of the registered security interests are available to creditors on request. 3.6 Events leading to our appointment Set out below is a summary of the events leading to our appointment to the D&D Group: Date Event 24 November 2015 OXC Bidco acquired the shares in D&D November 2015 April 2016 April 2016 May 2016 Approximately $7m in additional funding provided by OXC Bidco to fund the D&D Group s working capital requirements. Additional funding provided by other Obex group entities of approximately $385k post April Paul Dickson and Dianne Dickson cease to be office holders of the D&D Group Former COO Stuart Clark leaves the business \A01_B09 14 October 2016 Page 13

16 Date May 2016 June 2016 August 2016 June 2016 August 2016 September 2016 August August September 2016 Event The D&D Group directors become aware that the financial position and the trading position of the D&D Group did not accurately reflect the D&D Group s true financial position and trading performance and that additional capital may be required. A detailed reconciliation of the D&D Group s books and records undertaken with respect to the accounting irregularities and an extensive cost reduction plan implemented. The reconciliation was completed in mid-august As a part of the cost reduction plan, the business commenced the exit of the mattress rental and washing business. As a consequence of the investigation into to the accounting irregularities, a series of journal entries are recorded in the D&D Group s accounts to re-state the financial performance and position of the D&D Group across FY14, FY15 and FY16 Healthscope advised DPL that it was considering placing strategic sourcing activities on hold Representatives of Ferrier Hodgson met with the board to provide an overview of the voluntary administration process and options available in the event of insolvency 16 September 2016 The directors of the D&D Group determined that there was a significant working capital shortfall, and following the withdrawal of shareholder support at a meeting held on 16 September (and absent other viable funding options available), it was deemed that steps to appoint voluntary administrators should be taken 19 September 2016 The directors resolved to appoint Administrators to the D&D Group \A01_B09 14 October 2016 Page 14

17 4 Historical financial information This section provides information on the historical financial performance of the D&D Group during the FY14, FY15 and FY16 financial years, together with recent draft profit and loss accounts. 4.1 Preparation of financial statements Statutory financial statements were prepared up to 30 June The financial statements relating to FY14 and FY15 were audited by Graham Baker & Associates Chartered Accountants. The financial statements were prepared on a consolidated basis, and in addition to the entities within the D&D Group, incorporated the financials for the following entities: FY14 Claveguard NZ Pty Ltd (now Dickson & Dickson Healthcare NZ Limited) Claveguard CC (South Africa) FY15 Claveguard NZ Pty Ltd (now Dickson & Dickson Healthcare NZ Limited) Claveguard CC (South Africa) Dickson & Dickson Healthcare (US), Inc For the purpose of presenting the financial performance for each company within the D&D Group, we have utilised the management accounts (which largely reconcile to the audited accounts), to eliminate any financials relating to the entities outside the D&D Group. Please note, for ease of comparison, we have presented the accounts in a different form which may have a minor impact on EBITDA however we have not modified the underlying figures in the audited accounts. The FY16 figures contained in this section, are based on the D&D Group s management accounts. We note that profit and loss accounts for the period from May to August 2016 remain in draft and may be subject to further adjustments including intercompany eliminations. As they are yet to be finalised, we are unable to provide commentary on the accounts for this four-month period. Any further analysis would be conducted by a liquidator. We have not included balance sheet information for August 2016 on the basis that the accounts remain in draft, and the asset and liability position as at the date of appointment is addressed in the RATAs in section Accounting irregularities and re-statement of accounts On or around May 2016, the board of directors became concerned that certain accounting entries may have been misstated in the accounts prepared for FY14, FY15 and FY16. An investigation was undertaken into a wide range of issues potentially impacting the accounts, including: Revenue recognition; Appropriateness of the capitalisation of expenditure; Valuation of stock; Customer and supplier deposit balances; Trade creditor balances; Unrecorded labilities, including the adequacy of accruals; Accounting for operating lease arrangements; and Timing differences arising from recognition of expenses in incorrect financial periods. This investigation was conducted with respect to the D&D Group s management accounts from 1 July 2014 to 30 April The outcome of that review was that a range of accounting adjustments were identified which have since been processed by the D&D Group in order to re-state the accounts. We are informed that the key adjustments primarily related to: Apparent non-compliance with accounting standards; Failure to incorporate all required journal entries; Inconsistences in accounting policies; and Unidentified or uncorrected errors. We understand that this has resulted in adjustments in a number of areas, including: \A01_B09 14 October 2016 Page 15

18 Revenue recognition, in particular regarding early recognition of revenue and duplicate sales revenue being recorded. Unrecorded/understated liabilities, in particular relating to payments to various financing companies, operating lease payments being inappropriately recorded and supplier invoices not being recorded in the company s accounts. Overstatement of assets, in particular relating to inventory, other assets and property plant and equipment accounts. By way of summary, on a D&D Group basis, the impact of the adjustments made is as follows: EBITDA FY14 FY15 FY16 (10 Months to April) (10M) Original 2,713 4,090 (626) Re-stated 1,329 (4,189) (7,351) Adjustments made (1,384) (8,279) (6,726) Net Assets * Original 2,647 4, Re-stated 2,704 (6,358) (20,174) Adjustments made 57 (10,788) (21,066) * We note that the net asset position does not account for the secured debt due to the ANZ Bank which is accounted for in the accounts of OXC Bidco. Each of the entities within the D&D Group is a guarantor of this debt. For each company, we have outlined both the Original and Re-stated accounts for FY14, FY15 and the 10 months to April We have provided some high level information with respect to the management accounts for May 2016 to August We have not conducted an audit or review of the Original or Re-stated accounts and cannot attest to their accuracy. Given the extent to which the accounts have been adjusted and the general state of the D&D Group s books and records, we would caution any reliance on the figures presented for both the D&D Group and each individual Company. It should be noted that the information contained in this Report with respect to the Re-stated accounts, is a representation of the books and records of the D&D Group, and in the time available we have been unable to investigate, verify or validate the appropriateness or the quantum of the adjustments made. Accordingly, we are unable to comment in detail as to the individual adjustments made with respect to each company. Further, due to the significant movements between the Original and Re-stated accounts, we have limited our commentary to the high level trends for each company. In addition, throughout the course of our preliminary investigations to date, we have identified a number of inconsistencies within the accounts. Our preliminary discussions with management of the D&D Group in relation to these inconsistencies appears to identify that they may relate to errors or misstatements within the accounts as well as corrections to errors in prior periods being posted in current periods. Further, due to the significant movements between the Original and Re-stated accounts, we are unable to verify the accuracy of the information within these accounts and as such we have limited our commentary to the high level trends for each company. The underlying circumstances relating to the re-statement of the accounts, and the subsequent adjustments made, will need to be considered by a Liquidator, particularly in the context of whether any investigations are likely to result in benefit for creditors of any of the companies within the D&D Group \A01_B09 14 October 2016 Page 16

19 4.3 D&D Historical profit and loss Original $000s FY14 FY15 FY16 (10M) Re-stated FY14 FY15 FY16 (10M) Revenue Less: Costs of goods sold - (2) (22) - (2) (22) Gross profit Gross profit margin % 100% 95% 88% 100% 100% 88% Other income Rent and leasing expenses - (38) (73) - (38) (73) Administration and legal expenses (92) (347) (514) (96) (352) (625) Travel expenses (15) (215) (250) (15) (215) (258) Employment expenses (379) (1,530) (3,613) (379) (1,622) (3,545) Other expenses - (5) (2) (17) (20) (2) EBITDA (226) (1,777) (4,287) 185 (1,454) (4,336) D&D is largely a non-trading company within the D&D Group. D&D incurs significant employment, travel and other expenses on behalf of other D&D Group entities. It does not appear as though these expenses are oncharged to other entities. We understand that employment expenses increased significantly year on year due to a large increase in staff and contractors, primarily due to the planned expansion into new business lines. A number of these employees were contracted to D&D notwithstanding that they may have worked in other areas of the D&D Group Profit and loss from May 2016 to August 2016 We note that profit and loss accounts for the period from May to August 2016 remain in draft and may be subject to further adjustments including intercompany eliminations. As they are yet to be finalised, we are unable to provide commentary on the accounts for this four-month period. Any further analysis would be conducted by a liquidator. This applies for each Company within the D&D Group. $000s May-16 Jun-16 Jul-16 Aug-16 Total (4M) Revenue (10) 323 Less: Costs of goods sold 4 - (14) (8) (19) Gross profit (18) 305 Gross profit margin % 117% 100% 66% 186% 94% Rent and leasing expenses (17) (11) (27) - (55) Administration and legal expenses (115) (88) (80) (231) (514) Travel expenses (31) (28) (6) (11) (76) Employment expenses (449) (393) (311) (269) (1,422) Other expenses (97) (185) (1) - (283) EBITDA (685) (433) (399) (529) (2,045) \A01_B09 14 October 2016 Page 17

20 4.3.3 Historical balance sheet Original Re-stated $000s Jun-14 Jun-15 Apr-16 Jun-14 Jun-15 Apr-16 Current assets Cash and cash equivalents 1 (433) Trade and other receivables Inventories Other current assets Total current assets 68 (271) Non-current assets Plant and equipment Intangibles Loans associated entities 3,328 1,990 (3,747) 3,763 1,998 (13,325) Total non-current assets 3,367 2,083 (3,569) 3,802 2,053 (13,214) Total assets 3,436 1,812 (2,661) 3,871 2,529 (12,520) Current liabilities Trade and other payables (39) 270 (227) (39) (144) (195) Tax liabilities 69 (531) Other current liabilities (53) (124) (343) (55) (182) (292) Total current liabilities (23) (385) (245) (23) (167) (94) Non-current liabilities Loans - financiers (2,985) (2,835) (1,438) (2,985) (2,834) - Total non-current liabilities (2,985) (2,835) (1,438) (2,985) (2,834) - Total liabilities (3,008) (3,220) (1,683) (3,008) (3,002) (94) Net assets 427 (1,408) (4,344) 863 (473) (12,614) D&D holds limited assets in its own right. D&D has significant loans owing to associated entities, in particular to OXC Bidco, DPL and Claveguard. We understand that these loans relate to funding for expenses paid on behalf of D&D \A01_B09 14 October 2016 Page 18

21 4.4 Claveguard Historical profit and loss Original $000s FY14 FY15 FY16 (10M) Re-stated FY14 FY15 FY16 (10M) Revenue 5,499 15,344 13,217 5,499 12,719 11,201 less: Costs of goods sold (3,491) (8,239) (7,452) (3,671) (7,757) (8,045) Gross profit 2,008 7,106 5,765 1,828 4,961 3,156 Gross profit margin % 37% 46% 44% 33% 39% 28% Other income Rent and leasing expenses (18) (186) (31) (18) (186) (609) Administration and legal expenses (151) (116) (162) (151) (566) (161) Travel expenses (239) (306) (290) (239) (306) (231) Employment expenses (1,559) (2,261) (2,718) (1,738) (2,426) (2,386) Other expenses 10 (365) (365) 32 EBITDA 53 3,967 2,606 (305) 1,208 (199) The Claveguard business commenced operations part way through FY14. Revenue increased in FY15 due to the first full year of operations, as well as significant work with Ramsay being undertaken and the commencement of a series of projects with Healthscope. This increase in revenue carried into FY16. Employment expenses increased throughout this period as further resources were utilised by Claveguard. Other entities within the D&D Group incur costs on behalf of Claveguard, including rent, warehousing, finance staff, travel and IT costs. These expenses are not recharged to Claveguard. If these expenses were recharged, it appears unlikely that Claveguard would have been profitable on a standalone basis Profit and loss from May 2016 to August 2016 $000s May-16 Jun-16 Jul-16 Aug-16 Total (4M) Revenue , ,305 less: Costs of goods sold 96 (592) (1,587) (25) (2,109) Gross profit ,196 Gross profit margin % 113% 6% 13% 74% 36% Other income Rent and leasing expenses (6) (5) (6) - (18) Administration and legal expenses (15) (44) (29) (10) (99) Travel expenses (39) (35) (3) (18) (94) Employment expenses (207) (471) (237) (155) (1,071) Other expenses (49) 3 (2) - (48) EBITDA 522 (513) (30) (113) (133) We understand that the positive COGS in May 2016 relate to a correction of costs of goods sold from prior periods \A01_B09 14 October 2016 Page 19

22 4.4.3 Historical balance sheet Original Re-stated $000s Jun-14 Jun-15 Apr-16 Jun-14 Jun-15 Apr-16 Current assets Cash and cash equivalents Trade and other receivables 1,431 3,494 4,390 1,431 3,157 3,579 Inventories 1,997 1,478 3,705 1,997 1,035 1,144 Other current assets , (805) 391 Total current assets 3,457 5,250 13,113 3,457 3,549 5,818 Non-current assets Plant and equipment Intangibles Loans associated entities (1,512) 833 (2,274) (1,512) 805 (1,215) Total non-current assets (1,151) 1,387 (1,707) (1,151) 1,370 (651) Total assets 2,306 6,637 11,406 2,306 4,919 5,167 Current liabilities Trade and other payables (1,581) (1,129) (5,223) (1,581) (2,542) (3,277) Tax liabilities (165) (459) (1,632) (165) (1,539) (1,645) Other current liabilities (81) (92) (79) (81) (92) (79) Total current liabilities (1,827) (1,680) (6,935) (1,827) (4,173) (5,002) Non-current liabilities Loans - financiers (229) (993) (54) (229) (998) (56) Total non-current liabilities (229) (993) (54) (229) (998) (56) Total liabilities (2,056) (2,673) (6,989) (2,056) (5,171) (5,058) Net assets 250 3,964 4, (253) 109 The Group s re-stated management accounts indicate that Claveguard has a small net asset surplus as at 30 April Claveguard s working capital positions have increased as the D&D Group has undertaken more projects, with receivables, inventory and payables all increasing significantly throughout FY15 and FY \A01_B09 14 October 2016 Page 20

23 4.5 DPL Historical profit and loss Original $000s FY14 FY15 FY16 (10M) Re-stated FY14 FY15 FY16 (10M) Revenue 1,982 8,254 11,089 2,995 11,190 10,062 less: Costs of goods sold 432 (2,211) (8,187) (2,980) (5,804) (9,874) Gross profit 2,414 6,043 2, , Gross profit margin % 122% 73% 26% 1% 48% 2% Other income Rent and leasing expenses (127) (638) (747) (127) (638) (850) Administration and legal expenses 270 (226) (246) (176) (242) (235) Travel expenses (2) (6) (8) (2) (6) (6) Employment expenses (338) (852) (796) (338) (852) (796) Other expenses (647) (959) 82 (649) (968) (82) EBITDA 1,570 3,428 1,187 (1,277) 2,746 (1,780) DPL s revenue increased significantly in FY15. We understand that this was as a result of the Healthscope strategic sourcing contract commencing in late FY14. This arrangement also saw DPL s portfolio of products broaden over time, however the margins for this strategic sourcing contract have been minimal. We have undertaken a preliminary investigation into gross margin variances throughout the period. We understand there were errors within the accounts relating to cost prices. The D&D Group has adjusted these errors in FY16. As such, FY15 EBITDA may be overstated, while FY16 may be understated. We understand that freight costs and rent were heavily capitalised in FY16 which had the effect of reducing other expenses and increasing profit / reducing losses. DPL utilised employees who were employed in other D&D Group entities, and as such incurred limited employment expenses. DPL was not recharged for these expenses Profit and loss from May 2016 to August 2016 $000s May-16 Jun-16 Jul-16 Aug-16 Total (4M) Revenue 1,211 1,124 1,014 1,206 4,555 less: Costs of goods sold (446) (1,136) (847) (994) (3,422) Gross profit 765 (12) ,133 Gross profit margin % 63% -1% 17% 18% 25% Other income Rent and leasing expenses (79) (86) (73) (6) (244) Administration and legal expenses (17) (31) (33) (58) (139) Travel expenses (5) (4) (0) (7) (16) Employment expenses (79) (89) (74) (75) (318) Other expenses (172) 9 68 (21) (116) EBITDA 412 (213) \A01_B09 14 October 2016 Page 21

24 4.5.3 Historical balance sheet Original Re-stated $000s Jun-14 Jun-15 Apr-16 Jun-14 Jun-15 Apr-16 Current assets Cash and cash equivalents 596 (419) Trade and other receivables 2,532 1,344 6,755 2,532 3,648 6,043 Inventories 2,137 6,795 11,371 2,137 6,274 8,819 Other current assets 1,807 1,465 3,187 1,807 1,384 1,725 Total current assets 7,072 9,185 21,427 7,072 11,314 16,701 Non-current assets Plant and equipment Intangibles Loans associated entities 1,801 3,785 (2,975) 1,366 2,418 (3,479) Total non-current assets 1,851 3,895 (2,417) 1,416 2,528 (3,389) Total assets 8,923 13,080 19,010 8,488 13,843 13,312 Current liabilities Trade and other payables (6,616) (8,605) (12,979) (6,559) (12,903) (13,231) Tax liabilities (394) (356) (816) (392) (769) (777) Other current liabilities (7) (34) (454) (9) (34) (273) Total current liabilities (7,016) (8,995) (14,250) (6,960) (13,705) (14,281) Non-current liabilities Loans - financiers (803) (16) (9) (803) (16) (9) Total non-current liabilities (803) (16) (9) (803) (16) (9) Total liabilities (7,819) (9,011) (14,259) (7,762) (13,722) (14,290) Net assets 1,104 4,069 4, (978) As the DPL business expanded throughout FY15 and FY16, its stock levels increased significantly. Furthermore, we understand that DPL held stock on behalf of other entities within the D&D Group further increasing its stock balances. The increase in business volumes enhanced DPL s reliance on working capital \A01_B09 14 October 2016 Page 22

25 4.6 Prius Historical profit and loss Original $000s FY14 FY15 FY16 (10M) Re-stated FY14 FY15 FY16 (10M) Revenue 21,277 13,074 10,244 22,630 13,630 10,341 less: Costs of goods sold (12,987) (8,653) (6,961) (12,924) (13,364) (7,487) Gross profit 8,291 4,422 3,283 9, ,854 Gross profit margin % 39% 34% 32% 43% 2% 28% Other income Rent and leasing expenses (857) (968) (280) (857) (1,029) (673) Administration and legal expenses (1,634) (1,167) (928) (1,634) (1,659) (948) Travel expenses (622) (524) (330) (622) (527) (395) Employment expenses (2,661) (2,393) (1,557) (2,661) (2,394) (1,557) Other expenses (1,344) (845) (205) (1,349) (1,295) (202) EBITDA 1,181 (1,476) (16) 2,592 (6,637) (921) There has been a significant decline in revenue on a year on year basis across the period. We understand that the decline in FY15 relates to pricing and volume changes relating to the Ramsey contract and a general movement of customers away from Prius and into DPL as the DPL business commenced. The business saw a further deterioration in FY16, which we understand was as a result of the termination of the Ramsay pumps and garments contract in September 2015, which also impacted the D&D Group s broader relationship with Ramsay in other areas of the business. The reduction in employment expenses over this period was due to the high turnover of staff, with new staff being employed by D&D on Prius behalf. Other entities within the D&D Group incur costs on behalf of Prius, including rent for premises, warehouse costs, finance staff costs and certain travel and IT costs. These expenses are not recharged to Prius Profit and loss from May 2016 to August 2016 $000s May-16 Jun-16 Jul-16 Aug-16 Total (4M) Revenue ,563 Less: Costs of goods sold (1,185) (480) (377) (291) (2,333) Gross profit (422) Gross profit margin % -55% 16% 46% 45% 9% Rent and leasing expenses (13) (13) (25) (2) (53) Administration and legal expenses 8 19 (41) (28) (43) Travel expenses (75) (2) 2 - (75) Employment expenses (196) (116) (95) (105) (512) Other expenses (722) (8) (51) 9 (772) EBITDA (1,421) (27) (1,225) We understand that the high costs in May 2016 relate to a correction of a rebate recharge with the other D&D Group entities over prior periods \A01_B09 14 October 2016 Page 23

26 4.6.3 Historical balance sheet Original Re-stated $000s Jun-14 Jun-15 Apr-16 Jun-14 Jun-15 Apr-16 Current assets Cash and cash equivalents Trade and other receivables 1,613 1,606 4,683 4,324 4,865 4,495 Inventories 5,594 4,804 5,412 5,594 3,884 2,760 Other current assets Total current assets 7,786 7,734 11,212 10,497 9,041 7,758 Non-current assets Plant and equipment Intangibles 863 1, , Loans associated entities (2,295) (4,913) (2,081) (2,914) (5,596) (6,383) Total non-current assets (905) (3,406) (810) (1,524) (4,089) (5,283) Total assets 6,882 4,328 10,402 8,973 4,952 2,475 Current liabilities Trade and other payables (2,042) (3,131) (8,826) (4,160) (7,753) (10,036) Tax liabilities (6) (13) 1,115 (6) 350 1,121 Other current liabilities (217) (306) (307) (212) (331) (221) Total current liabilities (2,265) (3,450) (8,018) (4,378) (7,734) (9,136) Non-current liabilities Loans - financiers (3,677) (2,822) (5,986) (3,655) (3,056) (36) Provisions (217) (380) (335) (217) (45) - Total non-current liabilities (3,894) (3,203) (6,321) (3,872) (3,101) (36) Total liabilities (6,160) (6,652) (14,339) (8,251) (10,835) (9,171) Net assets 722 (2,324) (3,937) 722 (5,884) (6,696) The Prius asset base appears to have declined in line with the overall decline in activity in the business. Prius has significant intercompany loans, in particular loans from OXC Bidco \A01_B09 14 October 2016 Page 24

27 4.7 TCSPL Historical profit and loss Original $000s FY14 FY15 FY16 (10M) Re-stated FY14 FY15 FY16 (10M) Revenue less: Costs of goods sold (103) (566) (6) (103) (566) (6) Gross profit (6) (6) Gross profit margin % 75% 43% - 75% 43% - Other income Rent and leasing expenses (1) (87) (1) (87) Administration and legal expenses (113) (57) (14) (113) (57) (14) Travel expenses (5) (24) (3) (5) (24) (3) Employment expenses (57) (306) (69) (57) (306) (69) Other expenses (2) (12) (24) (2) (12) (24) EBITDA 135 (52) (116) 135 (52) (116) TCSPL only had minor sales and expenses recorded, with TCS sales instead being recorded in other D&D Group entities Profit and loss from May 2016 to August 2016 The TCSPL management accounts for the period only indicate an expense of $1k over the four-month period \A01_B09 14 October 2016 Page 25

28 4.7.3 Historical balance sheet Original Re-stated $000s Jun-14 Jun-15 Apr-16 Jun-14 Jun-15 Apr-16 Current assets Cash and cash equivalents Trade and other receivables Inventories Other current assets Total current assets Non-current assets Plant and equipment Intangibles Loans associated entities (116) (626) (55) (116) (626) (55) Total non-current assets (96) (578) (55) (96) (578) (55) Total assets 253 (452) (53) 253 (452) (53) Current liabilities Trade and other payables (99) 690 (3) (99) 690 (3) Tax liabilities (1) 4 68 (1) 4 68 Other current liabilities (9) (86) (8) (9) (86) (8) Total current liabilities (109) (109) Non-current liabilities Loans - financiers - (26) - - (26) - Total non-current liabilities - (26) - - (26) - Total liabilities (109) (109) Net assets TCSPL only has minor assets and liabilities recorded on its balance sheet, with the majority of the assets used to run the TCS business being held within other D&D Group entities \A01_B09 14 October 2016 Page 26

29 5 Report as to affairs and director s reasons for failure This section provides a summary of the report as to affairs submitted by the directors, together with a detailed explanation of the director s reasons for failure of the D&D Group 5.1 Report as to affairs Section 438B of the Act requires the directors to give an administrator a statement about the company s business, property, affairs and financial circumstances. The directors have collectively prepared and lodged a report as to affairs (RATA) for each company under voluntary administration. We received the RATAs on 13 October In the Statement, the Directors detailed the assets and liabilities of each company at book value and ERV. The following tables summarise the book value of assets and liabilities disclosed in the Directors Statement. Given the commercial sensitivity associated with a number of the assets which are yet to be realised, we are not in a position to disclose the Directors ERV. Accordingly, the ERV is largely limited to an updated liability position, and cash available at the date of appointment. The Administrators have not audited the D&D Group s records or the book values. The below schedules should not be used to determine the likely return to creditors as a number of realisable values are based on the D&D Group s records and remain subject to the review of the Administrators and, in particular: The Administrators are not in a position to confirm (or otherwise) certain asset values as valuations commissioned by the Administrators are commercially sensitive and are not disclosed in this report. The value of creditor claims remains subject to change as further claims may be received and require adjudication. The tables below do not provide for possible trading losses or professional costs associated with the administration process \A01_B09 14 October 2016 Page 27

30 5.2 D&D $000s Notes RATA ERV Book Value Assets Cash at bank Debtors Withheld Inventory 0 0 Plant and equipment Withheld Assets with security interests (net of amounts owing) 0 0 Subsidiaries 0 0 Prepayments 0 0 Total assets 517 Withheld Liabilities Employees Secured creditors 5 15,283 15,334 Preferential claims Unsecured creditors ,487 Contingent claims Total liabilities 15,962 32,388 Surplus / (deficiency) $(15,445) Withheld Notes 1. The Administrator s realised $4k of cash at bank as at the date of appointment. 2. Debtors include a. Intercompany loans totalling $251k due by Dickson & Dickson Healthcare (US) Inc ($180k) and TCSPL ($71k). We understand that the US entity has no assets and is in the process of being wound down. Any recovery would be subject to the outcome of this process. The amount due by TCSPL is unlikely to be recovered on the basis that there is unlikely to be a return to unsecured creditors. b. The balance relates to amounts owing with respect to the EzyAccess business and balances due by related parties which we are continuing to pursue. The Administrators have chosen to withhold the realisable values of the debtors as these amounts are commercially sensitive. 3. D&D owns plant and equipment including office furniture, IT equipment and motor vehicles which was listed at $107k in the RATA. The Administrators have chosen to withhold the market values of the plant and equipment as these amounts are commercially sensitive. 4. The directors have allocated outstanding pre-appointment superannuation amounts ($62k) to preferential claims, however, these amounts should be classified as priority employee claims. Other employee claims included in the RATA include pre-appointment expenses, annual leave and long service leave. The ERV of $340k includes notice and redundancy entitlements for employees terminated during the administration. The Administrators have not adjudicated on employee claims. Therefore, the numbers and values for employee claims may change. 5. The $15.3m relates to debts owing to ANZ Bank with respect to outstanding secured facilities and bank guarantees as at the date of appointment. This amount is cross-collateralised across each company within the D&D Group. 6. Per the RATA, unsecured creditors include: \A01_B09 14 October 2016 Page 28

31 a. 29 trade and third party creditors totalling $304k. It should be noted however, that the supporting schedule to the RATA includes two further categories, totalling $15.3m as follows: b. Intercompany creditors totalling $4.3m; and c. Related party creditors totalling $11.0m Where additional information on creditor balances has been received during the administration, this is reflected in the ERV. The Administrators have not adjudicated on claims received to the date of this report. Therefore, the numbers and values for unsecured creditor claims may change. 7. Contingent claims relate to the amount outstanding with respect to an operating lease held by D&D \A01_B09 14 October 2016 Page 29

32 5.3 Claveguard $000s Notes RATA ERV Book Value Assets Cash at bank Debtors 2 8,718 Withheld Inventory Withheld Plant and equipment Withheld Assets with security interests (net of amounts owing) Subsidiaries 0 0 Prepayments 0 0 Total assets 10,286 Withheld Liabilities Employees Secured creditors 7 15,283 15,334 Preferential claims Unsecured creditors ,309 Contingent claims 0 0 Total liabilities 16,132 31,736 Net assets / (liabilities) $(5,846) Withheld Notes 1. The Administrator s realised $19k of cash at bank as at the date of appointment. 2. Debtors include: a. Intercompany loans totalling $8.2m due by DPL ($5,775k), Prius ($774k) and D&D ($1,684k). These amounts are unlikely to be recovered on the basis that there is unlikely to be a return to unsecured creditors. b. $278k in supplier prepayments / deposits. This should possibly be classified as a prepayment rather than a debtor. c. $207k in trade debtors, primarily in relation to completed or partly completed projects which we are continuing to pursue. The Administrators have chosen to withhold the realisable values of the debtors as these amounts are commercially sensitive. 3. Claveguard owns inventory which was listed at $988k in the RATA. This inventory includes items utilised in other areas of the D&D Group s operations, and largely consists of spare parts and used/aged products which are of minimal value other than to the Claveguard business. Some of this inventory was included in the sale of the Claveguard assets completed on 30 September 2016, with the balance to be realised. The Administrators have chosen to withhold the realisable values of the inventory as these amounts are commercially sensitive. 4. Claveguard owns plant and equipment including furniture and fittings, IT equipment, motor vehicles and demo equipment which was listed at $558k in the RATA. Some of this plant and equipment was included in the sale of the Claveguard assets completed on 30 September 2016, with the balance to be realised. The Administrators have chosen to withhold the market values of the plant and equipment as these amounts are commercially sensitive. 5. Claveguard held a finance lease in relation to a motor vehicle in which the directors estimated there was $3k in equity. An appraisal of the vehicle following our appointment suggested that there was no equity and accordingly the asset was disclaimed \A01_B09 14 October 2016 Page 30

33 6. The directors have allocated outstanding pre-appointment superannuation amounts ($34k) to preferential claims, however, these amounts should be classified as priority employee claims. Other employee claims included in the RATA include pre-appointment expenses, annual leave and long service leave. The ERV of $93k includes notice and redundancy entitlements for employees terminated during the administration, and also takes into account employees whose entitlements transferred as part of the Claveguard sale. The Administrators have not adjudicated on employee claims. Therefore, the numbers and values for employee claims may change. 7. The $15.3m relates to debts owing to ANZ Bank with respect to outstanding secured facilities and bank guarantees as at the date of appointment. This amount is cross-collateralised across each Company within the D&D Group. 8. Per the RATA, unsecured creditors include: a. 19 trade and third party creditors totalling $495k. It should be noted, however, that the supporting schedule to the RATA includes two further categories, totalling $4.6m as follows: b. Intercompany creditors totalling $138k; and c. Related party creditors totalling $4.5m Where additional information on creditor balances has been received during the administration, this is reflected in the ERV. The Administrators have not adjudicated on claims received to the date of this report. Therefore, the numbers and values for unsecured creditor claims may change. We note that the current creditor balance does not appear to include amounts prepaid by customers where equipment was not delivered. This is likely to increase the creditor balance significantly \A01_B09 14 October 2016 Page 31

34 5.4 DPL $000s Notes RATA ERV Book Value Assets Cash at bank Debtors 2 5,767 Withheld Inventory 3 7,796 Withheld Plant and equipment Withheld Assets with security interests (net of amounts owing) 5 15 Withheld Subsidiaries 0 0 Prepayments 0 0 Total assets 14,244 Withheld Liabilities Employees Secured creditors 7 15,283 15,334 Preferential claims Unsecured creditors 8 16,711 15,940 Contingent claims Total liabilities 32,179 31,514 Net assets / (liabilities) $(17,935) Withheld Notes 1. The Administrator s realised $19k of cash at bank as at the date of appointment. 2. Debtors include: a. Intercompany loans totalling $3.5m due by Prius ($1,509k) and D&D ($1,940k). These amounts are unlikely to be recovered on the basis that there is unlikely to be a return to unsecured creditors. b. $170k from Claveguard South Africa which is a related party and is in the process of being wound down. Any recovery would be subject to the outcome of this process. c. $294k in supplier prepayments / deposits where there is a significant risk of set off by the customers. d. $2.0m in trade debtors where there appears to be a significant risk of set off by the customers due to prepayments made or outstanding rebates. The Administrators have chosen to withhold the realisable values of the debtors as these amounts are commercially sensitive. 3. DPL owns inventory which was listed at $7.8m in the RATA. This inventory includes medical consumables relating to the Elite Med strategic sourcing business, garments and stockings relating to the TCS business and other inventory relating to non-core areas of the business. We note that the Elite Med inventory, which accounts for approximately $4.3m is subject to a dispute over title and has been previously paid for by the customer. Notwithstanding, it is the Administrator s view that title vests with DPL. Any inventory relating to the TCS business is intended to be included in any going concern sale, and expressions of interests have been requested for all other inventory categories. The Administrators have chosen to withhold the realisable values of the inventory as these amounts are commercially sensitive. 4. DPL owns plant and equipment including furniture and fittings, IT equipment, motor vehicles, demo equipment leasehold improvements and customer loan stock which was listed at $647k in the RATA. The majority of this value relates to aged loan stock in the possession of customers which may be difficult / uncommercial to recover and realise \A01_B09 14 October 2016 Page 32

35 The Administrators have chosen to withhold the market values of the plant and equipment as these amounts are commercially sensitive. 5. DPL held a finance lease in relation to a motor vehicle in which the directors estimated there was $14k in equity. An appraisal of the vehicle following our appointment suggests that the equity is well below this value. The Administrators have chosen to withhold the market value of the motor vehicle as this amount are commercially sensitive. 6. The directors have allocated outstanding pre-appointment superannuation amounts ($16k) to preferential claims, however, these amounts should be classified as priority employee claims. Other employee claims included in the RATA include pre-appointment expenses, annual leave and long service leave. The ERV of $88k includes notice and redundancy entitlements for employees terminated during the administration. The Administrators have not adjudicated on employee claims. Therefore, the numbers and values for employee claims may change. 7. The $15.3m relates to debts owing to ANZ Bank with respect to outstanding secured facilities and bank guarantees as at the date of appointment. This amount is cross-collateralised across each company within the D&D Group. 8. Per the RATA, unsecured creditors include: a. 52 trade and third party creditors totalling $2.5m; b. Customer deposits relating to prepaid stock totalling $7.3m; c. Intercompany creditors totalling $5.8m; and d. Related party creditors totalling $512k Where additional information on creditor balances has been received during the administration, this is reflected in the ERV. The Administrators have not adjudicated on claims received to the date of this report. Therefore, the numbers and values for unsecured creditor claims may change. 9. Contingent claims relate to the amount outstanding with respect to the fit-out at the warehouse in Camellia, NSW \A01_B09 14 October 2016 Page 33

36 5.5 Prius $000s Notes RATA ERV Book Value Assets Cash at bank Debtors 2 2,103 Withheld Inventory 3 1,069 Withheld Plant and equipment 4 1,721 Withheld Assets with security interests (net of amounts owing) Subsidiaries 0 0 Prepayments 0 0 Total assets 5,033 Withheld Liabilities Employees Secured creditors 7 15,283 15,334 Preferential claims Unsecured creditors 8 2,208 14,079 Contingent claims 0 0 Total liabilities 17,557 29,592 Net assets / (liabilities) 12,525 Withheld Notes 1. The Administrator s realised $129k of cash at bank as at the date of appointment. 2. Debtors include: a. Intercompany loans totalling $1.1m due by D&D ($646k), TCSPL ($14k) and Dickson & Dickson Healthcare (US) Inc ($454k). We understand that the US entity has no assets and is in the process of being wound down. Any recovery would be subject to the outcome of this process. The amounts due by D&D and TCSPL are unlikely to be recovered on the basis that there is unlikely to be a return to unsecured creditors. b. $554k arising from an unsuccessful sale of the Claveguard South Africa business. We are in the process of assessing the merits of pursuing this. c. $334k in trade debtors which we anticipate will be largely collectible. The Administrators have chosen to withhold the realisable values of the debtors as these amounts are commercially sensitive. 3. Prius owns inventory which was listed at $1.1m in the RATA. This inventory primarily relates to garments and stockings relating to the TCS business however includes other items relating to the discontinued bed / mattress operations. Any inventory relating to the TCS business is intended to be included in any going concern sale, and expressions of interests have been requested for all other inventory categories. The Administrators have chosen to withhold the realisable values of the inventory as these amounts are commercially sensitive. 4. Prius owns plant and equipment including furniture and fittings, IT equipment, motor vehicles, demo equipment leasehold improvements and customer loan stock which was listed at $1.7m in the RATA. The majority of this value ($868k) relates to pumps located in hospitals relating to the TCS business which are likely to only be of value if included as part of a going concern sale. The plant and equipment also includes a significant component of rental equipment (including beds and mattresses) which are in the possession of customers which may be difficult / uncommercial to recover and realise. The Administrators have chosen to withhold the market values of the plant and equipment as these amounts are commercially sensitive \A01_B09 14 October 2016 Page 34

37 5. Prius held a finance lease in relation to a motor vehicle in which the directors estimated there was $11k in equity. An appraisal of the vehicle following our appointment suggests that there was no equity in the vehicle and accordingly, it has been disclaimed. The Administrators have chosen to withhold the market value of the motor vehicle as this amount are commercially sensitive. 6. The directors have allocated outstanding pre-appointment superannuation amounts ($19k) to preferential claims, however, these amounts should be classified as priority employee claims. Other employee claims included in the RATA include pre-appointment expenses, annual leave and long service leave. The ERV of $176k includes notice and redundancy entitlements for employees terminated during the administration. The Administrators have not adjudicated on employee claims. Therefore, the numbers and values for employee claims may change. 7. The $15.3m relates to debts owing to ANZ Bank with respect to outstanding secured facilities and bank guarantees as at the date of appointment. This amount is cross-collateralised across each company within the D&D Group. 8. Per the RATA, unsecured creditors include: a. 39 trade and third party creditors totalling $2.2m. It should be noted, however, that the supporting schedule to the RATA includes three further categories, totalling $11.3m as follows: b. Customer deposits relating to prepaid stock totalling $25k; c. Intercompany creditors totalling $2.3m; and d. Related party creditors totalling $9.0m Where additional information on creditor balances has been received during the administration, this is reflected in the ERV. The Administrators have not adjudicated on claims received to the date of this report. Therefore, the numbers and values for unsecured creditor claims may change \A01_B09 14 October 2016 Page 35

38 5.6 TCSPL $000s Notes Book Value ERV Assets Cash at bank 0 0 Debtors 0 0 Inventory 0 0 Plant and equipment 0 0 Assets with security interests 0 0 Subsidiaries 0 0 Prepayments 0 0 Total assets 0 0 Liabilities Employees 0 0 Secured creditors 1 15,283 15,334 Unsecured creditors Contingent claims 0 0 Total liabilities 15,354 15,334 Surplus assets over liabilities (15,354) (15,334) Notes 1. The $15.3m relates to debts owing to ANZ Bank with respect to outstanding secured facilities and bank guarantees as at the date of appointment. This amount is cross-collateralised across each Company within the D&D Group. 2. Per the RATA, unsecured creditors include: a. Intercompany creditors totalling $71k Where additional information on creditor balances has been received during the administration, this is reflected in the ERV. The Administrators have not adjudicated on claims received to the date of this report. Therefore, the numbers and values for unsecured creditor claims may change \A01_B09 14 October 2016 Page 36

39 5.7 Omissions from statement We have not identified any material omissions from the Directors statement, albeit, note that the director s statement did not include any intellectual property owned by the D&D Group, which includes certain brands, trademarks and patents. 5.8 Directors opinions as to the reasons for failure The Directors have provided their views on the affairs of the D&D Group and the reasons for its failure. The Directors believe the D&D Group failed for the following reasons: Entity D&D Claveguard DPL Prius Director explanation as to reasons for failure D&D was largely a cost centre for its subsidiaries which were themselves loss making bearing many of the overhead, labour, and travel expenditures for itself and the subsidiaries. D&D s success was dependent on the success of its subsidiaries. The causes for the failure of the D&D Group were the high cost structure of the business, insufficient revenue and poor margins, and management s lack of controls over expenses combined with the poor financial condition of its subsidiaries which became apparent from the reconciliation referred to above and ultimately the decision of the major shareholders of the D&D Group s parent entity not to provide any further financial support to the D&D Group. The operating performance of the Claveguard business needs to be considered in concert with costs incurred by other entities in the D&D Group such as D&D and DPL which bore some of the operating expenses for the business such as travel, rent, finance and HR support as well as some labour costs. The profit and net asset position of Claveguard was materially overstated both in the original FY15 accounts and YTD FY16 accounts to April (prior to the review and reconciliations undertaken). Following completion of the accounting review in August 2016 it became apparent that there was a significant reduction in NPAT and net assets required for both periods to accurately reflect the financial performance. Contributing to the failure of Claveguard were the following factors: Financial performance was impacted by: - poor expense control by management - lower than expected realised margins on projects - product quality issues leading to delays, re-work and warranty work The appointment of administrators to the other D&D Group entities that provided operational support to Claveguard. Claveguard may not be able to support these costs on a standalone basis. The profit and net asset position or DPL was materially overstated both in the original FY15 accounts and YTD FY16 accounts to April (prior to the review and reconciliations undertaken). Following completion of the accounting review in August 2016 it became apparent that there was a significant reduction in NPAT and net assets required for both periods to accurately reflect the financial performance. The financial misstatements masked the true condition of the business. Contributing to the financial performance of DPL were the following factors: DPL s contract for the sourcing and sale of medical consumables to Healthscope was unprofitable: - Product margins were very low. - Margins were impacted by adverse FX movements. - The significant volume of stock held required a large warehouse facility which impacted the costs of storage of the products. - The Customer service model of picking, packing and delivering products daily to individual hospital wards resulted in very high freight & transport costs. Poor cost control by management resulted in a cost base that was not commensurate with the earnings. Inventory management issues resulted in an overstatement of assets and understatement of costs. The profit and net asset position of Prius was materially overstated both in the original FY15 accounts and YTD FY16 accounts to April (prior to the review and reconciliations undertaken). Following completion of the accounting review in August 2016 it became apparent that there \A01_B09 14 October 2016 Page 37

40 Entity TCSPL Director explanation as to reasons for failure was a significant reduction in NPAT and net assets required for both periods to accurately reflect the financial performance. Contributing to the financial performance of Prius were the following factors: Sales of hospital beds which were at low margins with long warranty periods. Quality issues led to significant costs to service and replace the installed fleet. This also impacted the reputation of Prius in the market. High cost base, notably in the division selling beds and mattress rental. Sales were not sufficient to support the associated costs. Significant freight costs associated with movement of stock from suppliers and to/from customers. Cancelation of DVT and compression garments and stockings contracts with Ramsay Healthcare. Sales of these products declined over 2016 as a result. TCSPL had an intercompany loan and was a guarantor of the D&D Group s secured debt facilities. These liabilities became payable when other entities in the D&D Group were placed into administration. This became apparent when it was likely other entities in D&D Group would be placed in administration. 5.9 Administrator s opinions as to the reasons for failure Our preliminary view is that, in addition to the reasons identified by the directors, the D&D Group suffered due to: The co-mingling of assets, employees, customer and supplier contracts and infrastructure throughout the D&D Group entities which led to significant, and unnecessary, complexities and inefficiencies throughout the business; and Poor record keeping and accounting practices \A01_B09 14 October 2016 Page 38

41 6 Trading by Administrators This section provides an overview of the trading undertaken during the Administration, including some of the challenges faced. The Administrators continued to trade the Total Compression Solutions business while taking measures to preserve the other assets of the D&D Group. 6.1 Overview The Administrators assumed control of the D&D Group s business upon appointment. Appropriate controls and systems were put in place with respect to cash / banking, purchase orders, stock control and reporting. We have endeavoured to allow the TCS business to trade in the ordinary course. In particular, we: Opened new accounts with service providers, utilities and other non-stock suppliers; Liaised with stock providers regarding the status of open purchase orders; Continued employment of staff, including staff that provided support services to the TCS business; Negotiated certain payments of necessity to ensure continued supply of business critical services and ensure the availability of in transit inventory to the purchaser of the TCS business; Issued instructions to carry out stock takes for inventories and consumables; Preparation of an Administration trading forecast and cash flow; Reviewed the procedures for IT services and back up processes for information on site; Reviewed the adequacy of the insurance policies held by the D&D Group and entered into arrangements for policy continuation. The other aspects of the D&D Group s operations were not traded in the ordinary course by the Administrators. The assets relating to these operations were preserved and have been realised, or are in the process of being realised, through different realisation strategies. 6.2 Trading issues The D&D Group operated a number of business prior the appointment of the Administrators, including the: TCS business; Claveguard business; and Strategic sourcing business (DP Logistics) Total Compression Solutions The Administrators continue to trade the TCS business, with sales and orders being fulfilled in the ordinary course. It is expected that the sale of the business will be completed shortly and trading obligations will immediately transfer to the purchaser of the business. Limited purchasing of inventory has been undertaken due to: The restricted cash position of the D&D Group; The lead time for delivery of the inventory; and Uncertainty regarding the success of the sale of business campaign. The reduction in inventory ordering, as well as the stock on hand position at the time of the Administrators appointment, has led to stock outs of some product lines. The Administrators have made arrangements to ensure that stock is readily available for any incoming purchaser. The Administrator s continue to liaise with key suppliers and customers to provide updates on the administration process and the potential for a sale of the TCS business. One customer contract has been formally terminated during the administration. The Administrators understand this was due to the agreement being exclusive and the customer intending to introduce a panel of suppliers. During the course of the administration, three key staff of the Total Compression Solutions business resigned. This has created a short period prior to the completion of the sale in which the business does not have a General Manager. The Administrators are comfortable that the remaining team and support staff can effectively operate the business through this period \A01_B09 14 October 2016 Page 39

42 Due to the circumstances of the appointment and the cash position of the D&D Group, the Administrators made the decision to cease the remanufacturing business shortly after their appointment Claveguard The Claveguard business was not actively traded during the administration. The Administrators continued to employ staff for a short period while a sale of business was completed. Due to cash constraints, no inventory or capital equipment was ordered during the administration. Further, no major work on projects was undertaken during the administration. However, some minor repair works for completed projects was undertaken during the administration prior to the business being sold DP Logistics The Group s strategic sourcing business and other product lines were not trading profitably prior to the appointment of the Administrators. Following the appointment of the Administrators, there has been a dispute over title to a significant amount of stock. In the administrator s view, the stock vested with the company under the PPSA. The Administrators took the decision to cease trading this business in the ordinary course and look at alternative options for realisation of all inventory. This has been deemed the most appropriate action while title to the disputed stock is being resolved. This is discussed further in section Summary of receipts and payments A summary of the Administrators receipts and payments for the period of 19 September 2016 to 12 October 2016 is included at part Error! Reference source not found. of the Administrators Remuneration Approval Request Report attached as Annexure D \A01_B09 14 October 2016 Page 40

43 7 Sale of business / assets The Administrators have adopted a variety of asset realisation strategies for different components of the D&D Group to maximise the return to creditors. 7.1 Total Compression Solutions Immediately following our appointment, we commenced a sales and marketing program seeking expressions of interest in the sale of the TCS business. As indicated at the First Meetings of Creditors, an administrator has statutory power to sell all or part of the assets or business of a company at any time during the administration process if the administrator forms the view that it is in the best interests of the company and its creditors to do so (and without any requirement for creditor or committee approval). The timetable for the sale process is as follows: Date Sale program 23 Sep 2016 Advertisement appeared in the Australian Financial Review 23 Sep 2016 Information memorandum made available to interested parties 27 Sep 2016 Non-binding indicative offers received 29 Sep 2016 Selected parties provided access to secure data room 04 Oct 2016 Management meetings and site tours commenced 06 Oct 2016 Binding offers received 10 Oct 2016 Preferred bidder notified 14 Oct 2016 Scheduled execution of contract of sale 21 Oct 2016 Target completion date The closing date for non-binding indicative offers was 27 September Eight indicative offers were received and five parties were shortlisted to conduct further due diligence. These parties were selected on the basis of the consideration offered, their capacity to complete a transaction and the inclusion of all assets of the TCS Business (as opposed to a break up). Shortlisted parties undertook due diligence enquiries and held meetings with the Administrators and management. Two binding offers were received on 6 October 2016 from credible parties well known in the industry. The Administrators accepted an offer to purchase the TCS business on a going concern basis incorporating the inventory, intellectual property, and fixed assets. The preferred party was selected based on the value of their offer, the nature of the conditions attached to the offer and the offer to provide ongoing employment to all TCS staff. The Administrators and the prospective purchaser are working towards executing a contract of sale imminently. Once a contract is signed, the Administrators, the purchaser and staff will work towards completing the contract conditions and finalising a sale, which is intended to occur within a week of signing. The alternative to a sale as a going concern would be a wind down of the operations which would likely result in significantly reduced recoveries for the assets both due to reduced realisations and the significant costs associated with selling the assets, termination of employment for all staff, and no prospects of ongoing business for the suppliers to the TCS business, including possible fulfilment of current open purchase orders by a prospective purchaser. Accordingly, a sale as a going concern is in the best interests of creditors. The total sale proceeds will be subject to final inventory stocktakes and cannot be confirmed until completion. 7.2 Claveguard As described earlier in this report, Claveguard is a project based business, delivering integrated theatres into hospitals. Given the long lead times involved in ordering equipment many Claveguard customers provided advanced payments on projects. Whilst these payments were initially received into the Claveguard bank account we understand they were not required to remain segregated and were subsequently used to fund the general overheads of the Claveguard business together with other loss making divisions of the wider D&D Group. Shortly following our appointment our initial assessment of the business confirmed the following: \A01_B09 14 October 2016 Page 41

44 1. Claveguard had approximately $18,000 cash at bank as at 19 September 2016; 2. Of the eight projects in progress, five projects were assessed as having a negative equity value in excess of $800,000 in aggregate, noting that this figure excludes any management overhead and labour costs required to actually deliver these projects to completion; 3. Whilst the remaining three projects were estimated to be profitable strictly on the revenue and material / labour costs to complete, the Administrators were unable to progress these projects given the: a. Profitability of these projects diminished significantly (and in certain cases may have been loss making) once management overhead and labour costs were accounted for; b. In order for the next tranche of revenue to be received there was a significant up-front cost required to be met, for which funding did not exist; c. Long dated completion timetables; d. Significant pre-appointment amounts owing to suppliers which would have presented challenges in sourcing materials moving forward; and e. Ongoing uncertainty as to whether current customers would look to terminate existing purchase orders held by Claveguard as a result of our appointment, particularly where all projects being conducted for them could not be completed. Given the insufficient resources available to the Administrators (including to meet upcoming employee entitlements and other overheads of the business) we determined that there was insufficient time to conduct an open market sales process. The Administrators therefore made direct enquiries with a series of potential purchasers of the business in an attempt to realise some value for creditors. Those parties were identified based upon our review of the books and records of Claveguard, discussions with staff and our assessment of who the most likely purchasers might be. We also had regard to the ability and financial capacity of those parties' to complete on an expedited sale timeframe. As foreshadowed at the first meeting of creditors, we needed to conduct a sale of the business within hours of that meeting (because of Claveguard's inability to meet employee entitlements, in particular, beyond that period). As indicated at the first meeting of creditors, an administrator has statutory power to sell all or part of the assets or business of a company at any time during the administration process if the administrator forms the view that it is in the best interests of the company and its creditors to do so (and without any requirement for creditor or committee approval). We subsequently agreed a sale of certain assets of Claveguard on 30 September 2016 for monetary consideration of $101,000 plus GST, as well as the assumption of employee entitlements by the purchaser for all 6 transferring employees. In addition to the above, there is an option to secure further monies in the event that the purchaser is able to procure the consent of the counterparty to the novation of a key contract. Had the sale not been completed by 30 September 2016, the Administrators would have had no alternative but to terminate all staff relating to the Claveguard business on 30 September 2016 given that any future wages would have been unfunded. As part of this transaction six employees were transferred to the purchaser who also acquired the Claveguard business name together with certain inventory and fixed assets relating to the Claveguard business. The alternative to a sale of the Claveguard assets and transfer of employees would have been the immediate cessation of business and a wind down of the operations which would have resulted in limited, if any net recoveries for the assets and termination of employment for all staff. Accordingly, we formed the view that the urgent sale of the Claveguard assets was in the best interests of creditors. Excluded from the sale were all Claveguard book debts which we will continue to pursue \A01_B09 14 October 2016 Page 42

45 7.3 Elite Med / Strategic Sourcing Inventory As outlined earlier in this report, in FY14, DPL entered into an agreement with Healthscope for the strategic sourcing and supply of medical consumable products to its hospitals carrying the 'Elite Med' brand. Under the arrangement, Healthscope prepaid for Elite Med product, which was then sourced by DPL and delivered to its hospitals. Overall, the relationship with Healthscope in relation to the Elite Med product lines delivered very low margins for DPL. We note that while many of the issues surrounding the strategic sourcing arrangement with Healthscope remain commercially sensitive, as indicated previously in this report, Healthscope had indicated to DPL shortly prior to the administration that it had little interest in continuing the arrangement with DPL due to issues which had surfaced regarding reliability of product and supply. As at the date of our appointment as administrators, DPL held approximately $4.5m of Elite Med product in inventory at its warehouse. There are a number of issues which have complicated our efforts to realise value for the Elite Med inventory. First, there are significant quality issues with the inventory. Of the $4.5m of Elite Med product on hand, approximately $1.1m had been rejected by Healthscope for quality issues prior to the administration. Second, while the Elite Med brand is owned by DPL, Elite Med products are only used at Healthscope hospitals and it is effectively an in-house brand for Healthscope. Other private and public hospitals which would have the capacity to purchase such products in the required volumes already have alternative supply arrangements in place, and would be unlikely to have any interest in products carrying the Elite Med branding. It would be difficult to efficiently and cost effectively sell this volume of product to small operators (e.g day surgeries), particularly given the ongoing warehousing and labour costs associated with continuing to hold the product for sale. Third, given the pre-payment arrangement between DPL and Healthscope, significant legal issues have arisen in relation to title to the Elite Med product on hand, which will complicate any sale of that product. Noting those issues, we are continuing with negotiations to realise the best price possible for the Elite Med inventory in the circumstances. While it would be inappropriate to comment on those negotiations at this time, we hope to resolve those negotiations shortly and will inform creditors of the outcome in due course. 7.4 Remaining Inventory and Intellectual Property Immediately following our appointment, we undertook a process to conduct stocktakes and understand the remaining inventory within the business which was not utilised by either TCS or Claveguard. Following this process being completed, the following timetable for the sale of the remaining inventory and its associated Intellectual Property process was implemented: Date Sale program 11 Oct 2016 Information memorandum made available to interested parties 14 Oct 2016 Advertisement appeared in the Australian Financial Review 18 Oct 2016 Binding offers due to be received 20 Oct 2016 Sale of inventory to be completed 26 Oct 2016 Inventory to be removed from the warehouse Simultaneously, the Administrators have investigated alternative options for the realisation of these assets in the event that the sale process does not provide adequate returns for the stock. The Administrators anticipate being in a position to provide an update on this process at the Second Meeting of Creditors. 7.5 Other Assets / Business Lines A number of discontinued businesses and assets remain in the Group. These include the remanufacturing assets, Ezy Access assets and a number of vehicles and fixed assets. The Administrators are exploring realisation options for these assets including an auction for fixed assets. In regards to Ezy Access, the Administrators are investigating whether all intellectual property utilised by the assets is owned by the D&D Group prior to making these assets available for sale \A01_B09 14 October 2016 Page 43

46 8 Administrator s investigations This section provides creditors with information on the preliminary investigations undertaken by the Administrators to date, and whether there have been any potential actions identified that may be pursued by a Liquidator As no proposal has been provided to the Administrators in respect of a DOCA for any of the D&D Group entities there is currently no alternative but for the Administrators to recommend that each company within the D&D Group 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 the D&D Group but it is measured in its disclosure, to preserve the integrity of further investigations and legal actions that might take place once each company is placed into liquidation 8.1 Nature and scope of review The Act requires an administrator to carry out preliminary investigations into a company s business, property, affairs and financial circumstances. We reiterate that the investigations are preliminary and have been limited for the following reasons: We have had a limited timeframe in which to undertake our preliminary investigations given the size and complexity of the D&D Group. Following our appointment, certain areas within the books and records of the D&D Group required significant work to be brought up to date as at 19 September This remains an ongoing exercise. The Directors Statements and questionnaires were delayed and only received on 13 October We have had limited opportunities to date to discuss certain transactions with previous employees and directors. Investigations centre on transactions entered into by a company that a liquidator might seek to void or otherwise challenge where the company is wound up. Investigations allow an administrator to advise creditors what funds might become available to a liquidator such that creditors can properly assess whether to accept a DOCA proposal or resolve to wind up the company. We investigated matters to the extent possible in the time available. A liquidator may recover funds from certain voidable transactions or though other avenues; for example, through action seeking compensation for insolvent trading or breach of director duties. Funds recovered would be available to the general body of unsecured creditors including secured creditors but only to the extent of any shortfall incurred after realising their security. A deed administrator does not have recourse to voidable transactions. The Administrators knowledge of the D&D Group s affairs comes principally from the following sources: Discussions with the Directors, their advisors and key staff members. The Directors Statement and questionnaire. Management accounts, books and records, board reports and financial statements. The D&D Group s internal accounting system. Correspondence and discussions with the D&D Group s creditors. An independent valuation of the D&D Group s assets. Searches obtained from relevant statutory authorities. Records maintained by the ATO. Publicly available information. 8.2 The Company s solvency In order for a liquidator to recover funds through the voiding of certain transactions or through other legal action, such as seeking compensation from directors for insolvent trading, the company s insolvency must be established at the relevant time. There are two primary tests used in determining a company s solvency, at a particular date, namely: \A01_B09 14 October 2016 Page 44

47 Balance sheet test; and Cash flow or commercial test. The Courts have widely used the cash flow or commercial test in determining a company s solvency at a particular date along with several other indicators. We have summarised below the insolvency indicators adopted by the Courts and the ASIC together with our comments in relation to each company within the D&D Group: D&D Insolvency indicator Present Comment Working capital deficiency No Working capital ratios can be used as a general indicator of liquid assets available to pay debts as and when they fall due within 12 months. A working capital ratio of less than 1 indicates a company may not be able to pay its debts as and when they fall due. Based on the Re-stated accounts, D&D recorded the following working capital ratios: June June June Net asset deficiency Yes Based on the Re-stated accounts, D&D recorded the following net asset positions: FY14 $863k FY15 ($473k) FY16 (10M) ($12,614k) Ageing of creditors No The majority of D&D s creditors (83.3%) were aged between 0 and 60 days as at the date of our appointment. Inability to extend finance facilities and breaches of covenants Inability to meet other financial commitments / default on finance agreements No No In addition, there were significant intercompany or related party loans payable. We are not aware of any monetary or non-monetary defaults occurring in respect of the D&D Group s banking facilities. To our knowledge there were no defaults on any operating or finance lease obligations at the date of administration. Profitability / trading losses Yes Based on the Re-stated accounts, D&D recorded the following EBITDA: FY14 - $185k FY15 ($1,454k) FY16 (10M) ($4,336k) \A01_B09 14 October 2016 Page 45

48 Insolvency indicator Present Comment Cash flow difficulties Yes Management advise that operational cash flow had been tightly managed for a number of years and that the deferral and stretching of creditor terms was commonplace. No access to alternative sources of finance (including equity capital) Inability to dispose non-core assets We are advised that there was minimal cash flow reporting within the D&D Group up until OXC Bidco acquired the business in late Following the transaction, a more regular and robust reporting regime was introduced but we are unable to comment as to the reasonableness of Management s assumptions at this stage. Following acquisition, approximately $7m in additional funding was provided by OXC Bidco in the period to April 2016 to fund the D&D Group s working capital requirements. We are advised that during mid 2016 a number of operational improvements / cost savings were identified and implemented to achieve a return to profitability. Areas addressed included: Labour Shipping and freight Identification of alternative suppliers Travel Marketing Recruitment Dishonoured payments No None identified to date. Overdue Commonwealth and State taxes No forbearance from creditors / legal action threatened or commenced by creditors No No Yes Yes During the period of the investigation into accounting irregularities and reconciliation (June August 2016), payment terms for certain creditors were extended due to concerns around the quality of the D&D Group s records and concerns regarding the D&D Group s dealings with those creditors. While the business experienced cash flow challenges, funding support by the shareholder was not withdrawn until 16 September We understand that OXC Bidco provided significant funding following its purchase of the D&D Group in late In addition, the operations of D&D were supported via various intercompany loans from other Obex group companies. We are not aware of any strategy that was agreed upon by the D&D Group to raise additional capital from external sources in the lead up to our appointment. We are not aware of any strategy that was agreed upon by the D&D Group to sell non-core assets in the lead up to our appointment. D&D had entered into a payment plan with the ATO initially in July 2015 (and subsequently revised in June 2016) totalling $285k in respect to historic BAS liabilities and was adhering to the terms of the plan up to the date of insolvency. We understand all other Commonwealth and State taxes remain current. We understand the D&D Group was involved in several legal disputes with certain suppliers, contractors and former employees at the date of our appointment \A01_B09 14 October 2016 Page 46

49 8.2.2 Claveguard Insolvency indicator Present Comment Working capital deficiency No Working capital ratios can be used as a general indicator of liquid assets available to pay debts as and when they fall due within 12 months. A working capital ratio of less than 1 indicates a company may not be able to pay its debts as and when they fall due. Based on the Re-stated accounts, Claveguard recorded the following working capital ratios: June June June Net asset deficiency No Based on the Re-stated accounts, Claveguard recorded the following net asset positions: FY14 $250k FY15 ($253k) FY16 (10M) $109k Ageing of creditors Yes Claveguard s third party trade creditors were significantly aged as at 19 September 2016 with 84.1% being 60+ days. Inability to extend finance facilities and breaches of covenants Inability to meet other financial commitments / default on finance agreements In addition, there were significant intercompany or related party loans payable. No As per comment for D&D in section No As per comment for D&D in section Profitability / trading losses Yes Based on the re-stated accounts, D&D recorded the following EBITDA: FY14 ($305k) FY15 - $1,208k FY16 (10M) ($199k) Cash flow difficulties Yes As per comment for D&D in section No access to alternative sources of finance (including equity capital) Inability to dispose non-core assets No As per comment for D&D in section No As per comment for D&D in section Dishonoured payments No As per comment for D&D in section Overdue Commonwealth and State taxes No forbearance from creditors / legal action threatened or commenced by creditors Yes Claveguard had entered into payment plans with the ATO in September 2015 totalling $523k in respect to historic BAS and FBT liabilities and was adhering to the terms of the plans up to the date of insolvency. We understand all other Commonwealth and State taxes remain current. Yes As per comment for D&D in section \A01_B09 14 October 2016 Page 47

50 8.2.3 DPL Insolvency indicator Present Comment Working capital deficiency No Working capital ratios can be used as a general indicator of liquid assets available to pay debts as and when they fall due within 12 months. A working capital ratio of less than 1 indicates a company may not be able to pay its debts as and when they fall due. Based on the Re-stated accounts, DPL recorded the following working capital ratios: June June June Net asset deficiency Yes Based on the Re-stated accounts, DPL recorded the following net asset positions: FY14 $725k FY15 $121k FY16 (10M) ($978k) Ageing of creditors Yes DPL s third party trade creditors were significantly aged as at 19 September 2016 with 73.0% being 60+ days. Inability to extend finance facilities and breaches of covenants Inability to meet other financial commitments / default on finance agreements In addition, there were significant intercompany or related party loans payable. No As per comment for D&D in section No As per comment for D&D in section Profitability / trading losses Yes Based on the re-stated accounts, D&D recorded the following EBITDA: FY14 ($1,277k) FY15 $2,746k FY16 (10M) ($1,780k) Cash flow difficulties Yes As per comment for D&D in section No access to alternative sources of finance (including equity capital) Inability to dispose non-core assets No As per comment for D&D in section No As per comment for D&D in section Dishonoured payments No As per comment for D&D in section Overdue Commonwealth and State taxes No forbearance from creditors / legal action threatened or commenced by creditors Yes DPL had entered into payment plans with the ATO during the period June 2015 to December 2015 totalling $451k in respect to historic BAS, FBT and income tax liabilities and was adhering to the terms of the plan up to the date of insolvency. We understand all other Commonwealth and State taxes remain current. Yes As per comment for D&D in section \A01_B09 14 October 2016 Page 48

51 8.2.4 Prius Insolvency indicator Present Comment Working capital deficiency Yes Working capital ratios can be used as a general indicator of liquid assets available to pay debts as and when they fall due within 12 months. A working capital ratio of less than 1 indicates a company may not be able to pay its debts as and when they fall due. Based on the Re-stated accounts, Prius recorded the following working capital ratios: June June June Net asset deficiency Yes Based on the Re-stated accounts, DPL recorded the following net asset positions: FY14 $722k FY15 ($5,884k) FY16 (10M) ($6,696k) Ageing of creditors Yes Prius creditors were significantly aged as at 19 September 2016 with 97.7% being 60+ days. Inability to extend finance facilities and breaches of covenants Inability to meet other financial commitments / default on finance agreements In addition, there were significant intercompany or related party loans payable. No As per comment for D&D in section No As per comment for D&D in section Profitability / trading losses Yes Based on the re-stated accounts, D&D recorded the following EBITDA: FY14 - $2,592k FY15 ($6,637k) FY16 (10M) ($921k) Cash flow difficulties Yes As per comment for D&D in section No access to alternative sources of finance (including equity capital) Inability to dispose non-core assets No As per comment for D&D in section No As per comment for D&D in section Dishonoured payments No As per comment for D&D in section Overdue Commonwealth and State taxes No forbearance from creditors / legal action threatened or commenced by creditors Yes Prius had entered into payment plans with the ATO in October 2015 totalling $244k in respect to historic BAS and FBT liabilities and was adhering to the terms of the plan up to the date of insolvency. Prius had also entered into payment plans with the Office of State Revenue for NSW in October 2015 totalling $84k in respect to historic payroll tax liabilities. This plan was finalised in March We understand all other Commonwealth and State taxes remain current. Yes As per comment for D&D in section \A01_B09 14 October 2016 Page 49

52 8.2.5 TCSPL Insolvency indicator Present Comment Working capital deficiency No Working capital ratios can be used as a general indicator of liquid assets available to pay debts as and when they fall due within 12 months. A working capital ratio of less than 1 indicates a company may not be able to pay its debts as and when they fall due. Based on the Re-stated accounts, TCSPL recorded the following working capital ratios: June June 2015 N/A June 2016 N/A Net asset deficiency No Based on the Re-stated accounts, TCSPL recorded the following net asset positions: FY14 $144k FY15 $129k FY16 (10M) $4k Ageing of creditors No Per TCSPL s records no trade and expense creditors existed as at 19 September Inability to extend finance facilities and breaches of covenants Inability to meet other financial commitments / default on finance agreements No As per comment for D&D in section No As per comment for D&D in section Profitability / trading losses Yes Based on the re-stated accounts, D&D recorded the following EBITDA: FY14 - $135k FY15 ($52k) FY16 (10M) ($116k) Cash flow difficulties No Given TCSPL was largely a dormant entity in recent years it did not have the same cash flow burden as other companies in the D&D Group No access to alternative sources of finance (including equity capital) Inability to dispose non-core assets No As per comment for D&D in section No As per comment for D&D in section Dishonoured payments No As per comment for D&D in section Overdue Commonwealth and State taxes No forbearance from creditors / legal action threatened or commenced by creditors Yes No TCSPL had entered into payment plans with the ATO in July 2015 and October 2015 totalling $82k in respect to historic BAS and income tax liabilities and was adhering to the terms of the plan up to the date of insolvency. We understand all other Commonwealth and State taxes remain current. Not applicable on the basis that the entity did not actively trade or deal with third party suppliers Preliminary conclusion as to solvency In light of the insolvency indicators discussed above, we are of the opinion that all the entities within the D&D Group may have been insolvent from at least 16 September 2016, being the date of an investment committee meeting which resulted in the shareholders declining to provide further funding to the D&D Group \A01_B09 14 October 2016 Page 50

53 Due to the intermingled nature of the D&D Group s operations and on the basis that certain companies within the D&D Group were funded by the operations of others, our preliminary view is that it is difficult to determine a specific date of insolvency on a company by company basis. We note that the companies within the D&D Group may have been insolvent for some time before 16 September Some of the relevant considerations the Liquidator will ultimately consider in forming a view on this issue with respect to each company will include: Net asset deficiency position which became apparent as early as FY15; Significant operating losses incurred in both FY15 and FY16; Significant ageing of trade creditors; Significant working capital shortage reflected by the requirement for additional funding of $7m from November 2015 (and possibly earlier); and Entering into repayment arrangements with the ATO from as early as June Other relevant considerations may include: We understand the D&D Group had the support of its shareholder until 16 September A liquidator, if appointed, would need to conduct further investigations, and possibly conduct a public examination of relevant parties, to ultimately determine whether or not the companies within the D&D Group became insolvent at that time or earlier. 8.3 Winding up applications At the date of our appointment, there was no outstanding winding up application against any of the entities within the D&D Group. 8.4 Books and records Section 286 of the Act requires a company to keep written financial records that correctly record and explain the company s transactions, financial position and performance and would enable true and fair financial statements to be prepared. The financial records must be retained for a period of seven years after the transactions covered by the records are completed. The failure to maintain books and records in accordance with Section 286 provides a rebuttable presumption of insolvency which might be relied upon by a liquidator in an application for compensation for insolvent trading. We note that the books and records of the D&D Group were principally maintained by the internal finance team and we are satisfied that the Directors of the D&D Group have provided all books and records in their possession. As outlined in Section 4, and based on our preliminary review of the books and records received, we are of the opinion that the D&D Group s books and records were potentially not maintained in accordance with Section 286 of the Act to 19 September Given the complexities of the issues involved we have not had the time to conduct a thorough investigation and this is something that would be conducted by a liquidator. 8.5 Other matters arising from investigations Falsification of books Pursuant to Section 1307 of the Act, it is an offence for a person to engage in conduct that results in the concealment, destruction, mutilation or falsification of any securities of or belonging to the company or any books affecting or relating to affairs of the company. If a breach is proven, Part 9.4 of the Act provides for criminal penalties only. Therefore, any breaches of Section 1307 will not result in recovery of funds by a liquidator. As outlined in Section 4 the Administrators preliminary investigations have potentially identified certain instances whereby one or more persons may have been involved in the falsification of the books and records of the D&D Group. Given the complexities of the issues involved we have not had the time to conduct a thorough investigation and this is something that would be conducted by a liquidator False or misleading statements Pursuant to Section 1308 of the Act, a company must not advertise or publish a misleading statement regarding the amount of its capital. It is an offence for a person to make or authorise a statement that, to the person s knowledge is false or misleading in a material particular \A01_B09 14 October 2016 Page 51

54 As outlined in Section 4 the Administrators preliminary investigations have potentially identified certain instances whereby one or more persons may have provided false or misleading statements in respect of the D&D Group. Given the complexities of the issues involved we have not had the time to conduct a thorough investigation and this is something that would be conducted by a liquidator False information Pursuant to Section 1309 of the Act, it is an offence for an officer or employee to make available or give information to a director, auditor, member, debenture holder, or trustee for debenture holders of the company that is to the knowledge of the officer or employee: False or misleading in a particular matter; or Has omitted from it a matter the omission of which renders the information misleading in a material respect. As outlined in Section 4 the Administrators preliminary investigations have potentially identified certain instances whereby one or more persons may have provided false information in respect of the D&D Group. Given the complexities of the issues involved we have not had the time to conduct a thorough investigation and this is something that would be conducted by a liquidator Litigation On 15 August 2016 a Commercial List Statement was filed with the Supreme Court, of which I have been provided a copy. The plaintiffs to the proceedings are: OXC Bidco Obex (NZ) Limited Obex Medical Holdings Pty Ltd The defendants to the proceedings are: Paul Gregory Dickson Dianne Dickson Fandola Investments Pty Limited (as trustee for the New Dickson Family Trust) Stuart Clark We understand that the nature of the dispute relates to the sale by Mr and Mrs Dickson of shares in D&D and Dickson and Dickson Healthcare NZ Limited to the plaintiffs. I am not aware of any documents filed by the defendants \A01_B09 14 October 2016 Page 52

55 9 Offences and voidable transactions This section informs creditors about potential voidable transactions that occurred prior to the appointment of the Administrators, and where the property of the D&D Group was disposed of or dealt with, may be recovered by a liquidator. Given that investigations undertaken to date are preliminary, the prospects of any recoveries would need to be properly assessed by a liquidator. 9.1 Potential liquidator recoveries voidable transactions A liquidator has the power to void certain transactions which are either not beneficial, or are detrimental, to a company. 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. 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 the D&D Group is the date that the Administrators were appointed, being 19 September Enclosed at Annexure E is a creditor information sheet published by ARITA. This information sheet details the types of transactions which a liquidator can seek to void. We have undertaken an initial review of the books and records of the D&D Group, including bank statements, in order to determine whether any voidable transactions were entered into. To assist with this review, we have held preliminary discussions in respect of the potential voidable transactions with D&D Group management. We have identified certain transactions below that may be classified as voidable transactions however due to the complexities associated with the D&D Group this will need to be investigated further by a liquidator Unfair preferences 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. Our preliminary investigations have identified: Payments made by D&D Group entities to the ATO under formal repayment plans; and Possible part payment of certain trade and expense creditor invoices by certain D&D Group entities. The Administrators are continuing to investigate the circumstances surrounding these payments. A liquidator, if appointed, would need to conduct further investigations in relation to the identified and similar transactions and make an assessment as to whether there are defences available to the creditor and whether the costs likely to be incurred in voiding the transactions will outweigh the return. It is likely that a liquidator would require funding to cover the costs of any recovery actions in relation to this process. Depending on the source and quantum of funding, these costs could be substantial 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 \A01_B09 14 October 2016 Page 53

56 A liquidator must investigate transactions deemed to be uncommercial, having regard to the detriment to the company suffered as a consequence of the transaction in the period two years prior to the date of administration. Based on the books and records in my possession I have not identified any transactions at this stage which would constitute uncommercial transactions. A liquidator, if appointed, would need to conduct further investigations in relation to this matter 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. A liquidator must investigate loans to the company which may be considered unfair due to extortionate interest rates or charges. At this stage we are not aware of any unfair loans which the D&D Group entered into. A liquidator, if appointed, would need to conduct further investigations in relation to any potential unfair loans 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 A liquidator must investigate related party transactions within four years of the date of administration and determine whether any transactions occurred when the company was insolvent or was likely to become insolvent as a result of the transaction. Our preliminary investigations have identified: Outstanding debtor amounts owing from entities related to Mr Paul Dickson, a former director of the D&D Group entities. A liquidator, if appointed, would need to conduct further investigations in relation to any further unreasonable director-related transactions Voidable transaction to defeat creditors 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 investigation to date has not highlighted any voidable transaction for creditor defeating purposes. A liquidator, if appointed, would need to conduct further investigations in this regard. 9.2 Insolvent trading Section 588G of the Act imposes a positive duty upon company directors to prevent insolvent trading. If a director is found guilty of an offence in contravening Section 588G, the Court may order him or her to pay compensation to the company equal to the amount of loss or damage suffered by its creditors. The Court may also impose upon the directors one of two types of civil penalty orders, the first can include a fine or an order prohibiting the directors from participating in the management of a company. The second, where there is criminal intent and conviction, a director could also be imprisoned for up to five years. This action is not a right that is available to an administrator or a deed administrator. Applications for compensation payable to the company are usually made by a liquidator, or in specified circumstances, a creditor. The substantive elements of Section 588G are: A person must be a director of a company at a time when the company incurs a debt; The company must be insolvent at the time or becomes insolvent by incurring the debt; and The director must have reasonable grounds for suspecting that the company is insolvent or would become insolvent \A01_B09 14 October 2016 Page 54

57 The defences available to directors contained in Section 588H are: The directors had reasonable grounds at the time the debt was incurred to expect the company to be solvent and would remain solvent even after the debt was incurred; The directors relied on another competent and reliable person to provide information about whether or not the company was insolvent; The directors were ill or for some other good reason did not take part in the management of the company; and The directors took reasonable steps to prevent the incurring of debt. A liquidator must form an opinion as to the date of insolvency and determine the debts incurred from that date; thereby quantifying the loss to the company. The costs of proceeding with an insolvent trading action must be considered. As outlined in our analysis in section above, our preliminary view is that the Companies within the D&D Group were insolvent, at least from 16 September 2016, and possibly earlier given some of the indicators outlined in our analysis. We note however, that an insolvent trading claim may be difficult to pursue given that financial support from the shareholder appears to have been available in the lead up to the administration appointment. We have not assessed the Directors capacity to meet any claims should it be determined that insolvent trading has occurred. 9.3 Holding company liability Section 588V of the Act provides that a holding company may be held liable for the debts of a subsidiary in certain circumstances. The substantive elements of Section 588V are: The corporation is the holding company at the time when the company incurs a debt; The subsidiary is insolvent at that time, or becomes insolvent by incurring that debt; The holding company, or one or more of its directors, is aware at that time that there are grounds for suspecting the subsidiary is insolvent; or Having regard to the nature and extent of the holding company s control of the subsidiary s affairs, then it would be reasonable to expect that: o o The holding company would be aware of the subsidiary s financial position; or The holding company s directors would also be aware of the subsidiary s financial position. The defences the holding company may rely upon are set out in Section 588X and are essentially the same as those a director may rely upon under Section 588H. Furthermore, the Courts have held that, as a defence to such proceedings, a holding company can off-set any claim by a liquidator under Section 588W against monies owing under an intercompany loan account. A liquidator, if appointed, would need to conduct further investigations in relation to any holding company liability, however, as outlined above, any claim may be difficult to pursue given the extent of the intercompany funding provided by OXC Bidco. 9.4 Other potential liquidator recoveries Compensation for breach of director s duties Sections 180 to 184 of the 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 best 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 Our investigations with respect of any breaches committed by the directors are continuing. In the event that the Companies are would up, further investigations may be undertaken into any such breaches \A01_B09 14 October 2016 Page 55

58 9.4.2 Arrangements to avoid employee entitlements Part 5.8A of the Act aims to protect the entitlements of a company s employees from agreements that deliberately defeat the recovery of those entitlements upon insolvency. Under Section 596AB(1) of the Act, it is an offence for a person to enter into a transaction or relevant agreement with the intention of, or with intentions that include: Preventing recovery of employee entitlements; or Significantly reducing the amount of employee entitlements recoverable. We are not aware of any such transactions although his matter may be further investigated by any liquidator. 9.5 Directors ability to pay a liquidator s claims At this stage, the Administrators have not made any assessment as to the financial capacity of the Directors to meet any potential actions that we may identify. 9.6 Reports to the ASIC Section 438D of the Act requires us to lodge a report with the ASIC should we become aware of: Any offences committed by a past or present officer of the companies; Evidence that money or property has been misapplied or retained; Evidence that a party is guilty of negligence, default, breach of duty or breach of trust in relation to the companies. Creditors should be aware that any report lodged pursuant to Section 438D (or an investigative report lodged by a liquidator pursuant to Section 533 of the Act) is not available to the public \A01_B09 14 October 2016 Page 56

59 10 Return to creditors There is unlikely to be any recovery available for unsecured creditors from the administration process, given the expected shortfall to the secured creditor. However, provided anticipated asset sales are achieved, there is a reasonable prospect of funds being available to employees from proceeds of circulating assets. The table below outlines an estimated outcome for each class of creditor for each Company in the D&D Group. Any funds received from the possible sale of the D&D Group s non-circulating assets (including plant and equipment and intellectual property) will first be applied to repay the secured creditors of the D&D Group. Any funds received from circulating assets (including cash, debtors and inventory), subject to the costs of the administrations, will be applied in the following order on a company by company basis; First, priority (employee) creditors; Second, any amounts which remain outstanding to the secured creditors following the distribution of proceeds of non-circulating assets; Third, unsecured creditors (including intercompany and related party creditors); and Fourth, any claims made by shareholders. Due to the commercially sensitive nature of the ongoing asset realisations, the information outlined in this section with respect to estimated asset recoveries has been largely withheld. The reasons for this were outlined in sections 5 and 7 of this Report. Whilst we are unable to disclose specific realisation estimates, we have endeavoured to provide the creditors with a preliminary view as to the potential return for each class of creditor for each Company within the D&D Group. Whilst in certain instances there appears a reasonable prospect that priority employee entitlements may be paid in part or in full, given that each Company is a guarantor under the ANZ Bank secured facilities ($15.3m) there is expected to be a significant shortfall to the secured creditor from the realisations across the D&D Group, and therefore the prospects of any return to unsecured creditors is low. As outlined in Section 9, there may be actions available to a liquidator to recover voidable transactions. Any recoveries of these amounts would first be available to priority creditors, followed by a distribution to all other creditors pari-passu (i.e. unsecured creditors and the secured creditors for any amount which remains outstanding to them are entitled to rank equally). We estimate that the dividends to each class of creditors for each Company within the D&D Group are as follows: Company D&D Secured Employee Priority Unsecured Claveguard NIL 25% NIL DPL NIL 10% 90% 100% NIL Prius 50% 100% NIL TCSPL N/A NIL NIL NIL The primary issues likely to impact returns include: The final amount realised from the sale of the TCS business; Any proceeds received with respect to the Elite Med inventory and brand; Any proceeds received from the sale of the residual inventory; Recoverability of the remaining pre-appointment debtors; The ability to quickly and cost effectively exit the D&D Group s premises; Final proving and adjudication of employee creditor claims; The recoverability of voidable transactions and the liquidator s costs associated with pursuing those recoveries; and \A01_B09 14 October 2016 Page 57

60 Other costs of the liquidation. As previously advised in our initial correspondence to all employees, in a scenario where a Company is placed into Liquidation and that Company does not generate sufficient net realisations from circulating assets to enable it pay employee entitlements in full, those affected employees may be entitled to make a claim for any unpaid entitlements through the government s Fair Entitlements Guarantee (FEG) scheme. We expect that some of the commercially sensitive issues are likely to be resolved between the date of this report and the Second Meeting of Creditors, and accordingly, we will endeavour to provide further detail regarding the estimated returns to the various creditor classes at that meeting \A01_B09 14 October 2016 Page 58

61 11 Administrator s opinion As no DOCA proposal has been received it is our opinion that each D&D Group entity should be placed into liquidation. Pursuant to Section 439A(4)(b) of the Act, we are required to provide creditors with a statement setting out our opinion on whether it is in creditors interests for the: Administration to end; Company to be wound up; or Company to execute a DOCA. Each of these options is considered below. In forming our opinion, it is necessary to consider an estimate of the dividend creditors might expect and the likely costs under each option Administration to end The Company is insolvent and unable to pay its debts as and when they fall due. Accordingly, returning control of each company within the D&D Group to its directors would be inappropriate and is not recommended DOCA As no DOCA has been proposed at this point in time, this option is not available to creditors Winding up of the D&D Group In the absence of a DOCA proposal, it is our opinion that each company within the D&D Group should be placed into liquidation. A liquidator would be in a position to conduct detailed investigations into the conduct of directors and the financial affairs of each company within the D&D Group. A liquidator will also be empowered to: Complete the sale of assets in an orderly manner. Assist employees in applying for FEG for the payment of certain employee entitlements that cannot otherwise be funded by each company within the D&D Group. Pursue various potential recoveries under the Act to recover funds for creditors. Distribute recoveries made in accordance with the priority provisions of the Act. Report to the ASIC on the results of investigations into each D&D Group company s affairs \A01_B09 14 October 2016 Page 59

62 12 Further information and enquiries The ASIC has released several insolvency information sheets to assist creditors, employees and shareholders with their understanding of the insolvency process. You can access the relevant ASIC information sheets at We will advise creditors in writing of any additional matter that comes to our attention after the release of this Report, which in our view is material to creditors consideration. Should you have any enquiries, please contact Marcela Landeka on or by at Dated this 14th day of October 2016 Jim Sarantinos and Peter Gothard Joint and Several Administrators of Dickson & Dickson Healthcare Pty Limited and associated entities \A01_B09 14 October 2016 Page 60

63 Glossary of terms Abbreviation ACN Description Australian Company Number Act Corporations Act 2001 Administrators Administrators Remuneration Approval Request Report APAAP Appointment ARITA ASIC ATO CG Claveguard Code COC Company or Companies D&D D&D Group or the Group Directors DIRRI DOCA DPL EBITDA ERV FEG Jim Sarantinos and Peter Gothard The report attached as Annexure D All present and after-acquired property no exceptions Appointment of Jim Sarantinos and Peter Gothard as Joint and Several Administrators of the D&D Group on 19 September 2016 Australian Restructuring, Insolvency & Turnaround Association Australian Securities & Investments Commission Australian Taxation Office CG Realisations Pty Ltd (formerly Claveguard Pty Ltd) (Administrators Appointed) CG Realisations Pty Ltd (formerly Claveguard Pty Ltd) (Administrators Appointed) ARITA Code of Professional Practice Committee of Creditors One or more of: Dickson & Dickson Healthcare Pty Limited (Administrators Appointed) CG Realisations Pty Ltd (formerly Claveguard Pty Ltd) (Administrators Appointed) DP Logistics Pty Ltd (Administrators Appointed) Prius Healthcare Solutions Pty Limited (Administrators Appointed) Total Compression Solutions Pty Limited (Administrators Appointed) Dickson & Dickson Healthcare Pty Limited (Administrators Appointed) Dickson & Dickson Healthcare Pty Limited and its associated entities (Administrators Appointed) Jose Matosantos David Radford Adam St John Declaration of Independence, Relevant Relationships and Indemnities, pursuant to s436da of the Act and Code. Deed of Company Arrangement DP Logistics Pty Ltd (Administrators Appointed) Earnings before interest, tax, deprecations and amortisation Estimated Realisable Value Fair Entitlements Guarantee First Meetings First meetings of creditors held on 29 September 2016 FYxx Healthscope Obex Original Financial year ended 30 June 20xx Healthscope Limited Obex Medical Holdings Pty Ltd Management accounts prepared by the D&D Group prior to any accounting adjustments \A01_B09 14 October 2016 Page 61

64 Abbreviation OXC Bidco PMSI PPSA PPSR Prius RATA Remuneration Report Report Re-stated ROT Second Meetings Statement TCSPL Description OXC Bidco Pty Ltd Purchase Money Security Interest Personal Property Securities Act 2009 (Cth) Personal Property Securities Register Prius Healthcare Solutions Pty Limited (Administrators Appointed) Report as to Affairs The Administrators Remuneration Approval Request Report attached as Annexure D This report, prepared pursuant to Section 439A of the Act Management accounts restated to incorporate a number of adjustments Retention of Title Second meeting held pursuant to Section 439A of the Act, where creditors determine the future of the Company. Report as to affairs Total Compression Solutions Pty Limited (Administrators Appointed) \A01_B09 14 October 2016 Page 62

65 Annexure A Notice of meeting Form 529A Notice of Second Concurrent Meeting of Creditors of Group Under Administration Corporations Act 2001 Subregulation (2) Dickson & Dickson Healthcare Pty Limited ACN CG Realisations Pty Limited (formerly Claveguard Pty Ltd) ACN DP Logistics Pty Limited ACN Prius Healthcare Solutions Pty Limited ACN Total Compression Solutions Pty Limited ACN (Administrators Appointed) (the Group) Notice is given that the second meetings of creditors of the Group will be held concurrently on Tuesday 25 October 2016 at The Balinga Room meeting room at the Grace Hotel at 77 York Street, SYDNEY NSW 2000 at 10:00am. Agenda 1. To consider the Administrators report pursuant to Section 439A of the Corporations Act 2001, in relation to the Group and any other matters raised relating to the Group s future, and then to resolve either that: The companies execute a Deed of Company Arrangement; or The administrations should end; or The companies be wound up. 2. To approve the Administrators remuneration. 3. If it is resolved that the companies be wound up, consider whether a Committee of Inspection is to be appointed, and if so, the members of that Committee. 4. Any other business that may be lawfully brought forward. Dated this 14 th day of October 2016 Jim Sarantinos Administrator Dickson & Dickson Healthcare Pty Limited (Administrators Appointed) c/- Ferrier Hodgson GPO Box 4114, SYDNEY NSW 2001 Tel: Fax: dndhealthcare@fh.com.au Annexures Prius Healthcare Solutions Pty Ltd 14 October 2016 Page A-1

66 Annexure B Appointment of proxy form Form 532 Appointment of Proxy Corporations Act 2001 Regulation Prius Healthcare Solutions Pty Limited (Administrators Appointed) (the Company) ACN CREDITOR DETAILS Full Name of Company or Individual Registered Address Contact Telephone Number Address A. APPOINTMENT OF PROXY Note: You may nominate the Chairperson of the meeting as your proxy (or your alternate proxy in the event that the first-named proxy is not in attendance). The Chairman of the Meeting (mark box) OR If you are not appointing the Chairman of the Meeting as your proxy, please write the name of the person or body corporate (excluding the registered creditor) you are appointing as your general / special proxy... or in his/her absence,... to vote at the meeting of creditors to be held on 25 October 2016 at 10:00am at The Balinga Room meeting room at the Grace Hotel at 77 York Street, SYDNEY NSW 2000, or at any adjournment of that meeting in accordance with the instructions in Section C below. Proxies will only be valid and accepted by the Company if they are signed and received no later than 4:00pm (AEDST) on Monday, 24 October 2016, to: Dickson & Dickson Healthcare Pty Limited (Administrators Appointed) c/- Ferrier Hodgson GPO Box 4114, SYDNEY NSW 2001 Tel: Fax: dndhealthcare@fh.com.au Please read the voting instructions at the end of this form before marking any boxes. Annexures Prius Healthcare Solutions Pty Ltd 14 October 2016 Page A-2

67 B. VOTING DIRECTIONS Option 1 and/or Option 2 If appointed as a general proxy, as he/she determines on my/our behalf (Please proceed directly to section C) If appointed as a special proxy in the manner set out below (Please complete the table below before proceeding to section C) No. Resolution For Against Abstain 1 For creditors to consider the options available and to resolve that a. The Company be wound up; or b. The Company execute a Deed of Company Arrangement; or c. The Administration should end (and control revert back to the Company director(s)) 2 That the remuneration of the Administrators, as set out in the Remuneration Approval Request Report dated 14 October 2016, for the period from 19 September 2016 to 11 October 2016 be fixed in the amount of $96,931.50, plus any applicable GST, and may be paid. 3 That the remuneration of the Administrators, as set out in the Remuneration Approval Request Report dated 14 October 2016, for the period from 12 October 2016 to 25 October 2016 be fixed up to a maximum amount of $55,005.00, plus any applicable GST, but subject to upward revision by resolution of creditors, and that the Administrators be authorised to make periodic payments on account of such accruing remuneration as incurred. 4 If the Company is wound up, that a Committee of Inspection be formed comprising representatives as nominated at the meeting of creditors C. SIGNATURE OF CREDITOR THIS MUST BE COMPLETED (in accordance with Sections 127 or 250D of the Corporations Act 2001) If the creditor is an individual If the creditor is a Company.. Director / Company Secretary. Print name Dated this. day of October 2016 Annexures Prius Healthcare Solutions Pty Ltd 14 October 2016 Page A-3

68 CERTIFICATE OF WITNESS (to be completed only in special circumstances see below) This certificate is only to be completed only if the person giving the proxy is blind or incapable of writing. The certificate of the creditor, contributory, debenture holder or member must not be witnessed by the person nominated as proxy. I (name of witness)... Of (address of witness) Certify that the above instrument appointing a proxy was completed by me in the presence of and at the request of the person appointing the proxy and read to him/her before he/she signed or marked the instrument. Dated... Signature... Annexures Prius Healthcare Solutions Pty Ltd 14 October 2016 Page A-4

69 Creditor Assistance Sheet: Completing a Proxy Form APPOINTMENT OF A PROXY If you wish to appoint the Chairman of the Meeting as your 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 Meeting please write the name of that person in Step 2. A proxy need not be a creditor of the company. A proxy may be an individual or a body corporate. Note: The proxy nomination will be deemed invalid if you do not complete this step. VOTES ON ITEMS OF BUSINESS PROXY APPOINTMENT Directed Votes You may direct your proxy how to vote by placing a mark in one of the boxes opposite each item of business. All your entitlements will be voted in accordance with such a direction. If you mark more than one box on an item your vote on that item will be invalid. General (open) Votes If you do not mark any of the boxes on an item of business, your proxy may vote as he or she chooses. Signing Instructions You must sign this form as follows in the spaces provided: Individual: where the holding is in one name, the holder must sign. Joint Holding: where the holding is in more than one name, either creditor may sign. Power of Attorney: to sign under Power of Attorney, you must lodge the Power of Attorney with the registry. If you have not previously lodged this document for notation, please attach a certified photocopy of the Power of Attorney to this form when you return it. Companies: where the company has a Sole Director who is also the Sole Company Secretary, this form must be signed by that person. If the company (pursuant to section 204A of the Corporations Act 2001) does not have a Company Secretary, a Sole Director can also sign alone. Otherwise this form must be signed by a Director jointly with either another Director or a Company Secretary. Please indicate the office held by signing in the appropriate place. NOTES 1. If the creditor is a sole trader, sign in accordance with the following example: [Full Name], proprietor. 2. If the creditor is a partnership, sign in accordance with the following example: [Full Name], 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, [Full Name] (duly authorised under the Seal of the Company). Annexures Prius Healthcare Solutions Pty Ltd 14 October 2016 Page A-5

70 Annexure C Proof of debt form Form 535 Formal Proof of Debt or Claim (General Form) Corporations Act 2001 Regulation (2) Prius Healthcare Solutions Pty Limited (Administrators Appointed) (the Company) ACN Instructions: Please complete Sections A, B and C and submit to: Dickson & Dickson Healthcare Pty Limited (Administrators Appointed) c/- Ferrier Hodgson GPO Box 4114, SYDNEY NSW 2001 Tel: Fax: dndhealthcare@fh.com.au * Strike out if inapplicable. A. NAME AND CONTACT DETAILS OF CREDITOR ( the Creditor ) (if in a personal capacity, given name and surname; if a corporate entity, full name of company, etc) of (address) Tel: Fax: B. DETAILS OF DEBT OR CLAIM To the Administrators of the Company 1. This is to state that the Company was, on Monday, 19 September 2016, and still is justly and truly indebted to the Creditor for (amount in words) dollars and cents (inclusive of GST, if applicable). Annexures Prius Healthcare Solutions Pty Ltd 14 October 2016 Page A-6

71 Particulars of the debt are: Date Consideration 1 Net GST Total Remarks 2 $ $ $ 1. Under "Consideration" state how the debt arose, for example "goods sold and delivered to the company between the dates of...", "moneys advanced in respect of the Bill of Exchange". 2. Under "Remarks" include details of vouchers substantiating payment. 2. To my knowledge or belief the Creditor has not, nor has any person by the Creditor s order, had or received any satisfaction or security for the sum or any part of it, *except for: (insert particulars of all securities held. If the securities are on the property of the company, assess the value of those securities. If any bills or other negotiable securities are held, indicate refer attached above and show them in a schedule in the following form:) Date Drawer Acceptor Amount $ Due Date 3. *I am employed by the Creditor / *I am the Creditor s agent *and authorised in writing by the Creditor to make this statement. I know that the debt was incurred for the consideration stated and that the debt, to the best of my knowledge and belief, remains unpaid and unsatisfied. C. Signature Dated: Signature: Name / Capacity # : # If the Creditor is an individual, insert full name If the Creditor is a sole trader, insert in accordance with the following example: full name, proprietor If the Creditor is a partnership, insert in accordance with the following example: full name, partner of the firm named in Section A above If the Creditor is a company, insert in accordance with the following example: full name, director / secretary / director/secretary of the company named in Section A above 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: full name, for the company named in Section A above (duly authorised under the seal of the company). Where this form is completed by, for example, a solicitor or accountant of the Creditor, sign this form as the Creditor s authorised agent; where this form is completed by an authorised employee of the Creditor, indicate occupation (eg: credit manager, etc) Annexures Prius Healthcare Solutions Pty Ltd 14 October 2016 Page A-7

72 Annexure D Remuneration approval request report Corporations Act 2001 Section 449E Prius Healthcare Solutions Pty Limited (Administrators Appointed) (the Company) ACN Declaration We, Jim Sarantinos and Peter Gothard of Ferrier Hodgson, have undertaken a proper assessment of this remuneration claim for our appointment as Administrators of the Company in accordance with the Corporations Act 2001 (Cth) (the Act), the Australian Restructuring Insolvency & Turnaround Association (ARITA) Code of Professional Practice (the Code) and applicable professional standards. We are satisfied that the remuneration claimed is in respect of necessary work, properly performed, or to be properly performed, in the conduct of the administration. 2 Executive summary 2.1 Summary of remuneration approval sought for the Company To date, no remuneration has been approved and paid in the administration of the Company. This remuneration report details approval sought for the following fees: Period Current remuneration approval sought: Voluntary administration Report reference Amount (ex GST) $ Resolution 1: 19 September 2016 to 11 October , Resolution 2: 12 October 2016 to 25 October , Total voluntary administration* 151, * Approval for the future remuneration sought is based on an estimate of the work necessary to the completion of the administration. Should additional work be necessary beyond what is contemplated, further approval may be sought from creditors. Please refer to Parts 3 and 4 for full details of the calculation and composition of the remuneration approval sought. 2.2 Comparison to estimate of costs provided in initial advice to creditors The remuneration approval sought differs to the estimate of professional costs provided in the initial advice to creditors on remuneration dated 20 September Our initial estimate of fees for the administration of the Group s affairs was $450,000. We note this is the total for the administration of the five entities within the Group. In total, we are seeking fee approval of $397, (excluding GST) for the period 19 September 2016 to 11 October 2016 across the five companies in the Group. We are also seeking total prospective fee approval of up to $199, (excluding GST) for the period 12 October 2016 to 25 October Accordingly, our total fee estimate has increased by $147, (excluding GST). The increase relative to our initial estimate is due to the following reasons: The nature of the business is more complex than originally expected. In particular, the multiple business units operate discreetly with their own management teams. This required more involvement than one unified business operation. The sale process for the TCS business extended longer than generally expected, with a more exhaustive due diligence period. Annexures Prius Healthcare Solutions Pty Ltd 14 October 2016 Page A-8

73 The sale of the Claveguard assets and Intellectual Property, which is based on advice provided by the directors, did not appear to be an option at the date of our appointment. Multiple issues relating the warehouse that were not expected on appointment, including negotiations with third parties in respect to goods held in the warehouse, which vested on our appointment, and payments negotiated for their release. There was a significant amount of inventory not recorded on the warehouse system, requiring additional work to understand realisation options for available for these assets. The separation of the business head offices and finance teams across three premises necessitated additional work. The nature of the employee records required a more extensive review than expected to calculate entitlements. 3 Description of work completed / to be completed 3.1 Resolution 1 Company: Prius Healthcare Solutions Pty Limited (Administrators Appointed) Administration Type: Voluntary Administration Practitioners: Jim Sarantinos and Peter Gothard of Ferrier Hodgson Period: 19 September 2016 to 11 October 2016 Task area General description Includes Assets 75.5 hours $38, (excl GST) Sale of business as a going concern Plant and equipment Debtors Preparing an information memorandum Maintaining interested party register Liaising with potential purchasers Holding management presentations and on site meetings Preparing and administering a secure data room Facilitating due diligence inquires Preparation on bidder information and term sheets. Internal meetings to discuss / review offers received Liaising with solicitors in relation to contract negotiations Liaising with valuers, auctioneers and interested parties Reviewing asset listings Correspondence with debtors Reviewing and assessing debtors ledgers Other assets Tasks associated with realising other assets Creditors 47.8 hours $20, (excl GST) Leasing Creditor enquiries Secured creditor reporting Creditor reports Dealing with proofs of debt Reviewing leasing documents Liaising with owners / lessors Tasks associated with disclaiming leases Review and respond to creditor enquiries via telephone and Review and prepare correspondence to creditors and their representatives Providing verbal and updates to secured creditor Preparing report pursuant to section 439A of the Act Receipting and filing proofs of debt when not related to a dividend Annexures Prius Healthcare Solutions Pty Ltd 14 October 2016 Page A-9

74 Task area General description Includes Employees 11.5 hours $5, (excl GST) Trade on 45.9 hours $20, (excl GST) Investigation 5.5 hours $2, (excl GST) Administration 23.5 hours $9, (excl GST) Preparation of meeting notices, proxies and advertisements Forward notice of meeting to all known creditors Preparation of meeting file, including agenda, certificate of postage, attendance register, list Meeting of creditors of creditors, reports to creditors, advertisement of meeting and draft minutes of meeting. Preparation and lodgement of minutes of meetings with ASIC Respond to stakeholder queries and questions immediately following meeting Receive and return employee enquiries via Employee enquiries telephone Review and prepare correspondence to employees via facsimile, and post Calculating employee entitlements Reviewing employee files and Company s Calculation of entitlements books and records Reviewing awards Other employee issues Preparation of separation certificates Liaising with suppliers Liaising with management and staff Attendance on site Trade-on management Preparing and authorising purchase orders Maintaining purchase order registry Preparing and authorising receipt vouchers Preparing and authorising payment vouchers Entering receipts and payments into accounting Processing receipts and payments system Reviewing Company s budgets and financial statements Preparing budgets Budgeting and financial reporting Maintaining and monitoring cash flow position Finalising trading profit or loss Meetings to discuss trading position Conducting investigation Collection of Company books and records Reviewing Company s books and records for the purpose of the section 439A report Correspondence General correspondence Document maintenance / file review / Filing of documents checklist Updating checklists Identification of potential issues requiring attention of insurance specialists Insurance Correspondence with insurer regarding initial and ongoing insurance requirements Reviewing insurance policies Preparing correspondence opening and closing accounts Requesting bank statements Bank account administration Bank account reconciliations Correspondence with bank regarding specific transfers Preparing and lodging ASIC forms including ASIC Form 524 and other forms 505 ATO and other statutory reporting Notification of appointment Annexures Prius Healthcare Solutions Pty Ltd 14 October 2016 Page A-10

75 Task area General description Includes Planning / review Discussions regarding status / strategy of administration 3.2 Resolution 2 Company: Prius Healthcare Solutions Pty Limited (Administrators Appointed) Administration Type: Voluntary Administration Practitioners: Jim Sarantinos and Peter Gothard of Ferrier Hodgson Period: 12 October 2016 to 25 October 2016 Task area General description Includes Assets 40.0 hours $19, (excl GST) Creditors 33.0 hours $14, (excl GST) Employees 16.0 hours $7, (excl GST) Negotiations with preferred bidder for TCS business of contract issues. Liaise with solicitors regarding contract and Sale of business as a going concern completion matters Complete conditions precedent to sale to finalise sale. Liaising with valuers, auctioneers and Plant and equipment interested parties Correspondence with debtors Debtors Reviewing and assessing debtors ledgers Conducting stock takes Stock Reviewing stock values Liaising with purchasers Other assets Tasks associated with realising other assets Liaising with owners / lessors Leasing Tasks associated with disclaiming leases Receive and respond to creditor enquiries via telephone and Maintaining creditor enquiry register Creditor enquiries Review and prepare correspondence to creditors and their representatives via facsimile, and post Providing verbal and updates to secured Secured creditor reporting creditor Preparing report on results of investigation, Creditor reports meeting and general reports to creditors Receipting and filing proofs of debt when not Dealing with proofs of debs related to a dividend Preparation of meeting notices, proxies and advertisements Forward notice of meeting to all known creditors Preparation of meeting file, including agenda, certificate of postage, attendance register, list Meeting of creditors of creditors, reports to creditors, advertisement of meeting and draft minutes of meeting. Preparation and lodgement of minutes of meetings with ASIC Respond to stakeholder queries and questions immediately following meeting Employee enquiries Receive and respond to employee enquiries via telephone Review and prepare correspondence to creditors and their representatives Annexures Prius Healthcare Solutions Pty Ltd 14 October 2016 Page A-11

76 Task area General description Includes Trade on 8.0 hours $3, (excl GST) Investigation 13.0 hours $5, (excl GST) Administration 13.0 hours $5, (excl GST) Calculation of entitlements Other employee issues Trade-on management Processing receipts and payments Budgeting and financial reporting Conducting investigation Preparation of letters to employees advising of their entitlements and options available Receive and prepare correspondence in response to employees objections to leave entitlements Calculating employee entitlements Reviewing employee files and Company s books and records Correspondence with Centrelink Preparation of separation certificates Liaising with suppliers Liaising with management and staff Attendance on site Authorising purchase orders Maintaining purchase order registry Preparing and authorising receipt vouchers Preparing and authorising payment vouchers Entering receipts and payments into accounting system Reviewing Company s budgets and financial statements Preparing budgets Maintaining and monitoring cash flow position Meetings to discuss trading position Reviewing the nature and background of the Company Reviewing Company s books and records for the purpose of the section 439A report Correspondence General correspondence First month administration review Document maintenance / file review / Filing of documents checklist Updating checklists Correspondence with insurer regarding initial Insurance and ongoing insurance requirements Requesting bank statements Bank account reconciliations Bank account administration Correspondence with bank regarding specific transfers Correspondence with ASIC regarding statutory ASIC Form 524 and other forms forms Discussions regarding status / strategy of Planning / review administration Annexures Prius Healthcare Solutions Pty Ltd 14 October 2016 Page A-12

77 4 Calculation of remuneration 4.1 Resolution 1 Employee Position Rate Total Task Area (ex GST) Assets Creditors Employees Trade On Investigation Administration $/Hr Hrs $ Hrs $ Hrs $ Hrs $ Hrs $ Hrs $ Hrs $ Sarantinos, Jim Partner / Appointee , , , , Dampney, James Director , , , , Creedon, Liam Senior Manager , , , , Sutherland, Ian Senior Manager , , , Daniel, Adam Manager , , Arnfield, Sarah Senior Analyst , , , Grulovic, Ana Senior Analyst , , , , Javernik, Luke Analyst , , , Landeka, Marcela Analyst , , , Williams, Haydn Analyst , , Delaguiado, Astra Accounts Supervisor Total (excluding GST) , , , , , , , GST 9, Total (including GST) 106, Average hourly rate Annexures Prius Healthcare Solutions Pty Ltd 14 October 2016 Page A-13

78 4.2 Resolution 2 The remuneration estimate may be summarised as follows: Task Hours Amount $ Assets , Creditors , Employees , Trade on 8.0 3, Investigation , Dividend Administration , Total , Please note that the above is an estimate only. If costs exceed the estimate, creditors will be advised accordingly and further approval will be sought. 5 Statement of remuneration claim At the Second Meeting of creditors convened for Tuesday, 25 October 2016 at 10:00am, creditors will be asked to consider the following resolutions: Resolution 1 "That the remuneration of the Administrators, as set out in the Remuneration Approval Request Report dated 14 October 2016, for the period from 19 September 2016 to 11 October 2016 be fixed in the amount of $96,931.50, plus any applicable GST, and may be paid." Resolution 2: That the remuneration of the Administrators, as set out in the Remuneration Approval Request Report dated 14 October 2016, for the period from 12 October 2016 to 25 October 2016 be fixed up to a maximum amount of $55,005.00, plus any applicable GST, but subject to upward revision by resolution of creditors, and that the Administrators be authorised to make periodic payments on account of such accruing remuneration as incurred. Please note that the above is an estimate only. Final costs depend heavily upon: The number of employee queries and objections in relation to their entitlements calculations; Any unforeseen delays in completing the sale of the TCS business; and The number of proxy forms and creditor queries in relation to the second creditors meeting. If costs exceed the estimate, creditors will be advised accordingly. Should the second meeting of creditors be adjourned, additional Administrators remuneration may be sought in the future. No prospective approval for remuneration of a Liquidator (should one be appointed at the second meeting of creditors), has been claimed in this remuneration report. Any remuneration in respect of the potential liquidation of the Company will be sought at a later date. 5.1 Remuneration approved and drawn to date Creditors have not previously approved any remuneration of the Administrators. Annexures Prius Healthcare Solutions Pty Ltd 14 October 2016 Page A-14

79 6 Remuneration recoverable from external sources The Administrators have not received, and are not entitled to receive, any funding from external sources in respect of remuneration. 7 Disbursements 7.1 Types of disbursements Disbursements are divided into three types: Externally provided professional services. These are recovered at cost. An example is legal fees. Externally provided non-professional costs such as travel, accommodation and search fees. These disbursements 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 relevant rates are set out below: Creditor approval for the payment of disbursements is not required. However, the Administrators must account to creditors. Creditors have the right to question the incurring of disbursements and can challenge disbursements in court. Disbursements have not been paid by the Administration to our firm to date. Future disbursements provided by our form will be charged to the Administration on the following basis: Disbursement type Advertising Couriers Mileage reimbursement Photocopying (colour) Photocopying (mono) Photocopying (outsourced) Printing (colour) Printing (mono) Printing (outsourced) Postage Searches Storage and storage transit Telephone calls Charges (ex GST) At cost At cost $0.66 per kilometre $0.50 per page $0.20 per page At cost $0.50 per page $0.20 per page At cost At cost At cost At cost At cost Note: Above rates are applicable for the financial year ending 30 June Report on progress of the Administration The Remuneration Approval Request Report must be read in conjunction with the report to creditors dated 14 October 2016 which outlines the progress of the administration. Annexures Prius Healthcare Solutions Pty Ltd 14 October 2016 Page A-15

80 9 Summary of receipts and payments A summary of receipts and payments for the period 19 September 2016 to 12 October 2016 is set out in the table below: Receipts and payments Receipts Cash at bank on appointment 129, Pre-appointment debtors 262, Realisation of plant and equipment 11, Total receipts 403, Payments Bank fees (42.75) Contractor payments (1,084.25) Intercompany recharge (2,983.00) Salary & wages (8,395.00) Total payments (12,505.00) Closing cash at bank 390, Total $ 10 Queries If you require further information in respect of the above, or have other questions, please contact Marcela Landeka of this office on (02) Information available The partners of Ferrier Hodgson are members of ARITA. Ferrier Hodgson follows the Code. A copy of the Code may be found on the ARITA website at An information sheet concerning approval of remuneration in external administrations can also be obtained from the Australian Securities & Investments Commission website at Dated this 14 th day of October 2016 Jim Sarantinos and Peter Gothard Administrators Annexures Prius Healthcare Solutions Pty Ltd 14 October 2016 Page A-16

81 Annexure E ARITA creditor information sheet Annexures Prius Healthcare Solutions Pty Ltd Annual Report to Creditors 14 October 2016 Page A-17