DONACO INTERNATIONAL LIMITED 2018 ANNUAL REPORT 4 DONACO INTERNATIONAL LIMITED 2018 ANNUAL REPORT 5 Dear fellow shareholders, The 2018 financial year can be described as a year of challenges, changes and progress. The challenges occurred early in the year when it became apparent that the vendor of the Star Vegas casino was operating two casinos in breach of the non-compete provisions in the sale contract. This challenge was compounded by the poaching of our VIP junkets by the vendor, which severely impacted our junket business at Star Vegas. The Board acted swiftly when the issues were identified and we are actively pursuing all legal avenues to stop the illegal operation of the competing casinos, and to receive compensation for the financial impact that we have suffered as a result of the contract breaches. The Company was successful in obtaining an injunction ordering the closure of the competing casinos. After the injunction was obtained, one of the casinos changed its name from ‘Star Paradise’ to ‘Winsor’, and at present continues to operate. The vendor’s initial arguments against the injunction were rejected by the Cambodian court, but a further appeal by the vendor to a higher court is pending. In late March 2018 the Company obtained a freezing order on the vendor’s Donaco shares from the NSW Supreme Court, and this order has now been extended until 2 November 2018. When the breaches became apparent the Board withheld the final management fee payment to the vendor in respect of the 2017 financial year. The vendor then made a claim for security rights over certain assets of Star Vegas, relating to this payment. This claim was rejected by the Cambodian court, but a few days later, a different firm of lawyers acting for the vendor filed an essentially identical claim. We have argued that this is an abuse of process, and should also be rejected. The vendor then threatened to terminate the lease of the Star Vegas property, on what the Board considers to be contrived and spurious grounds. The Company has obtained an injunction to prevent the threatened termination, and the injunction continues in force. The vendor has now commenced arbitration proceedings in Cambodia over this matter. The Board is seeking a positive resolution within the next six months. The vendor has also commenced defamation proceedings in Thailand against Donaco and two of our directors for damages of THB1 million (approximately $41,000). This frivolous claim relates to Donaco’s ASX releases, which Donaco is legally required to issue. We will not be deterred from our obligations to keep our shareholders informed of the important issues and developments in relation to these matters. Most significantly, the Board has commenced arbitration proceedings in Singapore for US$190 million, relating to the vendor’s breaches of the sale agreements for Star Vegas, and the subsequent impairment charge that was incurred to the Star Vegas casino license. The Board would like a rapid resolution to this issue, but unfortunately the hearing date is currently set for 29 July 2019, due to unavailability of lawyers and the arbitrator. The year has also seen a number of significant changes. At the Board level, the directors appointed by the Star Vegas vendor have left, following the breaches by the vendor. We are comfortable with our present Board composition and experience of our Board members. Strong corporate governance remains the Board’s most important area of focus at Donaco, and we retain our recognition in the Asian region as a group that operates with high standards of probity and good governance. A significant change occurred when management of the Star Vegas casino was taken in-house in July 2018, following the expiration of the management contract with the vendor. The new management team have worked actively to address and rebuild the VIP business at Star Vegas, and to undertake a number of improvements at the property during the year. Progress has also occurred during the year, with new junkets introduced at Star Vegas, new facilities being built and introduced at the property to attract new main floor and VIP patrons, the refurbishment of hotel rooms, the introduction of new gaming machines and gaming systems, and the recently announced launch of the online gaming operations. These initiatives will all hold the business in good stead over the next few years. Despite the challenging conditions in our major market, the casinos continued to produce positive cash flows of $34.6 million, and this has been used to further strengthen our financial position through the repayment of debt. The primary focus, given the challenges during the 2018 financial year, has been on further reducing the Mega Bank debt, which has now fallen to US$40 million, following the further repayment of US$8.55 million in August 2018. The $143.9 million impairment charge which the Board deemed as prudent, given the breaches by the vendor, did result in the loss recorded in the statutory results. This has meant that the Board is unable to declare a dividend for the 2018 financial year, and cannot extend the current buy-back. Under the Mega Bank facility, these capital management initiatives are restricted to 100% of statutory net profit after tax (NPAT). The Board recognises that capital allocation is one of the most important areas of value creation for shareholders, and aims to restore a range of capital management initiatives, such as buy backs and dividends, as the financial performance is restored. On a separate note, despite the attention of the Board to the challenges presented to it during the 2018 financial year, we continued to make a positive contribution to the communities in which we operate both in Cambodia and Vietnam. For example, during the year we donated two mobile medical clinics to Samdech Techo Voluntary Youth Doctors Association. This is a not-for-profit organisation which mobilises medical professionals, medical students and volunteers to help provide free healthcare to rural Cambodians throughout the country. The two new mobile clinics will help to address a significant problem faced by poor families in remote areas of Cambodia, who often have difficulty accessing proper medical and dental treatment. At the Aristo in Vietnam, we made significant donations to local orphanages, schools and war veterans, assisting both with cash and with practical gifts. In summary, the 2018 financial year was one of challenges, changes and significant progress. We expect that the encouraging signs that have emerged in the second half of the financial year in terms of restoring the VIP junket business at Star Vegas, the upgrades of facilities and slot machines and systems, together with the launch of the online gaming operations, and a further solid contribution from Aristo in Vietnam, should result in better performance in the next financial year. As a Board we aim to allow the management to focus on the business, as we attend to the issues of progressing and resolving the outstanding litigation against the vendor. I thank our shareholders for their continuing support, and I assure you all that we will continue to pursue our legal rights aggressively, and demands for compensation, and will continue to keep you informed of our progress. I am pleased to say that management have taken up the challenge of restoring the financial performance of the group, and expect to see improved financial results for the 2019 financial year. Stuart McGregor Chairman FROM THE CHAIRMAN “Strong corporate governance remains the Board’s most important area of focus at Donaco, and we retain our recognition in the Asian region as a group that operates with high standards of probity and good governance.”