Alamos Gold
Annual Report 2010

Plain-text annual report

2010 A N N U A L R E P O R T QUALITY INNOVATION EXCELLENCE Ainsworth’s passion for product innovation through technology delivers to it’s players a highly entertaining experience. The A560™ cabinets and the GamePlus™ game range, couple technology advancement with creative, unique and industry leading performing game content. Ainsworth is synonomous for its culture of innovation, quality and sustainable game performance. The Company’s product range and customer service are now recognised as global leaders. The Ainsworth A560™ and GamePlus™ range are a true reflection of the Company’s core aspirational values, of quality, innovation and excellence. KEY DATES Annual General Meeting: Wednesday 24 November 2010 Results announcement for six months ending 31 December 2010: Wednesday 23 February 2011 Results announcement for year ending 30th June 2011: Thursday 25 August 2011 Dates may be subject to change. NOTICE OF ANNUAL GENERAL MEETING Ainsworth Game Technology Limited ABN 37 068 516 665 Notice is hereby given that the 2010 Annual General Meeting of the members of Ainsworth Game Technology Limited will be held at: Bankstown Sports Club “Georges River Room” 8 Greenfield Parade (Cnr Greenfield Parade and Mona Street) BANKSTOWN NSW 2200 on Wednesday 24 November 2010 at 10.00am. 01 CONTENTS Executive Chairman’s Report Chief Executive Officer’s Report Operational Review Information About Shareholders and Noteholders Corporate Governance Statement Annual Financial Report Corporate Directory PAGE 2 3 5 9 11 18 Inside Back Cover AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 02 EXECUTIVE CHAIRMAN’S REPORT “The recently secured Nevada licence will provide the Company with access to the largest market within the Americas, once the necessary equipment approvals are received.” Dear Shareholder, I am pleased with the Company’s progress thus far and encouraged to see that the product strategy and licensing initiatives previously implemented have enabled AGT to produce a financial turnaround marked by a small profit in the second half of FY10. Further investment in product initiatives should ensure the Company continues to be recognised as a supplier of premium, high performance gaming products. The Company has successfully established itself as a major supplier within domestic markets and is endeavouring to increase its presence in key international jurisdictions as the current difficult market conditions recover. The A560™ machine range, first launched in Macau and subsequently in New South Wales and Queensland, has been very well received. I congratulate our people involved in the completion of this innovative machine. The initial development concept for this new gaming machine was commenced in 2007 and has taken 3 ½ years development from initial concept to commercial release. The recently secured Nevada licence will provide the Company with access to the largest market within the Americas, once the necessary equipment approvals are received. Continuing investment in gaming licenses, product submissions and the development of additional hardware derivatives leveraging off the new A560™ product, provide the Company with the opportunity to grow revenue as we move forward. The Company will continue to reinvest in the business to maintain progress and allow commencement of shareholder returns. Difficult economic conditions within international markets, primarily North America, have restricted the Company from capitalising in the short-term on the significant opportunities available in this very large market. Conversely domestic revenues have grown strongly through the solid performance of the current suite of products offered and this growth is expected to continue. I am pleased to have been able to support the Company financially, which has facilitated the timely investment in new markets, innovative product strategies and research and development, necessary to compete in an evolving and dynamic market place. Under the leadership of our Chief Executive Officer, Mr Danny Gladstone, the Company has in place a highly experienced executive team with significant gaming industry expertise, backed by a multi disciplined, skilled and hardworking staff. I wish to thank the Board, staff and shareholders for their continued support. I believe the Company is well positioned to achieve profitability once international economic conditions improve. Len Ainsworth Executive Chairman AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 CHIEF EXECUTIVE OFFICER’S REPORT 03 “the recent release of the A560™, which is now approved for sale in targeted domestic markets, will assist in continued revenue growth within FY11.” Dear Shareholder, I am pleased to report that the profit of $1.5 million achieved by the Company in the second half of the year ended 30 June 2010 confirmed the success of the reform strategies implemented over previous periods. The full year loss after income tax of $2.7 million is a significant improvement on the corresponding 2009 year loss of $12.5 million. I believe AGT is well positioned to continue this turnaround. The Company continued its recovery in performance during FY10 and I am particularly pleased with the substantial increase achieved in domestic revenues, arising from the successful product development, improved gross margins and cost control measures to minimise operating costs. Sales revenue achieved for FY10 was $69 million, an increase of 53% on the prior period. This increase was primarily due to the success of innovative product development strategies and market leading game performance in domestic markets. In international markets further diversification and minimisation of fixed overheads limited the impact of the difficult market conditions generally prevailing. Domestic revenue contributed 70% of total revenue and resulted in a 110% increase on the prior year. The Australian geographical segments contributed $7.7 million in profit compared to a loss of $2.3 million in 2009. All domestic markets increased their revenue contributions, with New South Wales, Victoria and Queensland experiencing significant growth. The growth was attributable to a strong uplift in sales as a result of the Company’s increased range of innovative product offerings and improved game performance. I believe the recent release of the A560™, which is now approved for sale in targeted domestic markets, will assist in continued revenue growth within FY11. The next generation A560™ cabinet range is the result of the Company’s continued commitment to research and development and provides leading edge game presentation, features and cabinet configurations. Following its launch at the G2E gaming show in Macau, the A560™ was approved for sale in New South Wales and Queensland in July and September, respectively. Approvals in other domestic jurisdictions and in selected international jurisdictions with the greatest opportunity for increased revenue in the short-term, are expected progressively throughout FY11. Continuing investment in research and development has positioned the Company at the forefront of gaming product technology and has ensured a pathway for the development of innovative high quality equipment. In addition, improved operating systems and streamlined development procedures have reduced regulatory approval timeframes and enabled a faster release to market. Improved gross margins of 54% were achieved, due to a range of factors including, increased selling prices, reductions in product and overhead costs, efficiencies in the production process and reduced material costs. Cost control measures implemented by the Company were successful in reducing operating overhead costs, excluding research and development, to 33% of total revenue, down from 46% in the previous period. This reduction assisted the Company to offset the impact of the global financial crisis which resulted in lower international revenue. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 04 CHIEF EXECUTIVE OFFICER’S REPORT (continued) “The Company is now well positioned to achieve improved financial performance as we continue to produce and sell to world markets, innovative next generation game technology, with increased player appeal and entertainment value.” A560™ Launch - Star City Casino, Sydney Improved working capital and cash management initiatives, including reduction in receivables and inventory holdings, continued to be a priority and resulted in net cash inflow from operating activities of $10.6 million compared to a $1.6 outflow in the previous year. The resultant falls in receivables and inventory levels despite the launch of the new A560™ model in July, assisted in achieving the positive turnaround in operating cashflows. The granting of a Nevada gaming licence was a major achievement for the Company during the year. Since then the Company has commenced its initial Nevada product submissions and plans a progressive targeted expansion within the Americas, based on having an increased local presence and management structure. This will enable the Company to capitalise on the revenue opportunities as and when market conditions improve. I would like to thank the Chairman and Directors, the management team, external consultants and staff for their ongoing dedication and commitment. The Company is now well positioned to achieve improved financial performance as we continue to produce and sell to world markets, innovative next generation game technology, with increased player appeal and entertainment value. Danny Gladstone Chief Executive Officer / Executive Director AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 OPERATIONAL REVIEW 05 “Continued strong performance from the Double Shot™ standalone range of games in 5c and 1c denominations has Ainsworth placed as market leaders in this product range.” National Sales Manager Peter Black at the Australasian Gaming Expo, Sydney Sales and Service Domestic Markets: The year 2010 saw a continuation of improved product performance and in turn increased sales throughout all domestic markets, resulting in revenue growth of 110% distributed across all States. Contributions to revenue growth during this period included additional product diversity and mix, with increased sales personnel coverage. While the major markets in NSW and Queensland remain largely static due to uncertainty relating to the Productivity Commission’s recommendations, the Company has continued to grow floor space percentage in both States. The Players Paradise® linked progressive jackpot system launched at the 2009 Australasian Gaming Expo enhanced mid denomination market share providing the Company with a market leading Linked Progressive jackpot package. Additional new product lines including Triple Shot and Super Games created greater product diversity and allowed Ainsworth to gain market share in the low denomination market, whilst expanding existing product lines of 50 line games. Continued strong performance from the Double Shot™ standalone range of games in 5c and 1c denominations has Ainsworth placed as market leaders in this product range. Throughout the year the increased sales of premium products, specifically Players Paradise® which contributed almost 30% of sales, further increased the average selling price and gross revenues. Initiatives were undertaken during the year with the introduction of more flexible purchasing options offered by Ainsworth, specifically related to hardware and software licensing. The NSW service division again provided strong customer service links with sales by maintaining timely and quality installation of new machines and an innovative preventative maintenance program. The current maintenance contracts cover in excess of 9,000 machines in Metropolitan and Regional venues. International Markets: International revenue fell 5% to $21.0 million in the FY10 period as a result of continuing difficult financial conditions, particularly in North America. The Company experienced an increase in revenues from the South American market of 41% and a reduction in the North America market of 18%. Revenues within Europe experienced a reduction of $2.3 million, while revenues from Asian and New Zealand markets were similar to those achieved in the prior period. The Company has implemented a number of strategies in Europe and other international markets, including the diversification of distribution channels and minimisation of fixed overheads to limit the impact of the global financial crisis and to explore opportunities to increase revenue as they arise The Company is reviewing opportunities within the South American market to establish new distribution relationships thus increasing sales coverage in that region in order to further increase sales revenue. Potential opportunities relating to the ability to offer machines on a participation basis are also being explored. The North American market continues to be impacted by the reduction in capital purchases by venues which have restricted opportunities for the Company to provide product. Another key objective is the pursuit of necessary product approvals following the recent granting of further licences in North America. To further provide the opportunity for increased revenue contributions in this key market the Company plans to build on its currently established presence by expanding its operations and management structure in the Americas in coming periods. The Ambassador® SL product continues to perform well. The A560™ will be released in selected North American markets at the upcoming G2E trade show in Las Vegas, enabling the Company to provide additional hardware configurations and product offerings in those markets. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 06 OPERATIONAL REVIEW (continued) ”The expanding game library has been further complemented by the in-built flexibility of the A560™ hardware platform.” Product Development The Company continues its commitment to fostering a culture of innovation and quality whilst maintaining a focus on reducing lead times to market. Strategic game library expansion continues across a variety of game categories and denominations. In excess of 50 games were added during FY10 with the emphasis being placed on international markets. Major achievements were made in domestic markets with new game performance firmly establishing the Company as an industry leader. Notably the dominant performing games were Players Paradise® and the Double Shot™ standalone double progressives range. These products performed well in excess of floor average in New South Wales, Queensland and Victoria contributing over 70% of sales volumes. A key highlight during the year was the launch of the Big Shot Statewide Link progressive in New South Wales in conjunction with Max Gaming. In international markets Play 50 Line games and the custom designed 4 level link progressive Players Paradise® were leading performers. An expanded “World of Jackpots” link progressive strategy will be unveiled at the November G2E in Las Vegas featuring the new wide screen A560™ platform. The expanding game library has been further complemented by the in-built flexibility of the A560™ hardware platform. This will allow the marketing of games in multiple cabinet configurations and provide players with an enhanced level of choice and entertainment value. Further diversity on the current suite of games is planned for release in the 2011 calendar year. Research and Development (R&D) / Engineering The Technical Services Division continues to pursue research and development initiatives which will play an instrumental role in the Company’s current and future business plans. The key objectives achieved during FY10 include approval of the newly developed A560™ High Boy dual screen, A560™ Low Boy single screen and the A560™ video topper in NSW and Queensland. The recent platform approvals received for the new A560™ gaming machine have been a culmination of significant investment over a period of three and a half years. Further A560™ product submissions in domestic and selected international markets are planned over FY11, including associated hardware derivatives which will provide additional product choices and entertainment appeal for customers. The Company’s research and development initiatives are optimised by leveraging off previously proven technology, while the department’s extensive experience in gaming design processes ensures the ongoing development of strategic, diverse and innovative gaming platforms. Processes and procedures on product submissions are regularly monitored and upgraded to facilitate timely approvals by gaming regulators. Compliance and Licensing The Company continues to maintain a high level of regulatory compliance based on recognised Australian and international standards and accreditation. The Company is approved to conduct business in 20 US states and three provinces in Canada. The highlight for the past year was the approval by the Nevada Gaming Commission of the Company’s manufacturer’s and distributor’s licence. Other major approvals were granted by the States of Illinois, Maryland and West Virginia, the Seneca tribe in New York, the Canadian province of Alberta, and Singapore. In total, the Ainsworth Group has 73 tribal licences (compared to 61 as at 30 June 2009) across California, Connecticut, Florida, Michigan, Minnesota, New Mexico, New York, North Dakota, Oklahoma, Oregon and Wisconsin. The Company reinforced its commitment to continuing improvement by successfully renewing and extending its accreditation to June 2013 for its quality management system against the AS/NZ ISO 9001:2008 standard. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 07 “Domestic revenue represented $48.2 million of total revenue, a 110% increase on 2009. All domestic markets contributed toward the growth experienced.” Manufacturing Further reductions in both raw material inventory and assembly times have been achieved through changes in operational flow through the Enterprise Resource Planning (ERP) system. This has enabled global sales forecasts to be accurately entered into the Material Resource Planning (MRP) module, resulting in accurate purchasing and delivery of components. With the incorporation of the ERP system into our USA operation during the year, a fully configured machine is now managed for both hardware and firmware through a unique, customised program. The main emphasis for the year was to further streamline assembly processes including the implementation of supply chain management strategies for the new A560™ product. The release of the new product in August 2010 was achieved with no interruptions to the current process and material costs were below expectations. Additional work will take place in this financial year with the aim of achieving further reductions in material costs, overheads and assembly times by relocating tooling to local vendors. Finance As outlined in the enclosed Annual Financial Report, significant financial performance was achieved in the FY10 period. Despite the loss of $2.7 million, the full year included the following highlights: • A profit of $1.5 million was achieved in the second half compared to the $4.2 million loss in the first half of FY10; • Revenue increased by 53% to $69.3 million for the year ended 30 June 2010; • Gross margin achieved on sales revenue was 54%, compared to 48% in the corresponding period in 2009; • Operating expenses were $33.1 million and represented 48% of revenue, compared to 73% of revenue in 2009; and • Operating cashflows were $10.6 million positive, compared to an outflow of $1.6 million in 2009. Included in the FY10 result was $0.5 million in net foreign exchange losses compared to gains of $5.3 million in the corresponding period. Excluding the impact of foreign currency, FY10 resulted in a $15.6 million turnaround on 2009. Domestic revenue represented $48.2 million of total revenue, a 110% increase on 2009. All domestic markets contributed toward the growth experienced. The core markets of New South Wales and Queensland represented 85% of the increase achieved. The recent launch of the A560™ product and the success of previous product development strategies can be expected to maintain the current performance turnaround and provide sustainable growth in earnings and profitability in the years ahead. International revenue achieved was $21.0 million compared to $22.2 million for the prior year, a fall of 5%, as a result of the extended global financial crisis. International revenue represented 30% of total revenue for the year compared to 49% in the prior period. Gross margins continue to increase with a 54% margin being achieved in FY10 compared to 48% in 2009 and 39% in 2008. This result was a combination of higher selling prices, reduced material costs and continued overhead efficiencies in production activities. Operating costs, excluding cost of sales and financing costs, were $33.1 million compared to $33.0 million in the corresponding period in 2009. Included in operating costs were research and development expenditure of $10.2 million, a decrease of $2.2 million over the previous year in 2009. This investment in product development programs allows the Group to remain at the forefront of product innovation in the global gaming market. The cash inflow from operations for the period under review was $10.6 million compared to an outflow of $1.6 million in the corresponding period in 2009. The Company continues to closely monitor its working capital requirements and has significantly reduced the extent of credit offered on sales made in all jurisdictions. Reduction in receivables and inventory holdings have occurred which have assisted in the turnaround and improvement of cashflows from operating activities. For further commentary on the results refer to the “Operating and Financial Review” on page 26 of this report. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 08 OPERATIONAL REVIEW (continued) “Ongoing training and development initiatives, along with a comprehensive performance management system, support our people in providing for future growth and profit performance.” Human Resources Ainsworth has in place a team of dedicated executives, management and staff with the necessary skills and industry knowledge to successfully take the Company forward. The Company has implemented a range of Human Resources strategies that are closely aligned with our overarching business objectives. Ongoing training and development initiatives, along with a comprehensive performance management system, support our people in providing for future growth and profit performance. The Company is revisiting its incentive program, including short and long term bonus structures, to help ensure retention of key employees and the creation of a performance culture where achievement is recognised and rewarded. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 INFORMATION ABOUT SHAREHOLDERS AND NOTEHOLDERS 09 Securityholder information required by the Australian Securities Exchange Limited Listing Rules and not disclosed elsewhere in this report is set out below. SECURITY HOLDINGS (as at 14 September 2010) Number of securityholders and securities on issue The issued shares in the Company were 278,942,304 ordinary shares held by 3,372 shareholders. The issued convertible notes in the Company were 19,714,717 held by 718 noteholders. Substantial shareholders / noteholders The number of shares and convertible notes held by substantial securityholders and their associates are set out below: Shareholder / Noteholder Mr LH Ainsworth Votraint No 1019 Pty Ltd (Braesyde Super Fund A/C) Number of Convertible Notes Number of Ordinary Shares 10,385,282 1,898,286 174,044,331* 30,115,528 * Mr LH Ainsworth previously granted share options over a portion of his personal shareholding to all Australian employees, excluding directors and four key management personnel. Share options outstanding as at 14 September 2010 were 7,346,907 (issued to 124 employees) and remain unexercised. Voting rights Ordinary shares The voting rights attaching to ordinary shares are that on a show of hands every member present in person or by proxy has one vote and upon a poll, each share shall have one vote. Convertible notes The convertible notes do not give their holders any voting rights at shareholders’ meetings. Options Option holders have no voting rights. Distribution of securityholders Category 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over Total NUMBER OF CONVERTIBLE NOTE AND EQUITY SECURITYHOLDERS Convertible Notes Ordinary Shares Options 308 250 66 78 16 718 309 1,562 637 763 101 3,372 - - - 4 1 5 The number of securityholders holding less than a marketable parcel of ordinary shares and convertible notes respectively is 1,475 (3,102,635 ordinary shares) and 146 (40,698 convertible notes). On market buy-back There is no current on market buy-back. Unquoted equity securities At 14 September 2010, 420,810 unlisted non-transferable options have been issued to 5 option holders and remain unexercised. Regulatory considerations affecting shareholders The Company is subject to a strict regulatory regime in regard to the gaming licences and operations within the gaming industry. It is necessary for the Company to regulate the holding of shares to protect the businesses of the Company in respect of which a gaming licence is held. By accepting shares, each potential investor acknowledges that having regard to the gaming laws, in order for the Company to maintain a gaming licence, the Company must ensure that certain persons do not become or remain a member of the Company. The Constitution of the Company contains provisions that may require shareholders to provide certain information to the Company and the Company has powers to require divesture of shares, suspend voting rights and suspend payments of certain amounts to shareholders. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 10 INFORMATION ABOUT SHAREHOLDERS AND NOTEHOLDERS (continued) SECURITY HOLDINGS (as at 14 September 2010) (continued) Twenty largest shareholders Name Mr L H Ainsworth Votraint No. 1019 Pty Ltd (Braesyde Super Fund A/C) Associated World Investments Pty Ltd Writeman Pty Limited (PLA Investment Fund A/C) Serioso Pty Limited (GGHA Trading Account) HSBC Custody Nominees (Australia) Limited Reserve Properties Pty Ltd (NBF Investment A/C) Coastwide Poker Machine Sales & Services Pty Ltd (R&V Turner Super Fund A/C) JP Morgan Nominees Australia Ltd HFT Nominees Pty Ltd (HFT Super Fund A/C) Mr D Piliouras & Mrs K Piliouras (Energia Super Fund A/C) Hotel Bondi Pty Ltd (Bondi Unit A/C) Miss P Smarnkeo Mr A D Schneller & Mrs K U Schneller (A & K Super Fund A/C) Custodial Services Limited (Beneficiaries Holding A/C) Anvil Properties Pty Ltd Mrs C Larment Mr D W Larment & Mrs C Larment (D&C Larment Super Fund A/C) ANZ Nominees Limited (Cash Income A/C) Mrs C E Coghlan Total Twenty largest noteholders Name Baclupas Pty Ltd (Valhalla A/C) Associated World Investments Pty Ltd Votraint No 1019 Pty Ltd (Braesyde Super Fund A/C) Citadel Investments Limited Anvil Properties Pty Ltd JP Morgan Nominees Australia Limited ANZ Nominees Limited (Cash Income A/C) Ms D R Lowes CJHA Pty Ltd (CJHA Family A/C) Casola Holdings Pty Ltd (Nordiv Holdings Super Fund A/C) Mrs M M & Mr V M (Murone Family Super Fund A/C) Tie Fabrications Pty Ltd (Tie Fabrications Super Fund A/C) Mr K Arculli Kjerulf David Pty Limited Mr R Y (Jarsey Super Fund A/C) Wing Sing Capital Pty Ltd (Wing Sing Capital A/C) Boardwalk Pty Ltd Mr R Burow Mr D M Fite Mr W P McBride & Mrs K M McBride Total AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 Number of ordinary shares held 167,131,473 30,115,528 Percentage of total 59.92 10.80 6,912,858 4,311,123 3,841,984 3,816,688 2,433,204 1,420,144 1,250,033 1,000,000 838,544 660,000 659,999 650,250 603,179 601,100 600,637 588,645 588,430 550,000 228,573,819 Number of convertible notes held 8,000,000 2,252,382 1,898,286 800,287 630,000 480,684 405,606 354,254 281,797 230,000 200,000 173,699 153,846 132,900 110,000 108,460 100,000 100,000 80,225 77,927 16,570,353 2.47 1.55 1.38 1.37 0.87 0.51 0.45 0.32 0.30 0.24 0.24 0.23 0.22 0.22 0.22 0.21 0.21 0.20 81.93 Percentage of total 40.58 11.42 9.63 4.06 3.20 2.44 2.06 1.80 1.43 1.17 1.01 0.88 0.78 0.67 0.56 0.55 0.51 0.51 0.41 0.40 84.07 CORPORATE GOVERNANCE STATEMENT 11 THE COMPANY’S APPROACH TO CORPORATE GOVERNANCE The Company’s Board of Directors and management strongly support the principles of good corporate governance to create long-term value for shareholders and maintaining the Company’s strong reputation for integrity. This is particularly important given the highly regulated nature of the industry within which the Company operates and is essential for securing new gaming licences and protection of current licences. The following are the Company’s main corporate governance principles placed in the order as set out in the “Corporate Governance Principles and Recommendations, 2nd edition” which was published by the Australian Securities Exchange (ASX) Corporate Governance Council in August 2007. Statements to this corporate governance section have been referenced to the applicable ASX Recommendations and compliance is indicated by . Principle 1 Lay solid foundations for management and oversight Role of the Board The Board’s primary role is the protection and enhancement of long- term shareholder value. To fulfill this role, the Board is responsible for the overall corporate governance of the Company, including guiding its strategic direction, approving and monitoring capital expenditure, monitoring financial performance, setting remuneration and reviewing the performance of the Chief Executive Officer. The Board is responsible for ensuring appointments, removals and succession plans for directors and where necessary, seeking shareholder approval. In addition, the Board is responsible for appointing, removing and creating succession polices for the Chief Executive Officer and senior executives. The Board establishes and monitors the achievement of management’s goals, ensuring the integrity of internal control and management information systems and approves and monitors financial and other business related reporting. In his role as Executive Chairman, Mr LH Ainsworth provides input into technical design, strategic guidance and overview of the Company with the responsibility for management of the day to day operations delegated to the Chief Executive Officer. Responsibilities are delineated by formal authority delegations. Board Processes To assist in the execution of its responsibilities, the Board has established three Board Sub-Committees namely the Remuneration and Nomination Committee, the Regulatory and Compliance Committee and the Audit Committee. Each Committee has a Charter which includes a more detailed description of their duties and responsibilities. These Charters are regularly reviewed and approved by the Board and are available in the Corporate Governance section of the Company’s website. The Board has also established a framework for the management of the Company including a system of internal control, a business risk management process and the establishment of appropriate ethical standards. The Board currently holds monthly scheduled meetings throughout the year and any extraordinary meetings at such other times as may be necessary to address any specific significant matters that may arise. The agenda for the Board meetings is prepared in conjunction with the Chairperson, Chief Executive Officer and the Chief Financial Officer / Company Secretary. Standing items include declaration of interests or conflicts, the Chief Executive Officer’s report, financial reports and any issues relating to strategic matters, governance and compliance requirements of the Company. Board papers and submissions are circulated in advance. Executives are regularly involved in Board discussions and directors have the opportunity for contact with a wider group of employees and other stakeholders. During the year under review, the Board met ten times and the Board members’ attendance record is disclosed in the table of directors’ meetings on page 19 of this Report. Performance of Key Executives The non-executive directors of the Remuneration and Nomination Committee review the performance of the Company’s Chief Executive Officer and senior executives who directly report to the Chief Executive Officer. Their findings are reported to the Board. A performance management review process is undertaken which involves self-assessment and review against previously established goals and objectives set by the Board. The performance of the Company’s senior executives has been assessed this year in accordance with this process. Key aspects of the review process are described below. The Chief Executive Officer annually presents a self-assessment to the Non-Executive Directors of the Remuneration and Nomination Committee, who formally review the performance of the Chief Executive Officer. The key aspects of the assessment include financial performance measures, strategic initiatives, staff and human relations indicators and compliance performance. The Remuneration and Nomination Committee reports on the performance of the Chief Executive Officer to the Board. The Chief Executive Officer evaluates, at least annually, the performance of the following key executives: Chief Financial Officer / Company Secretary, General Manager of Technical Services, General Manager of Manufacturing, Group Compliance Manager and Division Sales Managers. Both qualitative and quantitative measures are used that vary according to an individual’s role. Factors that are taken into consideration when assessing performance include relative contributions to profit, how business is conducted, people leadership and adherence to the Company’s Code of Conduct and compliance policies. These performance assessments are reviewed by the non-executive directors of the Remuneration and Nomination Committee and reported to the Board.  ASX Corporate Governance Council’s Recommendations 1.1, 1.2, 1.3 Principle 2 Structure the Board to add value Composition of the Board The names and details of the directors of the Company in office at the date of signing the Financial Report are set out on page 19 of this Report. The composition of the Board is evaluated and reviewed to ensure it provides a broad range of skills, personal qualities, expertise, ability to exercise independent judgment and diversity required to discharge its responsibilities. Provision of such skills and experience is aimed to assist the Company to achieve its objectives and continual development. The Remuneration and Nomination Committee assists the Board in regularly evaluating the effectiveness, size and composition of the Board. It identifies and evaluates suitability qualified candidates as directors and makes recommendations to the Board for consideration. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 12 CORPORATE GOVERNANCE STATEMENT (continued) Principle 2 Structure the Board to add value (continued) Composition of the Board (continued) An objective of the Company is to ensure that the majority of the Board should comprise independent, non-executive directors with no other significant business or other links to the Company. An independent director is a director who is not a member of the management (i.e. a non-executive director) team and who: • holds less than five percent of the voting shares of the Company and is not an officer of the Company, or otherwise associated, directly or indirectly, with a shareholder of more than five percent of the voting shares of the Company; • has not within the last three years been employed in an executive capacity by the Company or another group member, or has been a director after ceasing to hold any such employment; • within the last three years has not been a principal or employee of a material* professional adviser or a material* consultant to the Company or another group member; • is not a material* supplier or customer of the Company or another group member, or an officer of the Company or otherwise associated, directly or indirectly, with a material* supplier or customer; • has no material* contractual relationship with the Company or another group member other than as a director of the Company; • has not served on the Board for a period which could, or could reasonably be perceived to, materially interfere with the director’s ability to act in the best interests of the Company; and • is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the director’s ability to act in the best interests of the Company. * the Board considers, “material”, in this context to be where any director-related business relationship has represented, or is likely in future to represent the lesser of at least 10% of the relevant segment’s or the director-related business’s revenue. The Board has considered the nature of the relevant industries’ competition and the size and nature of each director-related business relationship, in arriving at this threshold. The majority of the Board comprises independent non executive directors with the roles of the Chairperson and Chief Executive Officer not being exercised by the same individual. Each director has the right of access to all Company information and to the Company’s executives. Further, subject to informing the Board, a director may seek independent professional advice from a suitably qualified adviser at the Company’s expense. A copy of the advice received by the director is made available to all other members of the Board. The Company has a formal process to educate new directors about the nature of the business, current issues, the corporate strategy and the expectations of the Company concerning performance of directors. Directors also have the opportunity to meet with management to gain a better understanding of business operations. Directors are able to access continuing education opportunities to update and enhance their skills and knowledge. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 Board Performance Review The Chairman of the Board is responsible for evaluating the performance of the Board, its committees and individual directors. The performance of the Board is currently under assessment in accordance with the process described below. The process for conducting the Board’s performance review consists of individual interviews with each director. The review includes an assessment of the individual contribution of each Board member as well as the performance of the Board as a whole. The performance criteria that is taken into account include each director’s contribution to setting the direction, strategy and financial objectives of the group and monitoring compliance with regulatory requirements and ethical standards. A written report discussing the results, issues for discussion and recommendations is to be presented to the Board and discussed at a Board Meeting. Each of the Board Committees undertakes a periodic review of their performance in accordance with their Charters. The results of these reviews are then presented and discussed at a Board meeting. Sub-Committees of the Board 1. Audit comittee Details regarding the composition of the Committee, its role and responsibilities are provided under Principle 4 of this statement. 2. Remuneration and Nomination Committee Details regarding the composition of the Committee and its role and responsibilities are provided under Principle 8 of this statement. 3. Regulatory and Compliance Committee The members of the Committee during the year are set out below: Composition of Regulatory and Compliance Committee Chairman: Mr SL Wallis AO (Independent Non-Executive Director) Members: Mr GJ Campbell (Independent Non-Executive Director) Mr SM Cohn (Independent Member) Mr JF O’Reilly (Independent Member, appointed as member on 18 November 2009) Mr DE Gladstone (Executive Director / Chief Executive Officer) Due to the highly regulated nature of the gaming industry within which the Company operates, the securing of new gaming licences and protection of current licences is an on-going process which is of great importance to the Company. The Regulatory and Compliance Committee Charter, which is reviewed regularly and has been approved by the Board, outlines responsibilities to monitor, review, advise and assist the Board to ensure all compliance related matters and procedures have been established and are operating effectively. The Charter is available on the website of the Company. A majority of members are independent, including two non-executive directors and the chairman is not the Chairman of the Board. The Regulatory and Compliance Committee monitors probity related matters, technical compliance issues and compliance conduct and issues, systems and procedural requirements to ensure that the Company maintains a high standard of compliance with all of its gaming regulatory and licence obligations. In addition, the Regulatory and Compliance Committee advises and makes recommendations to the Board regarding regulatory compliance matters, including the suitability of key employees and other persons or entities with whom the Company has or intends to have an association or affiliation, in line with gaming regulations. 13 The Group Compliance Manager and the Technical Compliance Manager are invited to the Regulatory and Compliance Committee meetings to present and discuss their reports and recommendations. The Regulatory and Compliance Committee met five times during the year and the directors’ attendance record is disclosed in the table of directors’ meetings on page 19 of this Report. Due to the importance of the regulatory environment within which the Company operates, and to ensure the commitment by the Board within this important area, the Committee is scheduled to meet at least four times each financial year and as required to address any specific issues that may arise. The main responsibilities of the Regulatory and Compliance Committee are to: • oversees activities of the compliance, licencing and technical compliance functions; • regularly review the application of compliance to ensure that the Company meets all requirements outlined in its Compliance Policy; • deal with and investigate any breaches, complaints and derogatory information of which it becomes aware; • provide assistance and advice to the Board on matters pertaining to the Company’s continuing suitability to obtain and maintain gaming licences; • review operational policies and recommendations relating to compliance issues; and • perform, at least annually, a performance evaluation of the Committee members to ensure delivery on its Charter and continually enhance the Committee’s contribution to the Board. The Regulatory and Compliance Committee may seek independent professional advice, at the Company’s expense, in carrying out these duties, subject to informing the Board. The Committee has the authority to conduct any investigation appropriate to fulfilling its responsibilities and is provided with the right to direct access to any person within the Company.  ASX Corporate Governance Council’s Recommendations 2.1, 2.3, 2.4, 2.5, 2.6 Non-compliance to the ASX Corporate Governance Council’s Recommendations is as below: Principle 2.2 The chair should be an independent director Given that the Chairman, Mr LH Ainsworth, is a substantial shareholder of the Company, he is not considered to be an independent director. The Board intends to consider the succession of the Chairperson when trading performance of the Company is improved. Mr SL Wallis AO has been appointed as the lead independent director to ensure that any conflicts which may arise are dealt with in line with ASX Corporate Governance Principles and Recommendations. Principle 3 Promote ethical and responsible decision-making Ethical Standards All directors, managers and employees are expected to act with complete integrity and objectivity in all their activities related to the Company, striving at all times to enhance the reputation and performance of the Company. Every employee has a nominated supervisor to whom they may refer any issues or complaints arising from their employment. To further promote a culture within the Company where ethical standards are maintained in accordance with Company policy, the Company has established a “Whistleblower” Policy which ensures protection of individuals reporting any incidents of misconduct or unethical behaviour. Conflict of Interest Directors must keep the Board advised, on an on-going basis, of any interest that could potentially conflict with those of the Company. The Board has developed procedures to ensure that directors disclose any potential conflicts of interest. Where the Board believes that a significant conflict exists for a director on a Board matter, the director concerned does not participate in any discussion and voting on the applicable matter and, if considered appropriate, the director is requested not to be present whilst the matter is considered. Details of director related transactions with the Company are set out in Note 33 in the financial statements. Code of Conduct The Company has established a Code of Conduct that embraces high standards of personal and corporate conduct. Each director, manager and employee has been advised that they must comply with this Code. The full Code may be viewed on the Company’s website and it requires all directors and officers to: • conduct all dealings with internal and external stakeholders in a truthful, honest and trustworthy manner; • value and maintain professionalism; • treat all persons with whom they interact, with respect and dignity; • respect the rights of individuals; • act towards others without discrimination; • comply with the Company’s internal policies and procedures; • report unethical behaviour or wrongdoing; • use authority in a fair and unbiased way; • comply with all applicable laws, regulations and licensing conditions; and • not knowingly make a misleading statement. A copy of the Code of Conduct is made available to all staff. The Code is reviewed regularly by the Board and processes are in place to communicate any amendments to the Code to all staff. New employees are issued with an employee handbook containing the Code of Conduct and prior to commencing their respective employment, they are required to certify that they have read and understood the requirements contained within it. The Company has established procedures to monitor compliance with the Code of Conduct. In addition to the Code of Conduct and the Whistleblower policy, the Company also has policies which govern: • Occupational Health and Safety; • Dealing in Company’s securities; and • Equal Employment Opportunity. All employees are required to complete the harassment, discrimination and compliance training conducted by the Company. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 14 CORPORATE GOVERNANCE STATEMENT (continued) Principle 3 Promote ethical and responsible decision-making (continued) Trading in Company Securities by Directors and Employees The Company has in place a policy which outlines the rules that directors, senior executives and all employees must follow when dealing in the Company’s securities. The policy also details the insider trading provision of the Corporations Act 2001 and is available on the website of the Company. The key elements of the Company’s policy regarding trading in Company securities by directors and employees are: • that directors, senior executives and employees may acquire shares in the Company, but are prohibited from dealing in Company shares or exercising options: - whilst in possession of information, which if disclosed publicly, would be likely to materially affect the market price or value of those securities; and - at any time outside a Window Period*, unless there are exceptional circumstances and in accordance with the procedure as laid down in the policy. • to raise the awareness of legal prohibitions on trading, including transactions involving associates, colleagues and external advisers; • to require details to be provided of any intended trading in the Company’s shares as well as subsequent confirmation of the trade; and • to identify the process for unusual circumstances where discretions may be exercised in cases such as financial hardship. * Window Period: (a) commence on the day following the release of the Company’s Half-Yearly and Preliminary Final Results and Dividend announcements for a 30 day period; (b) commence on the day following the Annual General Meeting for a 30 day period; and (c) during the offer or application period specified in a prospectus or supplementary prospectus issued for a new share issue. The policy stipulates a number of notification and approval procedures that must be carried out before any director or employee can deal in securities of the Company. The Company has in place internal mechanisms to review compliance with the policy.  ASX Corporate Governance Council’s Recommendations 3.1, 3.2, 3.3 AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 Principle 4 Safeguard integrity in financial reporting Audit Committee The members of the Committee during the year are set out below: Composition of the Audit Committee Chairman: Mr GJ Campbell (Independent Non-Executive Director) Member: Mr SL Wallis AO (Independent Non-Executive Director) Mr MB Yates (Independent Non-Executive Director, appointed as member on 15 December 2009) The Audit Committee has a documented Charter, which is regularly reviewed and approved by the Board. All members are currently independent non-executive directors. The chairman of the Committee is not the Chairman of the Board. The company has adopted the ASX Corporate Governance Council’s recommendation 4.2 during the year whereby the Audit Committee now comprises of three members following the appointment of Mr MB Yates. The Committee advises on the establishment and maintenance of a framework of internal financial control for the management of the Company. The external auditors, the Chief Executive Officer and Chief Financial Officer / Company Secretary, are invited to attend Audit Committee meetings at the discretion of the Committee. The Committee met two times during the year and Committee members’ attendance record is disclosed in the table of directors’ meetings on page 19 of this Report. The external auditor met with the Audit Committee and the Board during the year, without management being present. The Chief Executive Officer and the Chief Financial Officer / Company Secretary declared in writing to the Board that the Company’s financial reports for the year ended 30 June 2010 present a true and fair view, in all material respects, of the Company’s financial condition and operational results and are in accordance with relevant accounting standards. This statement is required for the full year and half year reporting periods. The main responsibilities of the Audit Committee are to: • assist the Board to discharge its fiduciary responsibilities with regard to the Company’s accounting, control and reporting practices by monitoring the risk and internal control environment and management over corporate assets; • review internal controls and any changes thereto approved and submitted by the Company’s Chief Financial Officer / Company Secretary; • provide assurance regarding the quality and reliability of financial information used by the Board; • oversee the activities of the internal audit function and external audit staff of the Company and to review the Company’s risk management policies and internal control processes; • review and recommend to the Board the adoption of the Company’s half year and annual financial statements; • liaise with and review the performance of the external auditor; • consider whether non-audit services provided by the external auditor are consistent with maintaining the external auditors’ independence; and • perform, at least annually, a performance evaluation of the Committee members to ensure delivery on its Charter and continually enhance the Committee’s contribution to the Board. 15 The Audit Committee reviews the performance of the external auditors on an annual basis and meets with them during the year to: • discuss the external audit and internal audit plan; • identify any significant changes in structure, operations, internal controls or accounting policies likely to impact the financial statements; • review the fees proposed for the audit work to be performed; • review the half-year and preliminary final reports and any significant adjustments required as a result of the auditor’s findings prior to lodgment with the ASX; • review the results and findings of the auditor and monitor the implementation of any recommendations made; and • organize, review and report as required on any special reviews or investigations deemed necessary by the Board subject to the engagement not impairing audit independence. The Audit Committee’s Charter is available on the Company’s website. The Audit Committee also considers the selection and appointment of external auditors and the rotation of external audit engagement partners.  ASX Corporate Governance Council’s Recommendations 4.1, 4.2, 4.3, 4.4 Principle 5 Make timely and balanced disclosure The Company is listed on the ASX and is committed to ensuring that information which is expected to have a material effect of the price or value of its shares is notified to the ASX in a timely and balanced manner, with regard to the Corporations Act 2001 and ASX Listing Rules outlining continuous disclosure requirements for listed companies. All senior executives must follow a process which involves monitoring all areas of the Company’s internal and external environment to identify and communicate significant matters in a timely manner to the Chief Financial Officer / Company Secretary. The Chief Executive Officer and Chief Financial Officer / Company Secretary are responsible for determining whether matters are required to be disclosed in accordance with the above continuous disclosure requirements and for informing the Board accordingly. The Chief Financial Officer / Company Secretary is responsible for co-ordinating disclosure to the ASX and ensuring that such information is not released to any person until the ASX has confirmed its release to the market. Such matters are advised to the ASX on the day they are identified as being material.  ASX Corporate Governance Council’s Recommendations 5.1, 5.2 Principle 6 Respect the rights of shareholders The Company is committed to keeping shareholders fully informed of significant developments and activities of the Company. This commitment is fulfilled as follows: • all announcements made to the market and related information (including information provided to analysts or the media during briefings), are placed on the Company’s website after lodgment with the ASX; investor presentations, • the Annual Report (including relevant information about the operations of the Company during the year and changes in the state of affairs) is distributed to all shareholders (unless a shareholder has specifically requested not to receive the document); • the half yearly report contains summarised financial information and a review of the operations of the Company during the period. The half year reviewed financial report is lodged with the Australian Securities and Investments Commission and the ASX and sent to any shareholder who requests it; • the full texts of notices of meetings and associated explanatory material are placed on the Company’s website; • the Board encourages full participation of shareholders at the AGM, to ensure a high level of accountability and identification with the Company’s strategy and goals; • important issues are presented to shareholders as single resolutions; • shareholders are requested to vote on the appointment and aggregate remuneration of directors as well as changes to the Constitution. The Constitution is available on the website of the Company and copies are also given to shareholders who request for the same; and • the external auditor is requested to attend the AGM to answer any questions concerning the audit and the content of the Auditor’s report.  ASX Corporate Governance Council’s Recommendations 6.1, 6.2 Principle 7 Recognise and manage risk Oversight of the risk management system The Board oversees the establishment, implementation and annual review of the Company’s risk management system. Management has established and implemented the risk management system for identifying, assessing, monitoring and managing operational, financial reporting, and compliance risks for the Company. The Chief Executive Officer and the Chief Financial Officer / Company Secretary have declared, in writing to the Board, that the financial reporting risk management and associated compliance and controls have been assessed and found to be operating efficiently and effectively. All risk assessments covered the whole financial year and the period up to the signing of the annual financial report for all material operations in the Company and material associates. Risk profile and the Audit Committee The Audit Committee reports to the Board on the status of risks through integrated risk management processes and programs aimed at ensuring that risks are identified, assessed and appropriately managed. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 16 CORPORATE GOVERNANCE STATEMENT (continued) Principle 7 Recognise and manage risk (continued) Risk profile and the Audit Committee (continued) Each business operational unit is responsible and accountable for implementing and managing the standards required by the risk management system. The major risks that the Company faces are allocated to individual executives and are reviewed to determine progress and to provide updates as to the individual status and to ensure the identification of any further risks. Risk management and compliance and control The Company has implemented a compliance program which complies with the Australian Standard for Compliance Programs AS 3806. This Standard was prepared by the Standards Australia Committee following a request by the Australian Competition and Consumer Commission and details the essential elements of an effective compliance program. The Standard provides principles for the development, implementation and maintenance of an effective compliance program, whilst emphasising the need for continuous improvement. The use of these principles will enable the Company to identify risks and to develop processes to ensure compliance with relevant laws and regulations, including gaming regulatory and licence obligations. The Company was initially accredited in 2007 and following a re-certification audit of the Company’s quality management system in June 2010, this accreditation was renewed for a further three year period. This accreditation confirmed the Company’s compliance with the AS/NZ ISO 9001:2008 standard Quality Management Systems-Requirements, published by the International Organisation for Standardisation (ISO). Further to receiving the above accreditations, the Company has demonstrated its ongoing commitment to continuous improvement by successfully maintaining its quality accreditation through regular independent surveillance audits of its quality management system during the year. In addition to the above, the Company continually reviews internal controls and operating procedures, to enable compliance with Gaming Machine National Standards and the Company’s Control System Manual. To ensure that these standards are maintained, there are a number of internal reporting measures including monthly Compliance Reports from all department managers and monthly Continuous Disclosure Reports from all senior executives. The Regulatory and Compliance Committee receives details from the above reports and reviews the Company’s reporting and processes on all these matters. The Board is responsible for the overall internal control framework, but recognises that no cost effective internal control system will preclude all errors and irregularities. The Board’s policy on internal control is continually under review to ensure it keeps pace with internal and external changes. The Board oversees the Company’s internal compliance and control systems, including: Operating unit controls - Operating units confirm compliance with financial controls and procedures, including information systems controls detailed in procedures manuals; Functional specialty reporting - Key areas subject to regular reporting to the Board include Treasury and Risk Management, Environmental, Legal and Insurance matters; and AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 Investment appraisal - Guidelines for capital expenditure include annual budgets, detailed appraisal and review procedures, levels of authority and due diligence requirements where businesses are being acquired or divested. Comprehensive practices have been established to ensure: • capital expenditure and revenue commitments above a certain size, obtain prior Board approval; • occupational health and safety standards and management systems are monitored and reviewed to achieve high standards of performance and compliance with regulations; • business transactions are properly authorised and executed; • the quality and integrity of personnel is maintained (see below); • financial reporting accuracy and compliance with the financial reporting regulatory framework (see below); and • environmental regulation compliance (see below). Quality and integrity of personnel Written confirmation of compliance with policies of the Company is obtained from all operating units. Formal appraisals are conducted at least annually for all employees. Training and development and appropriate remuneration and incentives with regular performance reviews create an environment of co- operation and constructive dialogue with employees and senior management. A formal succession plan has been established to ensure competent and knowledgeable employees fill senior positions, as and when retirements or resignations occur. Financial reporting The Chief Executive Officer and the Chief Financial Officer / Company Secretary have declared, in writing to the Board, that the Company’s financial reports are founded on a sound system of risk management and internal compliance and control. Monthly actual results are reported against budgets approved by the directors and revised forecasts for the year are prepared regularly. Environmental regulation The Company’s operations are not subject to significant environmental regulations under either Commonwealth or State legislation. The Board believes that the Company has adequate systems in place for the management of its environmental requirements and is not aware of any breaches of those environmental requirements as they apply to the Company. Assessment of effectiveness of risk management Internal audit To further assist the Board in ensuring compliance with these internal controls and risk management programs, the Company allocated the responsibilities of the Internal Audit function to a key employee within the Company’s compliance department. This role is to oversee and regularly review the effectiveness of the abovementioned compliance and control systems and conduct regular audits against the International and Australian Standards as well as against all operating policies and procedures. The Audit Committee is responsible for approving the internal audit plan to be undertaken during the year and for the scope of the work to be performed.  ASX Corporate Governance Council’s Recommendations 7.1,7.2,7.3,7.4 Principle 8 Remunerate fairly and responsibly Remuneration and Nomination Committee The members of the Committee during the year are set out below: Composition of the Remuneration and Nomination Committee Chairman: Mr SL Wallis AO (Independent Non-Executive Director) Members: Mr GJ Campbell (Independent Non-Executive Director) Mr ML Ludski (Chief Financial Officer / Company Secretary) The Remuneration and Nomination Committee has a documented Charter which is regularly reviewed and approved by the Board. A majority of members are independent non-executive directors and the chairman of the Committee is not the Chairman of the Board. The Chief Executive Officer and Human Resources/Payroll Manager are invited to attend the Remuneration and Nomination Committee meetings, as required, to discuss senior executives’ performance and remuneration packages. The Chief Executive Officer and Chief Financial Officer / Company Secretary are not involved in matters pertaining to their own remuneration. During the year under review, the Committee met three times and the directors’ attendance record is disclosed in the table of directors’ meetings on page 19 of this Report. The main responsibilities of the Remuneration and Nomination Committee are to: • review the composition of the Board and make evaluations and recommendations thereon; • identify and evaluate potential candidates as non-executive directors and report findings to the Board; • recommend the selection, appointment, induction process and succession planning process for the Chief Executive Officer, the Chief Financial Officer / Company Secretary and other senior executives; • recommend to the Board ways in which the skills, experience and expertise levels of existing directors and senior executives can be enhanced and developed; • conducts an annual review of performance of the Chief Executive Officer, the Chief Financial Officer / Company Secretary and the senior executives reporting directly to them, and report findings to the Board; • review and make the Board on recommendations remuneration packages and incentive policies applicable to the Chief Executive Officer, Chief Financial Officer / Company Secretary, senior executives and directors themselves; and to • perform, at least annually, a performance evaluation of the Committee members to ensure delivery on its Charter and continually enhance the Committee’s contribution to the Board. Further details of the Remuneration and Nomination Committee’s responsibilities are outlined in its Charter, which is available on the Company’s website. The policy and procedure for appointment of directors also forms a part of the Committee’s Charter. 17 Remuneration Report The Remuneration Report is set out on pages 20 to 25 of this Report. Remuneration policies Remuneration levels for key personnel of the Company are competitively set to attract and retain appropriately qualified and experienced executives and directors. The Remuneration and Nomination Committee obtains independent advice on the appropriateness of remuneration packages, given trends in comparative companies both locally and internationally. The remuneration structures explained below are designed to attract suitably qualified candidates, reward the achievement of strategic objectives and achieve the broader outcome of creation of value for shareholders. The remuneration structures take into account: • the capability and experience of key management personnel; • management performance against key performance indicators the Company’s individual contributions to (KPIs) and performance; • the Company’s performance includes; - revenue and earnings; and - growth in share price and delivering increased returns to shareholders. Remuneration packages include a mix of fixed and variable remuneration and short-term and long-term performance-based incentives. In addition to salaries, the Company also provides non- cash benefits to its key management personnel and contributes to defined contribution superannuation plans on their behalf. Senior executives may receive bonuses based on the achievement of specific performance hurdles. The performance hurdles are a blend of the Company’s and each relevant segment’s result. In the year under review, no incentive payments were made as Company performance did not reach the minimum threshold levels. The Company does not have any profit-share plan. Total remuneration for all non-executive directors, last voted upon by shareholders is not to exceed $500,000 per annum. The base fee for individual non-executive directors for the financial year under review was $70,000 per annum, excluding superannuation and covers all main Board activities. Membership of Committees is remunerated in addition to the base fee as outlined in the Remuneration Report on page 21 of this Report. Non-executive directors do not receive any performance related remuneration or bonuses or retirement benefits other than statutory superannuation payments.  ASX Corporate Governance Council’s Recommendations 8.1, 8.2, 8.3 AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 18 Annual Financial Report For the year ended 30 June 2010 CONTENTS PAGE Directors’ report. ...........................................................................................................................................................................................19 Consolidated statement of comprehensive income ............................................................................................................31 Consolidated statement of changes in equity ..........................................................................................................................32 Consolidated statement of financial position ...........................................................................................................................34 Consolidated statement of cash flows ...........................................................................................................................................35 Notes to the financial statements .....................................................................................................................................................36 Directors’ declaration .................................................................................................................................................................................78 Independent auditor’s report ..............................................................................................................................................................79 Lead auditor’s independence declaration ...................................................................................................................................80 AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 DIRECTORS’ REPORT For the year ended 30 June 2010 19 The directors present their report together with the financial report of Ainsworth Game Technology Limited (‘the Company’) and of the Group (‘the Company and its subsidiaries and any interest in associates’) for the financial year ended 30 June 2010 and the auditor’s report thereon. 1. Directors The directors of the Company at any time during or since the end of the financial year are: Name, qualifications and independence status Current Mr Leonard Hastings Ainsworth Executive Chairman Age Experience, special responsibilities and other directorships 87 yrs • Fellow of the Institute of Company Directors in Australia and the Australian Institute of Management • Fifty-six years gaming industry experience • Founder and former Managing Director of Aristocrat • Life member – Clubs N.S.W. • • G2E Asia Gaming Visionary Award Recipient in June 2010 • Director and Chairperson since 1995 – Executive Chairperson since 2003 Inducted into the Australian Gaming Hall of Fame in 1994 and U.S Gaming Hall of Fame in 1995 Mr Stewart Laurence Wallis AO, BCE (Hon), FIE Aust Lead Independent Non-Executive Director 76 yrs • Fellow of the Institute of Engineers, Australia • Advisory Board member of St Hilliers Contracting Pty Ltd • Former Chief Executive and Director of Leighton Holdings Limited • Director since 2002 • Chairperson of Remuneration and Nomination Committee and Regulatory and Compliance Committee • Member of Audit Committee Mr Graeme John Campbell Independent Non-Executive Director 53 yrs • Graeme has specialised in the area of liquor and hospitality for over 27 years in corporate consultancy services with particular emphasis on hotels and registered clubs • Chairman of Harness Racing NSW • Director of Central Coast Stadium • Director of Blue Pyrenees Wines • Chairman of Operational Committee of Panthers Group/ING Entertainment Fund Joint Venture • Director since 2007 • Chairperson of Audit Committee • Member of Regulatory and Compliance Committee and Remuneration and Nomination Committee Mr Michael Bruce Yates Independent Non-Executive Director 56 yrs • Michael has extensive commercial and corporate law experience in a career spanning over 30 years • He is a former senior corporate partner of Sydney Law practices Holding Redlich and Dunhill Madden Butler and has acted for a number of clients involved in the gaming industry. • Appointed Director on 15 December 2009 • Member of Audit Committee from appointment Mr Daniel Eric Gladstone Executive Director and Chief Executive Officer 55 yrs • Danny has held senior positions within the gaming industry over a successful career spaning 36 years Inducted into the Club Managers Association Australia Hall of Fame in 2000 • • Chief Executive Officer since 2007 • Appointed Executive Director on 25 February 2010 • Member of Regulatory and Compliance Committee 2. Company secretary Mr Mark L Ludski has held the position of Company Secretary since 2000. Mr ML Ludski previously held the role of Finance Manager with another listed public company for ten years and prior to that held successive positions in two leading accounting firms where he was employed in each of their respective audit, taxation and business advisory divisions. Mr ML Ludski is a Chartered Accountant holding a Bachelor of Business degree, majoring in accounting and sub-majoring in economics. 3. Directors’ meetings The number of directors’ meetings (including meetings of committees of directors) and number of meetings attended by each of the directors of the Company during the financial year are: Director Current Mr LH Ainsworth Mr SL Wallis Mr GJ Campbell Mr MB Yates Mr DE Gladstone Board Meetings Audit Committee Meetings Remuneration & Nomination Committee Meetings Regulatory & Compliance Committee Meetings A 10 10 10 6 4 B 10 10 10 6 4 A - 2 2 1 - B - 2 2 1 - A - 3 3 - - B - 3 3 - - A - 5 5 - 1 B - 5 5 - 2 A - Number of meetings attended B - Number of meetings held during the time the director held office during the year AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 20 DIRECTORS’ REPORT (continued) For the year ended 30 June 2010 4. Remuneration report 4.1 Principles of compensation - audited Remuneration is referred to as compensation throughout this report. Key management personnel have authority and responsibility for planning, directing and controlling the activities of the Company and the Group, including directors of the Company and other executives. Key management personnel comprise the directors of the Company and executives for the Company and the Group including the five most highly remunerated Company and Group executives. Compensation levels for key management personnel and secretaries of the Company, and key management personnel of the Group are competitively set to attract and retain appropriately qualified and experienced directors and executives. The Remuneration and Nomination Committee reviews market surveys on the appropriateness of compensation packages of both the Company and the Group given trends in comparative companies both locally and internationally and the objectives of the Company’s compensation strategy. The compensation structures explained below are designed to attract suitably qualified candidates, reward the achievement of strategic objectives, and achieve the broader outcome of creation of value for shareholders. The compensation structures take into account: • the capability and experience of the key management personnel; • the key management personnel’s performance against key performance indicators (KPI’s) and individual contributions to the Group’s performance; • the Group’s performance includes: - revenue and earnings; and - growth in share price and delivering returns on shareholder wealth. Compensation packages include a mix of fixed and variable compensation and short-term and long-term performance-based incentives. In addition to their salaries, the Group also provides non-cash benefits to its key management personnel, and contributes to post- employment defined contribution superannuation plans on their behalf. Fixed compensation Fixed compensation consists of base compensation (which is calculated on a total cost basis and includes any FBT charges related to employee benefits including motor vehicles), as well as employer contributions to superannuation funds. Compensation levels are reviewed annually by the Remuneration and Nomination Committee through a process that considers individual, segment and overall performance of the Group. In addition market surveys are obtained to provide further analysis so as to ensure the directors’ and senior executives’ compensation is competitive in the market place. A senior executive’s compensation is also reviewed on promotion. Performance-linked compensation Performance linked compensation includes both short-term and long-term incentives and is designed to reward key management personnel for meeting or exceeding their financial and personal objectives. The short-term incentive (STI) is an ‘at risk’ bonus provided in the form of cash, while the long-term incentive (LTI) is provided as options over ordinary shares of the Company under the rules of the Employee Share Option Plan (see note 24 to financial statements). In addition to their salaries, selected key sales management personnel receive commission on sales within their specific business segments as part of their service contracts. Short-term incentive bonus Each year the Remuneration and Nomination Committee sets the Key Performance Indicators (KPIs) for the key management personnel. The KPIs generally include measures relating to the Group, the relevant segment, and the individual, and include financial, people, customer, strategy and risk measures. The measures are chosen as they directly align the individual’s reward to the KPIs of the Group and to its strategy and performance. The financial performance objective is ‘profit after tax’ compared to budgeted amounts which is designed to reward key management personnel for the Group’s performance and not simply the achievement of individual segment results. The non-financial objectives vary with position and responsibility and include measures such as achieving strategic outcomes, safety and environmental performance, customer satisfaction and staff development. At the end of the financial year the Remuneration and Nomination Committee assess the actual performance of the Group, the relevant segment and individual against the KPI’s set at the beginning of the financial year. The Remuneration and Nomination Committee recommends the cash incentive to be paid to the individuals for approval by the board. The method of assessment was chosen as it provides the Committee with an objective assessment of the individual’s performance. Long-term incentive Options are issued under the Employee Share Option Plan (ESOP) (made in accordance with thresholds set in plans approved by shareholders at the 2001 Annual General Meeting (AGM)) and it provides for key management personnel to receive options over ordinary shares for no consideration. The ability to exercise the options is conditional on the Group achieving certain performance hurdles. Performance hurdles are based on share price growth and are only exercisable once the Company’s share price achieves levels ranging from 100 – 300% of the exercise price established when the share options are granted. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 21 In assessing whether the performance hurdles have been met, the Remuneration and Nomination Committee receives independent data from the Australian Securities Exchange (ASX) which provides information required to assess Volume Weighted Average Price (VWAP). Short-term and long-term incentive structure The Remuneration and Nomination Committee considers that the above performance-linked remuneration structure is appropriate because the key management personnel have the ability to reach a level of performance which qualifies them for the maximum bonus and options. In the current year the Group did not reach its targets and has resulted in no short-term incentives being recommended for payment. Other benefits Key management personnel can receive additional benefits such as non-monetary benefits, as part of the terms and conditions of their appointment. Non-cash benefits typically include payment of club memberships and motor vehicles. The Company pays fringe benefits tax on these benefits. Service contracts It is the Group’s policy that service contracts for key management personnel are unlimited in term but capable of termination by either party on 3 months notice and that the Group retains the right to terminate the contracts immediately, by making payment equal to 3 months pay in lieu of notice. The Group has entered into service contracts with each key management person that provide for the payment of benefits where the contract is terminated by the Group. The key management persons are also entitled to receive on termination of employment their statutory entitlements of accrued annual and long service leave, together with any superannuation benefits. The service contract outlines the components of remuneration paid to the key management personnel but does not prescribe how remuneration levels are modified year to year. Remuneration levels are reviewed each year to take into account cost-of-living changes, any change in the scope of the role performed by the senior executive, retention of key personnel and any changes required to meet the principles of the remuneration policy. Mr Danny Gladstone, Executive Director and Chief Executive Officer (CEO), has a contract of employment dated 5 February 2007 with the Company. The contract specifies the duties and obligations to be fulfilled by the CEO and provides that the board and CEO will early in each financial year, consult and agree objectives for achievement during that year. The CEO has no entitlement to termination payment in the event of removal for misconduct as specified in his service contract. Refer to note 28 of the financial statements for details on the financial impact in future periods resulting from the Group’s commitments arising from non-cancellable contracts for services with key management personnel. Non-executive directors The fees paid to non-executive directors reflect the demands and responsibilities associated with their roles and the global nature of the operations within the highly regulated environment within which the Company operates. Fees incorporate an allowance for the onerous probity requirements placed on non-executive directors by regulators of the global jurisdictions in which the Company is or proposes to operate in. The Company’s non-executive directors only receive fees, including superannuation, for their services as compensation. In addition to these fees the cost of reasonable expenses which are reimbursed as incurred. Non-executive directors do not currently receive or participate in any performance related remuneration. The level of fees paid to non- executive directors has been established based on the demands and responsibilities of their positions and have been set with reference to fees paid to other non-executive directors of comparable companies. Current fees for directors effective 1 July 2006, excluding superannuation, are set out below. The Executive Chairman and CEO do not receive any additional fees for undertaking Board or Committee responsibilities. Other non-executive directors who also chair or are a member of a committee receive a supplementary fee in addition to their annual remuneration. POSITION Australian resident non-executive director Chair of Audit Committee Chair of Regulatory and Compliance Committee Chair of Remuneration and Nomination Committee Member of Audit Committee Member of Regulatory and Compliance Committee Member of Remuneration and Nomination Committee $ (per annum) 70,000 10,000 10,000 6,000 6,000 6,000 4,000 Total remuneration for all non-executive directors, last voted upon by shareholders at the 2000 AGM, is not to exceed $500,000 per annum. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 22 ) d e u n i t n o c ( T R O P E R ’ S R O T C E R D I 0 1 0 2 e n u J 0 3 d e d n e r a e y e h t r o F ) d e u n i t n o c ( t r o p e r n o i t a r e n u m e R . 4 i e h t e v e c e r o h w s e v i t u c e x e p u o r G l t n a v e e r d n a s e v i t u c e x e y n a p m o C d e m a n e v i f e h t f o h c a e y n a p m o C e h t f o r o t c e r i d h c a e f o n o i t a r e n u m e r f l o t n e m e e r o a m h c a e f j o t n u o m a d n a e r u t a n e h t f o s l i a t e D d e t i d u a – ) p u o r G d n a y n a p m o C ( n o i t a r e n u m e r ’ s r e c ffi o e v i t u c e x e d n a ’ s r o t c e r i D 2 4 . s n o i t p o f o e u l a V f o n o i t r o p o r p s a n o i t a r e n u m e r % n o i t r o p o r P n o i t a r e n u m e r f o d e t a l e r e c n a m r o f r e p % l a t o T $ d e s a b - e r a h S s t n e m y a p d n a s n o i t p O ) B ( s t h g i r $ n o i t a n m r e T i n o i t a u n n a r e p u S y r a t e n o m - n o N h s a c I T S s e l a S - t s o P t n e m y o p m e l m r e t - t r o h S : e r a l e n n o s r e p t n e m e g a n a m y e k r e h t o d n a n o i t a r e n u m e r t s e h g h i s t i f e n e b $ s t i f e n e b $ l a t o T $ s t i f e n e b $ ) A ( s u n o b n o i s s i m m o c s e e f & y r a l a S $ $ $ s r o t c e r i d e v i t u c e x e - n o N t n e r r u C - S R O T C E R D I D U A n I AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 - - - - - - - - - - - - - - - - - - - - 0 8 2 0 0 1 , 0 8 2 0 0 1 , - 0 0 1 8 9 , 0 0 1 8 9 , 8 7 2 5 4 , - 0 0 0 0 3 2 , 0 0 0 0 3 2 , 4 0 9 8 2 2 , - - - - - - - - - - - - - - - - - - - - 0 8 2 8 , 0 8 2 8 , 0 0 1 8 , 0 0 1 8 , 9 3 7 3 , - - - - 4 3 5 5 1 , 0 0 0 2 9 , 0 0 0 2 9 , 0 0 0 0 9 , 0 0 0 0 9 , 9 3 5 1 4 , - - - - - - - 0 0 0 0 3 2 , 0 0 0 0 3 , 0 0 0 0 3 2 , 0 0 0 0 3 , - - 0 7 3 3 1 2 , 1 9 4 7 2 , - - - - - - - - - - - - - - - - - - - - 0 0 0 2 9 , 0 0 0 2 9 , 0 0 0 0 9 , 0 0 0 0 9 , 9 3 5 1 4 , - - , 0 0 0 0 0 2 0 0 0 0 0 2 , 9 7 8 5 8 1 , 0 1 0 2 9 0 0 2 0 1 0 2 9 0 0 2 0 1 0 2 9 0 0 2 0 1 0 2 9 0 0 2 0 1 0 2 9 0 0 2 ) 9 0 0 2 r e b m e c e D 5 1 d e t n o p p A i ( l l e b p m a C J G r M s e t a Y B M r M s r o t c e r i d e v i t u c e x E h t r o w s n A H L r i M s i l l a W L S r M ) n a m r i a h C e v i t u c e x E ( ) 0 1 0 2 y r a u r b e F 5 2 d e t n o p p A i ( ) 1 ( e n o t s d a G E D l r M - - - - - - - - % 1 - - - - % 1 - - - - - - - - - - - - - - s n o i t p o f o e u l a V f o n o i t r o p o r p s a n o i t a r e n u m e r % n o i t r o p o r P n o i t a r e n u m e r f o d e t a l e r e c n a m r o f r e p % l a t o T $ s t h g i r $ s t i f e n e b $ s t i f e n e b $ l a t o T $ s t i f e n e b $ 1 9 1 4 3 4 , 7 9 4 8 6 6 , 0 6 0 5 9 3 , 7 7 6 1 9 3 , 8 6 7 8 9 2 , 8 6 7 8 8 2 , 1 2 5 0 9 2 , 1 8 2 2 0 2 , - - - - - - - - - 7 4 2 9 0 4 , - - 6 5 1 8 5 , 7 6 3 , 1 4 9 4 8 5 0 2 4 3 , - 6 6 7 2 5 , - - - - - - - - - - - - - - 8 4 3 1 , 0 4 6 6 2 , 6 6 4 9 2 , 0 0 0 5 4 , 2 4 5 2 2 , 2 4 5 2 2 , 2 9 1 1 2 , 2 9 1 1 2 , 5 2 1 9 1 , 8 3 0 3 1 , - 1 9 4 3 , 0 8 2 4 , 9 4 0 6 , - 7 5 1 2 , 5 2 7 4 0 4 , 5 4 1 2 5 , 7 9 4 3 2 6 , 6 3 0 5 8 , 8 1 5 2 7 3 , 7 0 6 8 9 , 5 3 1 9 6 3 , 4 2 2 5 9 , 6 7 5 7 7 2 , 0 0 0 4 2 , 6 7 5 7 6 2 , 0 0 0 4 1 , 6 9 3 1 7 2 , 0 5 5 2 4 , 3 4 2 9 8 1 , 8 2 2 3 3 , - - 8 9 2 4 5 , 3 0 6 6 , - 9 6 9 3 2 , - - 9 1 6 3 0 4 , 5 7 6 2 2 , 2 7 4 5 7 5 , 0 1 8 5 2 , - - - - - - - - - - - - - - ) A ( s u n o b n o i s s i m m o c s e e f & y r a l a S $ $ $ - - - - - - - - , 0 8 5 2 5 3 1 6 4 8 3 5 , 1 1 9 3 7 2 , 1 1 9 3 7 2 , 6 7 5 3 5 2 , 6 7 5 3 5 2 , 6 4 8 8 2 2 , 5 1 0 6 5 1 , - - 5 2 9 5 , 0 7 7 1 4 , 2 3 7 7 2 2 , 2 1 2 3 5 1 , 7 6 0 6 3 3 , 5 9 5 3 1 2 , - - - 9 6 9 3 2 , 0 1 0 2 9 0 0 2 0 1 0 2 9 0 0 2 0 1 0 2 9 0 0 2 0 1 0 2 9 0 0 2 0 1 0 2 9 0 0 2 0 1 0 2 9 0 0 2 0 1 0 2 9 0 0 2 y r a t e r c e S y n a p m o C / r e c ffi O l i i a c n a n F f e h C i t n e r r u C - S E V I T U C E X E ) 1 ( e n o t s d a G E D l r M D U A n I r e c i f f O e v i t u c e x E f e h C i i k s d u L L M r M s a c i r e m A - R H & e c n a n F i , s n o i t a r e p O P V ) 2 ( s o r d a u C M r M r e l z t i e M R r M r e m r o F s n o i t a r e p O d n a s e a S P V r o n e S l i s n o i t a r e p O g n i r u t c a f u n a M , r e g a n a M a r e n e G l ) 8 0 0 2 t s u g u A 2 2 d e n g i s e r ( n a r r u C P r M ) 0 1 0 2 l i r p A 0 3 d e n g i s e r ( ) a c i r e m A h t r o N ( g n i r u t c a f u n a M r e g a n a M a r e n e G l r e p o o C I r M ) 9 0 0 2 r e b o t c O 7 d e t n o p p A i ( i s e c v r e S l i a c n h c e T - r e g a n a M a r e n e G l e s e z z u r B V r M d e s a b - e r a h S s t n e m y a p - t s o P t n e m y o p m e l m r e t - t r o h S d n a s n o i t p O n o i t a n m r e T i n o i t a u n n a r e p u S y r a t e n o m - n o N h s a c I T S s e l a S ) d e u n i t n o c ( d e t i d u a – ) p u o r G d n a y n a p m o C ( n o i t a r e n u m e r ’ s r e c ffi o e v i t u c e x e d n a ’ s r o t c e r i D 2 4 . ) d e u n i t n o c ( t r o p e r n o i t a r e n u m e R . 4 23 . r e l z t i e M R r M f o n o i t a n g i s e r e h t g n w o i l l o f 0 1 0 2 y a M 1 e v i t c e ff e r e c ffi o t n e m e g a n a M y e K a s a d e fi i s s a c s a w s o r d a u C M l r M i . t n e m t n o p p a s i h t o t p u s d o i r e p e h t o t l s e t a e r e v o b a e h t d n a 0 1 0 2 y r a u r b e F 5 2 n o r o t c e r i D e v i t u c e x E n a s a t n e m t n o p p a s i h i l i t n u p u e v i t u c e x e n a s a w e n o t s d a G D l r M ) 1 ( ) 2 ( AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 24 DIRECTORS’ REPORT (continued) For the year ended 30 June 2010 4. Remuneration report (continued) 4.2 Directors’ and executive officers’ remuneration (Company and Group) - audited (continued) Notes in relation to the table of directors’ and executive officers’ remuneration - audited A. The short-term incentive bonus is for performance during the 30 June 2010 financial year using the criteria set out on page 20. The amount was considered on 17 June 2010 by the Remuneration and Nomination Committee who recommended that no bonuses be paid for the current period, subject to a complete review which is scheduled for September 2010. B. The fair value of the options is calculated at the date of grant using the Black Scholes and binomial lattice option-pricing models and allocated to each reporting period evenly over the period from grant date to vesting date. The value disclosed is the portion of the fair value of the options allocated to this reporting period. In valuing the options, market conditions have been taken into account. The following factors and assumptions were used in determining the fair value of options on grant date: Grant date 2 July 2007 Expiry date 2 July 2012 Fair value per option Exercise price Price of shares on grant date Expected volatility Risk free interest rate Dividend yield $0.06 $0.50 $0.38 50% 6.35% - Details of performance related remuneration Details of the Group’s policy in relation to the proportion of remuneration that is performance related is discussed on page 20. No short term incentive bonuses have been provided for the year ended 30 June 2010. 4.3 Equity instruments All options refer to options over ordinary shares of Ainsworth Game Technology Limited, unless otherwise stated, which are exercisable on a one-for-one basis under the ESOP. 4.3.1 Options and rights over equity instruments granted as compensation – audited Details on options over ordinary shares in the Company that were granted as remuneration to each key management person during the reporting period and details on options that vested during the reporting period are as follows: Number of options granted during 2010 Number of options vested during 2010 Grant date Fair value per option at grant date ($) Exercise price per option ($) Expiry date EXECUTIVES Current Mr M Cuadros Former Mr R Meitzler - - 02/07/2007 02/07/2007 40,000 40,000 0.06 0.06 0.50 0.50 02/07/2012 02/07/2012 All options issued from 1 July 2007 expire on the earlier of their expiry date or termination of the individual’s employment. The options are exercisable on an annual basis three years from grant date. In addition to a continuing employment service condition, the ability to exercise options is conditional on the Group achieving certain performance hurdles. Details of the performance criteria are included in the long-term incentives discussion on page 20. Further details, including grant dates and exercise dates regarding options granted to executives under the ESOP are in note 24 to the financial statements. 4.3.2 Modification of terms of equity-settled share-based payment transactions – audited No terms of equity-settled share-based payment transactions (including options and rights granted as remuneration to a key management person) have been altered or modified by the issuing entity during the reporting period or the prior period. 4.3.3 Exercise of options granted as compensation – audited During the reporting period no shares were issued on the exercise of options previously granted as compensation (2009: Nil). AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 25 4.3.4 Analysis of options and rights over equity instruments granted as compensation - audited Details of vesting profiles of the options granted as remuneration to each director of the Company and each of the five named Company executives and relevant Group executives and other key management personnel are detailed below. Options granted Number Date % Vested in year % Forfeited in year (A) Value yet to vest $ Financial years in which grant vests Min (B) Max (C) EXECUTIVES Current Mr ML Ludski Mr M Cuadros Former Mr R Meitzler 50,000 31/08/2004 200,000 02/07/2007 - 20% 100% 31/08/2005 - 31/08/2007 - 02/07/2008 - 02/07/2010 200,000 02/07/2007 20% 100% 02/07/2008 - 02/07/2010 Nil Nil Nil - - - A. The % forfeited in the year represents the reduction from the maximum number of options available to vest due to the highest level performance criteria not being achieved. B. The minimum value of options yet to vest is $Nil as the performance criteria may not be met and consequently the option may not vest. C. The maximum value of options yet to vest is not determinable as it depends on the market price of shares of the Company on the ASX at the date the option is exercised. The share price of the Company at 30 June 2010 was $0.09. This compares to an exercise price of $0.50 in respect of the share options. 4.3.5 Analysis of movements in options - audited The movement during the reporting period, by value, of options over ordinary shares in the Company held by each Company director and each of the five named Company executives and relevant Group executives is detailed below: Granted in year ($) Exercised in year (A) ($) Fortified in year (B) ($) Total option value in year ($) EXECUTIVES Current Mr M Cuadros Former Mr R Meitzler - - - - - 9,280 2,200 - A. No options were exercised during the year. B. The value of the options that lapsed during the year represents the benefit forgone and is calculated at the date the option lapsed using the Black Scholes model with no adjustments for whether the performance criteria have or have not been achieved. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 26 DIRECTORS’ REPORT (continued) For the year ended 30 June 2010 5. Principal activities The principal activity of the Group during the course of the financial year was the design, development, production, sale and servicing of gaming machines and other related equipment and services. There were no significant changes in the nature of the activities of the Group during the year. Objectives The Group’s objectives are to: • maintain strong operational focus on geographical markets which are expected to achieve positive contributions to the Group’s financial results; • manage and further reduce levels of investment in working capital and continue to achieve positive cash flow from operations in the ensuing financial year; • continue investment in research and development; • provide a positive return on equity through profitability and share price growth; • secure new gaming jurisdictional licences through selective entry into new international markets via distributors or direct sales channels; and • provide quality market leading products that are innovative and entertaining providing increased player satisfaction and therefore greater venue profitability. In order to meet these objectives the following action priorities will continue to apply in future financial years: • grow market share for existing business and increase revenue and operating activities, particularly in the North American market; • further reduce product and overhead costs through improved efficiencies in supply chain and inventory management; • continue to improve management of working capital; • to maintain best practice compliance policies and procedures and increase stakeholder awareness of the Group’s regulatory environment; and • ensure retention and development of key employees. 6. Operating and financial review Overview of the Group The loss after income tax for the year ended 30 June 2010 was $2.7 million compared to a loss in the corresponding 2009 year of $12.5 million. The above loss resulted in a second half profit of $1.5 million compared to the previously reported loss of $4.2 million for the six month period ended 31 December 2009. Sales revenue achieved was $69.3 million compared to $45.2 million in the corresponding period in 2009, an increase of 53%, primarily due to further improvements in product performance in domestic markets in the current period. Further diversification and less reliance on a relatively small number of international markets has minimised the impact of difficult market conditions presently being encountered. Domestic revenue was $48.2 million, an increase of 110% on the corresponding period in 2009. This increase is attributed to an increased range of innovative product offerings and sustainable high product performance in the period under review resulting from the re- enforcement and expansion of changes in product development strategies undertaken. Domestic revenue in the period under review represented 70% of total revenue, compared to 51% in the previous corresponding period. Continued investment and focus within the Americas, primarily within North American, including progression of the necessary product approval in the Nevada market should ensure progressive revenue growth once the impact of global economic conditions improve. Revenue from the Americas was $18.2 million, an increase of 7% on the previous year in 2009. Revenue within Europe was minimal in the current period compared to $2.4 million in 2009 due to continued financial uncertainties due to global financial conditions. Investments for future performance Increased investment during the current period in licensing and research and development will enable the Group to be at the forefront of technology in gaming related products. The global product development strategy previously introduced has ensured an extensive product range is available to targeted markets. Operating system upgrades and the streamlining of product development procedures have reduced lead times to market, including the time for regulatory approvals. The regulatory nature of the gaming industry results in significant delays between securing a jurisdictional licence and obtaining the necessary game approvals before sales can be made to that jurisdiction. The Company continues to pursue product development in all jurisdictions where licences have been secured and is progressively obtaining product approvals to enable commercial realisation of additional revenue opportunities. Significant compliance related costs are an inherent part of the supply of equipment to the gaming industry which assists in maintaining a high standard of integrity within the industry. The Company continues to invest in the future and through its licensing strategy has expanded its reach into North America. The North America market remains a key focus for the Company’s compliance and licensing strategic plan. The Company continues to maintain a high level of regulatory compliance based on recognised Australian and International standards and accreditation. The Company reinforced its commitment regarding continuous improvement by successfully renewing and extending its accreditation to June 2013 for its quality management system against the AS/NZ ISO 9001:2008 standard. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 27 The Company has consolidated its licensing strategy targeting incremental tribal applications in the US particularly focusing on developing medium to long term commercial relationships as well as emerging global markets in Asia, Europe and the Americas. As at 30 June 2010, the Company renewed 50 licences and is approved to conduct business in 20 US states, three (3) provinces in Canada and in Singapore. As previously announced the Company was granted a licence in November 2009 to distribute its range of products, once approvals are received within Nevada. Other major approvals were granted by the states of Illinois, Maryland and West Virginia, the Seneca tribe in New York, the Canadian province in Alberta and Singapore. In addition, the states of Indiana and Michigan granted permanent licences to replace the temporary licences that were previously issued. The Group has 71 tribal licences (compared to 61 at the same period last year) across California, Connecticut, Florida, Michigan, Minnesota, New Mexico, New York, North Dakota, Oklahoma, Oregon and Wisconsin. The Company continues to follow a licensing strategy to gain further state and tribal licenses in North America and additional Canadian provinces. This strategy targets jurisdictions where the necessary product approvals are either transferrable or can be readily adapted. Review of financial conditions Capital structure and treasury policy The Company currently has on issue 278,942,304 ordinary shares and 19,714,717 convertible notes. In December 2008 the Company received the necessary approval from security holders to extend the maturity date of the convertible notes from 31 December 2009 to either 31 December 2011 or 2014. Mr LH Ainsworth and his spouse (including entities they control) who collectively own 62% of the notes on issue at the time of seeking approval agreed to extend the maturity of their convertible notes until 31 December 2014. All registered noteholders are given a right to extend their notes for the same period should they elect to do so. The Company has the right to redeem all convertible notes that are extended, including those held by Mr LH Ainsworth and his spouse on 31 December 2011 or at the end of every six months until the maturity date of 31 December 2014. The interest rate payable on the convertible notes has been varied from 8% per annum to 10% per annum with effect from 1 January 2010. The Group is exposed to foreign currency risks on sales and purchases that are denominated in currencies other than AUD. The Group continually monitors and reviews the financial impact of currency variations and should facilities be available looks at establishing call options to minimise the volatility of changes in foreign currency exchange rates. No call options were placed in the current period due to the expectation of a reduction in the Group’s net asset exposure and the favourable reversal of previous translational impacts. Liquidity and funding The Company currently has a loan facility in place of $40 million with an entity controlled by the Executive Chairman, Mr LH Ainsworth, of which $26 million is unutilised at the reporting date. The maturity date of this facility was formally amended to a date that is 4 years from the will of Mr LH Ainsworth coming into effect and does not call for repayment of interest accrued until this maturity date. In addition to the above an additional $6 million trade finance facility has been established with an entity controlled by the Executive Chairman, Mr LH Ainsworth of which $1.0 million is unutilised at the reporting date. Cash flows from operations The cash inflow from operations for the period under review was $10.6 million compared to an outflow of $1.6 million in the corresponding period in 2009. The Group continues to monitor closely its working capital requirements and has significantly reduced the extent of credit offered on sales made in all jurisdictions. Continued efforts to reduce the Group’s investment in working capital have been made during the current period under review. Reduction in receivables and inventory holdings have occurred which have assisted in the turnaround and improvement of cashflows from operating activities. Impact of legislation and other external requirements The Group continues to work with regulatory authorities to ensure that the necessary licences to support its operations within Australia and overseas are granted on a timely and cost effective basis. The granting of such licences will allow the Group to expand its operations into new international markets. Market conditions within Australia presented opportunities during the year under review as previously introduced legislative and regulatory changes have become established. These changes specifically in relation to smoking legislation and increased government taxes were progressively offset by the Group’s innovative product development and the implementation of new strategies. Review of principal businesses Revenue Sales revenue of $69.3 million was recorded in the period under review compared to $45.2 million in the corresponding period in 2009, an increase of 53%. Within domestic markets revenue achieved was $48.2 million, an increase of 110% over the corresponding period in 2009. The increased revenue within Australia was primarily due to the product development strategies previously introduced providing improved game performance. Within New South Wales positive signs of recovery emerged in the period following the previously introduced legislative and regulatory changes, resulting in increased revenue of 118 % compared to the corresponding period in 2009. Further growth due to development investment within the Victorian market resulted in revenue of $6.4 million, an increase of 59% over the previous year. This market represented 13% of total domestic revenue in the period, however recent licensing changes which impact the two major operators continue to create uncertainties. Continued growth within Queensland followed product initiatives introduced during the financial year. This market achieved a 106% increase in revenue compared to the previous corresponding period in 2009. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 28 DIRECTORS’ REPORT (continued) For the year ended 30 June 2010 6. Operating and financial review (continued) Review of principal businesses (continued) Revenue (continued) International revenue represented 30% of total revenue for the period compared to 49% in the prior period in 2009. Total international revenue fell by 5% to $21.0 million in the period. The fall in international revenue was attributable to minimal revenue within Europe which fell by $2.3 million in the current period compared to the prior period in 2009. Excluding Europe international revenue increased by 6% on 2009. The revised distribution arrangements previously initiated within Europe, have assisted in minimising the adverse impacts of legislative changes and global financial uncertainties. The Group continues to explore the strategic game content licensing agreement entered into with Bally Gaming within the United States of America and Canada. This licensing agreement will expand the Group’s distribution channels through Bally’s extensive sales and marketing activities, as well as their currently installed base in the subject territory. The agreement has an initial term of three years and is expected to positively contribute to the Group’s result when further games licensed under the agreement receive the necessary regulatory approval. Operating costs Cost of sales in the period were $31.8 million compared to $23.3 million in the corresponding period in 2009. Gross margins for the year under review were 54% compared to 48% in the previous period in 2009. It is expected that margins will be further increased in the 2011 financial year due to higher selling prices of the recently released A560 electronic gaming machine, continued overhead efficiencies through production processes and reduced material costs. Operating costs, excluding cost of sales and financing costs, were $33.1 million compared to $33.0 million in the corresponding period in 2009. Included in operating costs were research and development expenditure of $10.2 million, a decrease of $2.2 million over the previous year in 2009. This investment in product development programs provides the Group with an ongoing product platform release strategy. Research and development, excluding the impact of capitalisation, amortisation and impairment losses on capitalised development expenditure, resulted in an increase in expenditure of 5% and represented 18% of revenue compared to 25% in the corresponding period in 2009. Continued cost reductions assisted the Group to offset the immediate impact of lower international revenue resulting from the global financial crisis and further align cost structures with realistic revenue expectations. Further investment within the key North American market occurred during the current period which is expected to allow the Group to sell product under a direct sales model thus providing the opportunity to increase revenue contributions in FY11 and beyond as economic market conditions improve. Administration costs include impairment losses in the current period of $0.2 million on previously acquired goodwill and development costs capitalised. Excluding impairment losses administration costs fell by 1% over the prior corresponding period in 2009. Financing costs Net financing costs were $7.0 million in the period, an increase of $6.3 million on the corresponding period in 2009. This increase was primarily a result of net foreign exchange losses of $0.5 million in the current period compared to currency gains of $5.3 million in the corresponding period in 2009. Significant changes in the state of affairs There has been increased investment in research and development to ensure product development changes continue to positively affect product performance. The reduced operating cost structure is now geared to continue the financial turnaround experienced in the second half of the current financial year. The Global Financial Crisis (GFC) adversely impacted international revenue during the current period. Further investment is envisaged in 2011 within the Americas following the recent granting of a Nevada licence, to ensure the Group is positioned to capitalise on the significant opportunities within this region. The development and recent release of new product in selected markets is expected to enable the Group to continue to improve performance. The continued commercial relationship with Bally Gaming will provide ongoing revenue and further opportunities following the recent approval of the Group’s games on Bally’s gaming platform. Other than the matters noted above, there were no significant changes in the state of affairs of the Group during the financial year. 7. Dividends No dividends were paid or declared by the Company since the end of the previous financial year. The directors do not recommend that any dividends be paid in respect of the 2010 financial year. 8. Events subsequent to reporting date There has not arisen in the interval between the end of the financial year and the date of this report any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the Company, to affect significantly the operations of the Group, the results of those operations, or the state of affairs of the Group, in future financial years. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 29 9. Likely developments The Group will continue to evaluate and pursue further gaming licences and seek the necessary product approvals of the Company’s products to ensure sustainable revenue growth and continued improvement in results is achieved in future. This strategy is expected to achieve increased market share in targeted geographical business sectors which will positively contribute to Group results during future financial years. Further investment in product development for current and new products is expected to provide increased revenue and profitable results in the coming financial year. The difficult market conditions caused by the GFC has impacted international revenue opportunities in the short term. Further investment is planned in the Americas which will ensure the Company is positioned to capitalise on revenue opportunities as and when conditions improve. Further information about likely developments in the operations of the Group and the expected results of those operations in future financial years has not been included in this report because disclosure of the information would be likely to result in unreasonable prejudice to the Group. 10. Directors’ interests The relevant interest of each director in the shares, convertible notes and rights or options over such instruments issued by the companies within the Group and other related bodies corporate, as notified by the directors to the ASX in accordance with S205G(1) of the Corporations Act 2001, at the date of this report is as follows: Current Mr Leonard H Ainsworth Mr Stewart L Wallis Mr Graeme J Campbell Mr Daniel E Gladstone Ainsworth Game Technology Limited Ordinary shares Convertible notes 174,024,331 716,703 489,674 100,000 10,385,282 232,000 - - 11. Share options Options granted to directors and officers of the Company During or since the end of the financial year, the Company granted no share options over unissued ordinary shares in the Company to any of the directors or to any of the five most highly remunerated officers of the Company as part of their remuneration: Unissued shares under options At the date of this report unissued ordinary shares of the Company under option are: Expiry date 2 July 2012 Exercise price ($) 0.50 Number of shares 420,810 420,810 The Company granted 1,020,555 share options to all American employees on 2 July 2007 under an incentive plan. During or since the end of the financial year 310,250 options expired due to cessation of employment and 425,000 options lapsed leaving a balance of 420,810 under issue. The share options under this incentive plan included 200,000 options granted to Mr M Cuadros. In addition to the share options issued by the Company an incentive plan was previously introduced whereby share options were granted to all Australian employees, excluding directors and four key management personnel. The share options granted on 2 July 2007 to Australian employees totalled 10,994,707 and were granted over a portion of the personal shareholding of the Company’s Executive Chairman, Mr LH Ainsworth. During or since the end of the financial year 440,035 (2009: 808,414) options expired due to cessation of employment leaving a balance of 7,404,952 share options under issue (2009: 7,844,987). The share options under this incentive plan issued to key management personnel totalled Nil (2009: Nil) share options. An exercise price of $0.50 per Share Option has been established and exercise is subject to vesting and performance conditions being met. The number of Share Options granted to each employee reflects the number of dollars comprising their individual base salary. The vesting of these Share Options is over a three year period with performance hurdles based on the market value of the shares in the Company. The Share Options lapse automatically on cessation of employment for any reason. The options above have vesting and performance conditions, which must be satisfied prior to any of the options being exercised. The vesting condition is set with reference to the anniversary of the issue date of the option. All options expire on the earlier of their expiry date or termination of the option holders’ employment. These options do not entitle the holder to participate in any share issue of the Company or any other body corporate. Shares issued on exercise of options During or since the end of the financial year, the Company issued no ordinary shares as a result of the exercise of options. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 30 DIRECTORS’ REPORT (continued) For the year ended 30 June 2010 12. Indemnification and insurance of officers Indemnification The Company has agreed to indemnify current and former directors of the Company against all liabilities to another person (other than the Company or a related body corporate) that may arise from their position as directors of the Company and its controlled entities, except where the liability arises out of conduct involving a lack of good faith. The agreement stipulates that the Company will meet the full amount of any such liabilities, including costs and expenses. The Company has also agreed to indemnify the current directors of its controlled entities for all liabilities to another person (other than the Company or a related body corporate) that may arise from their position, except where the liability arises out of conduct involving a lack of good faith. The agreement stipulates that the Company will meet the full amount of any such liabilities, including costs and expenses. Insurance premiums Since the end of the previous financial year, the Company has paid insurance premiums in respect of directors’ and officers’ liability and legal expenses’ insurance contracts, for current and former directors and officers, including executive officers of the Company and directors, executive officers and secretaries of its controlled entities. The directors have not included details of the nature of the liabilities covered or the amount of the premium paid in respect of the directors’ and officers’ liability and legal expenses contracts, as such disclosure is prohibited under the terms of the contract. 13. Non-audit services During the year KPMG, the Company’s auditor, has performed no other services in addition to its statutory duties. Details of the amounts paid to the auditor of the Company, KPMG, for audit services provided during the year are set out below. Audit services: Auditors of the Company Consolidated 2010 $ 2009 $ Audit and review of financial reports (KPMG Australia) 179,750 200,000 14. Lead auditor’s independence declaration The Lead auditor’s independence declaration is set out on page 80 and forms part of the directors’ report for the financial year ended 30 June 2010. 15. Rounding off The Company is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 and in accordance with that Class Order, amounts in the financial report and directors’ report have been rounded off to the nearest thousand dollars, unless otherwise stated. This report is made with a resolution of the directors. LH Ainsworth Executive Chairman Dated at Sydney this 25th day of August 2010 AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 30 June 2010 31 In thousands of AUD Revenue Cost of sales Gross profit Other income Sales, service and marketing expenses Research and development expenses Administrative expenses Profit / (loss) before financing costs Financial income Financial expenses Net finance expenses Share of loss of equity accounted investees (net of income tax) (Loss) before income tax Income tax Note 7 Consolidated Company 2010 69,278 (31,784) 2009 45,164 (23,306) 2010 64,027 (27,129) 2009 43,960 (21,428) 37,494 21,858 36,898 22,532 198 (14,192) (10,213) (8,699) 161 (11,888) (12,378) (8,751) 197 (14,083) (10,213) (9,619) 367 (13,696) (12,378) (8,751) 4,588 (10,998) 3,180 (11,926) 798 (7,752) 6,023 (6,662) 789 (7,729) 6,023 (6,656) (6,954) (639) (6,940) (633) - (407) - - (2,366) (12,044) (3,760) (12,559) (355) (498) - - 8 11 11 17 12 (Loss) for the period (2,721) (12,542) (3,760) (12,559) Other comprehensive income Foreign currency translation reserve (29) (119) - - Total comprehensive income for the period (2,750) (12,661) (3,760) (12,559) Earnings per share: Basic (loss) per share (AUD) Diluted (loss) per share (AUD) 13 13 ($0.01) ($0.05) ($0.01) ($0.05) The notes on pages 36 to 77 are an integral part of these consolidated financial statements. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 32 STATEMENT OF CHANGES IN EQUITY For the year ended 30 June 2010 In thousands of AUD Balance at 1 July 2008 Total comprehensive income for the period Loss Other comprehensive income Foreign currency translation reserve Total other comprehensive income Total comprehensive income for the period Transactions with owners, recorded directly in equity Equity component of related party borrowings Share-based payment transactions Total transactions with owners Balance at 30 June 2009 Consolidated Attributable to equity holders of the Company Equity compensation reserve Fair value reserve Translation reserve Accumulated losses Total equity 866 4,981 345 (104,038) 24,527 Issued capital 122,373 - - - - - - - - - - - - 146 146 - - - - 5,063 - 5,063 - (12,542) (12,542) (119) (119) (119) - - - - - (119) (119) (12,542) (12,661) - - - 5,063 146 5,209 122,373 1,012 10,044 226 (116,580) 17,075 Balance at 1 July 2009 122,373 1,012 10,044 226 (116,580) 17,075 Total comprehensive income for the period Loss Other comprehensive income Foreign currency translation reserve Share based payment adjustment on non-vesting options Total other comprehensive income Total comprehensive income for the period Transactions with owners, recorded directly in equity Equity component of related party borrowings Share-based payment transactions Total transactions with owners Balance at 30 June 2010 - - - - - - - - - - (435) (435) (435) - 88 88 - - - - - 720 - 720 - (29) - (29) (29) - - - (2,721) (2,721) - 435 435 (29) - (29) (2,286) (2,750) - - - 720 88 808 122,373 665 10,764 197 (118,866) 15,133 The notes on pages 36 to 77 are an integral part of these consolidated financial statements. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 STATEMENT OF CHANGES IN EQUITY For the year ended 30 June 2010 33 In thousands of AUD Balance at 1 July 2008 Total comprehensive income for the period Loss Total comprehensive income for the period Transactions with owners, recorded directly in equity Equity component of related party borrowings Share-based payment transactions Total transactions with owners Balance at 30 June 2009 Company Attributable to equity holders of the Company Issued capital 122,373 Equity compensation reserve Fair value reserve Accumulated losses 866 4,981 (102,680) Total equity 25,540 - - - - - 122,373 - - - 146 146 1,012 - - (12,559) (12,559) (12,559) (12,559) 5,063 - 5,063 10,044 - - - 5,063 146 5,209 (115,239) 18,190 Balance at 1 July 2009 122,373 1,012 10,044 (115,239) 18,190 Total comprehensive income for the period Loss Other comprehensive income Share based payment adjustment on non-vesting options Total other comprehensive income Total comprehensive income for the period Transactions with owners, recorded directly in equity Equity component of related party borrowings Share-based payment transactions Total transactions with owners Balance at 30 June 2010 - - - - - - - - (435) (435) (435) - 88 88 - - - - 720 - 720 (3,760) (3,760) 435 435 - - (3,325) (3,760) - - - 720 88 808 122,373 665 10,764 (118,564) 15,238 The notes on pages 36 to 77 are an integral part of these consolidated financial statements. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 34 CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 30 June 2010 In thousands of AUD Assets Cash and cash equivalents Receivables and other assets Inventories Prepayments Total current assets Receivables and other assets Property, plant and equipment Intangible assets Total non-current assets Total assets Current Liabilities Trade and other payables Loans and borrowings Employee benefits Provisions Total current liabilities Trade and other payables Loans and borrowings Employee benefits Note 2010 2009 2010 2009 Consolidated Company 14 15 16 15 19 20 21 22 23 25 21 22 23 6,144 18,703 13,091 980 958 19,630 17,531 550 5,091 18,010 12,803 930 804 18,801 17,241 500 38,918 38,669 36,834 37,346 10,325 23,055 12,966 7,999 23,446 10,943 13,666 22,200 10,147 12,289 22,653 7,972 46,346 42,388 46,013 42,914 85,264 81,057 82,847 80,260 6,875 6,162 2,287 140 7,764 3,311 1,787 216 5,386 5,962 1,568 140 5,676 3,136 1,481 216 15,464 13,078 13,056 10,509 - 54,242 425 - 50,432 472 388 53,849 316 1,169 50,120 272 Total non-current liabilities 54,667 50,904 54,553 51,561 Total liabilities Net assets Equity Share capital Reserves Accumulated losses Total equity 70,131 63,982 67,609 62,070 15,133 17,075 15,238 18,190 122,373 11,626 122,373 11,282 122,373 11,429 122,373 11,056 (118,866) (116,580) (118,564) (115,239) 15,133 17,075 15,238 18,190 The notes on pages 36 to 77 are an integral part of these consolidated financial statements. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 30 June 2010 35 In thousands of AUD Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Cash generated from operations Income taxes paid Borrowing costs paid Note 2010 2009 2010 2009 Consolidated Company 73,640 (59,801) 13,839 (355) (2,863) 52,939 (51,597) 1,342 (449) (2,489) 49,588 (36,719) 12,869 31,623 (28,067) 3,556 - - (2,804) (2,475) Net cash from operating activities 31 10,621 (1,596) 10,065 1,081 Cash flows from investing activities Proceeds from sale of property, plant and equipment Interest received Acquisitions of property, plant and equipment Acquisition of subsidiary, net of cash and overdraft acquired Development expenditure Acquisition of other intangibles 20 20 188 750 (932) - (3,517) (542) 210 556 (677) (68) (2,048) (1,018) 161 27 (902) - (3,517) (477) 210 31 (674) - (2,048) (226) Net cash from investing activities (4,053) (3,045) (4,708) (2,707) Cash flows from financing activities Proceeds from borrowings Repayment of borrowings Payment of finance lease liabilities 500 (500) (1,285) 2,450 (250) (874) 500 (500) (1,040) 2,450 (250) (846) Net cash from financing activities (1,285) 1,326 (1,040) 1,354 Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at 1 July Effect of exchange rate fluctuations on cash held 5,283 958 (97) (3,315) 3,735 538 4,317 804 (30) (272) 1,033 43 Cash and cash equivalents at 30 June 14 6,144 958 5,091 804 The notes on pages 36 to 77 are an integral part of these consolidated financial statements. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 36 Ainsworth Game Technology Limited INDEX TO NOTES TO THE FINANCIAL STATEMENTS Page Reporting entity ..........................................................................................................................................................................37 Basis of preparation ...................................................................................................................................................................37 Significant accounting policies..........................................................................................................................................38 Determination of fair values ................................................................................................................................................43 Financial risk management ..................................................................................................................................................43 Segment reporting ....................................................................................................................................................................44 Revenue............................................................................................................................................................................................47 Other income ................................................................................................................................................................................47 Personnel expenses ..................................................................................................................................................................47 Auditors’ remuneration ...........................................................................................................................................................47 Finance income and expense.............................................................................................................................................48 Income tax expense .................................................................................................................................................................48 Earnings per share .....................................................................................................................................................................49 Cash and cash equivalents ...................................................................................................................................................50 Receivables and other assets ..............................................................................................................................................50 Inventories ......................................................................................................................................................................................50 Equity accounted investees .................................................................................................................................................51 Tax assets and liabilities ..........................................................................................................................................................51 Property, plant and equipment .........................................................................................................................................52 Intangible assets .........................................................................................................................................................................54 Trade and other payables ......................................................................................................................................................57 Loans and borrowings.............................................................................................................................................................57 Employee benefits .....................................................................................................................................................................61 Share-based payments ...........................................................................................................................................................62 Provisions .........................................................................................................................................................................................63 Capital and reserves ..................................................................................................................................................................64 Operating leases .........................................................................................................................................................................64 Other commitments ................................................................................................................................................................65 Regulatory matters ....................................................................................................................................................................65 Group entities ...............................................................................................................................................................................65 Reconciliation of cash flows from operating activities .......................................................................................66 Financial instruments ...............................................................................................................................................................66 Related parties ..............................................................................................................................................................................73 Subsequent events....................................................................................................................................................................77 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 Ainsworth Game Technology Limited NOTES TO THE FINANCIAL STATEMENTS 37 1. Reporting entity Ainsworth Game Technology Limited (the ‘Company’) is a company domiciled in Australia. The address of the Company’s registered office is 10 Holker Street, Newington, NSW, 2127. The consolidated financial statements of the Company as at and for the year ended 30 June 2010 comprise the Company and its subsidiaries (together referred to as the ‘Group’) and the Group’s interest in associates. The Group primarily is involved in the design, development, sale and servicing of gaming machines and other related equipment and services. 2. Basis of preparation (a) Statement of compliance (‘AASBs’) (including Australian The financial report is a general purpose financial report which has been prepared in accordance with Australian Accounting Standards Interpretations) adopted by the Australian Accounting Standards Board (‘AASB’) and the Corporations Act 2001. The consolidated financial report of the Group and the financial report of the Company also comply with the International Financial Reporting Standards (IFRS’s) and interpretations adopted by the International Accounting Standards Board. Certain comparative amounts have been reclassified to conform with the current years’ presentation. The financial statements were approved by the Board of Directors on 25 August 2010. (b) Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except for loans and borrowings with a Director related entity, which are measured at fair value. (c) Functional and presentation currency These consolidated financial statements are presented in Australian dollars, which is the Company’s functional currency and the functional currency of the majority of the Group. The Company is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 and in accordance with that Class Order, all financial information presented in Australian dollars has been rounded to the nearest thousand unless otherwise stated. (d) Use of estimates and judgements The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ to these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described in Note 20 – Intangibles and Note 24 – Share-based payments. (e) Changes in accounting policies Starting as of 1 July 2009, the Group has changed its accounting policies in the following areas: • Presentation of financial statements; and • Determination and presentation of operating segments. (f) Going concern The financial statements have been prepared on the going concern basis of accounting, which assumes that the continuity of normal business activities and the realisation of assets and settlement of liabilities in the ordinary course of business. For the year ended 30 June 2010, the Group recorded a loss of $2.7 million (2009:$12.5 million). The Group’s operations are dependent on established facilities and funding by its major shareholder. In relation to the directors’ assessment of the going concern assumption, the directors have considered the following: • The Company has a loan facility of $40.0 million from its majority shareholder, Mr LH Ainsworth which was extended on 21 October 2008 and matures on a date 4 years subsequent to the will of Mr LH Ainsworth coming into effect. At 30 June 2010, $13.7 million of this facility has been drawn, leaving $26.3 million available. Interest on the facility is not payable until the maturity date; • The Company and Group do not expect to require funding beyond these facilities in the foreseeable future, or at least one year from the signing of these financial statements. Of all available facilities, $18.3 million was drawn at 30 June 2010, leaving $27.7 million in unutilised facilities; • At balance date, the Group had positive net working capital of $23.5 million and in the current period generated net operating cash inflows of $10.6 million; • Operating cost efficiencies were achieved in the current period under review; • The investment in research and development as well as servicing licenses within the key North American market is expected to achieve revenue opportunities beyond the 2010 financial year; further gaming • Progression of development strategies within domestic and targeted international markets is expected to create additional revenue opportunities in future periods; and • The directors have reviewed the cashflow forecasts and believe that these initiatives will enable the company to be to be able fund its operations for at least the next 12 months. The Directors have concluded that it is appropriate to prepare the financial report on a going concern basis, as they are confident the Company and the Group, has secured sufficient funding by way of support from its majority shareholder, can pay its debts as and when they fall due for the foreseeable future, being at least one year from the date of approval of the financial statements. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 38 Ainsworth Game Technology Limited NOTES TO THE FINANCIAL STATEMENTS (continued) 3. Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Group entities. (a) Basis of consolidation Subsidiaries Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. In the Company’s subsidiaries are carried at cost. financial statements, investments in Associates (equity accounted investees) Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Group holds between 20 and 50 percent of the voting power of another entity. Associates are accounted for using the equity method (equity accounted investees). The consolidated financial statements include the Group’s share of the income and expenses of equity accounted investees, after adjustments to align the accounting policies with those of the Group, from the date that significant influence commences until the date that significant influence ceases. When the Group’s share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest (including any long term investments) is reduced to nil and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the investee. In the Company’s associates are carried at cost. financial statements, investments in Transactions eliminated on consolidation Intra-group balances and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. Gains and losses are recognised when the contributed assets are consumed or sold by the equity accounted investees or, if not consumed or sold by the equity accounted investees when the Group’s interest in such entities is disposed of. (b) Foreign currency (i) Foreign currency transactions Transactions in foreign currencies are translated at the foreign exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance date are retranslated to the functional currency at the foreign exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments in foreign during the period, and the amortised cost AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 currency translated at the exchange rate at the end of the period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognised in profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. (ii) Foreign operations The assets and liabilities of foreign operations are translated to Australian dollars at exchange rates at the reporting date. The income and expenses of foreign operations are translated to Australian dollars at exchange rates at the dates of the transactions. recognised Foreign currency differences are in other comprehensive income. Since 1 July 2004, the Group’s date of transition to AASBs under AIFRS, such differences have been recognised in the Foreign Currency Translation Reserve (FCTR). When a foreign operation is disposed of, in part or in full, the relevant amount in the FCTR is transferred to profit or loss, as part of profit or loss on disposal. (c) Financial instruments Non-derivative financial assets Non-derivative financial assets comprise trade and other receivables and cash and cash equivalents. Trade and other receivables are recognised on the date that they are originated. Financial assets are derecognised if the Group’s contractual rights to the cash flows from the financial assets expire or if the Group transfers the financial asset to another party without retaining control or substantially all risks and rewards of the financial asset are transferred. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Trade and other receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value. Subsequent to initial recognition trade and other receivables are measured at amortised cost using the effective interest method, less any impairment losses. Cash and cash equivalents comprise cash balances and call deposits with original maturities of three months or less. Non-derivative financial liabilities Non-derivative financial borrowings and trade and other payables. liabilities comprise loans and Debt securities issued and subordinated liabilities are initially recognised on the date that they are originated. All other financial liabilities are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Loans and borrowings and trade and other payables are recognised initially at fair value plus any less directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis. Subsequent costs The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of an item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred. 39 Where the terms and conditions of borrowings are modified, the carrying amount is remeasured to fair value. Any difference between the carrying amount and fair value is recognised in equity. Compound financial instruments Compound financial issued by the Group instruments comprise convertible notes that can be converted to share capital at the option of the holder, and the number of shares to be issued does not vary with changes in their fair value. The liability component of a compound financial instrument is recognised initially at the fair value of a similar liability that does not have an equity conversion option. The equity component is recognised initially at the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts. Subsequent to initial recognition, the liability component of a compound financial instrument is measured at amortised cost using the effective interest method. The equity component of a compound financial instrument is not remeasured subsequent to initial recognition. Interest relating to the financial liability is recognised in the income statements. Share capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to issue of ordinary shares and share options are recognised as a deduction from equity, net of any related income tax benefit. (d) Property, plant and equipment Recognition and measurement Depreciation Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the assets. Leased assets are depreciated over the shorter of the lease term and their useful lives. Land is not depreciated. The estimated useful lives for the current and comparative periods are as follows:: • buildings • leasehold improvements • plant and equipment 40 years 10 years 2.5 – 20 years Depreciation methods, useful lives and residual values are reviewed at each financial year-end and adjusted if appropriate. (e) Intangible assets Goodwill Goodwill (negative goodwill) arises on the acquisition of subsidiaries and associates. Acquisitions prior to 1 July 2004 As part of its transition to AASBs, the Group elected to restate only those business combinations that occurred on or after 1 July 2004. In respect of acquisitions prior to 1 July 2004, goodwill represents the amount recognised under the Group’s previous accounting framework, Australian GAAP. Acquisitions on or after 1 July 2004 For acquisitions on or after 1 July 2004, goodwill represents the excess of the cost of the acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess is negative (negative goodwill), it is recognised immediately in profit or loss. Items of property, plant and equipment are measured at cost less accumulated depreciation and impairment losses. Subsequent measurement Goodwill is measured at cost less accumulated impairment Cost includes expenditures that are directly attributable to the acquisition of the asset. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognised net within “other income” in profit and loss. losses. Research and development Expenditure on research activities, undertaken with the prospect of gaining new technical knowledge and understanding, is recognised in profit or loss when incurred. Development activities is capitalised only involve a plan or design for the production of new or substantially improved products and processes. Development expenditure if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Group intends to and has sufficient resources to complete development and to use or sell the asset. The expenditure capitalised includes the cost of materials, direct labour and overhead costs that are directly attributable to preparing the asset for its intended use. Other development expenditure is recognised in profit or loss when incurred. Capitalised development expenditure is measured at cost less accumulated amortisation and accumulated impairment losses. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 40 Ainsworth Game Technology Limited NOTES TO THE FINANCIAL STATEMENTS (continued) 3. Significant accounting policies (continued) (e) Intangible assets (continued) Other intangible assets Other intangible assets that are acquired by the Group, which have finite useful lives, are measured at cost less accumulated amortisation and accumulated impairment losses. Subsequent expenditure Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognised in profit or loss when incurred. Amortisation Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill, from the date that they are available for use, since this most closely reflects the expected pattern of consumption of the future economic benefit embodied in the asset. The estimated useful lives for the current and comparative periods are as follows: • capitalised development costs • service contracts • intellectual property 2 – 5 years 8 years 10 years (f) Leased assets Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases are operating leases and the leased assets are not recognised on the Group’s statement of financial position. (g) Inventories Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the first-in first-out principle, and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based on normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. (h) Impairment Financial assets A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. Objective evidence that financial assets are impaired can include default or delinquency by a debtor, restructuring of an amount due to the Group on terms that the Group would not consider otherwise, indications that a debtor will enter bankruptcy. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, the present value of the estimated future cash flows discounted at the original effective interest rate. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 financial assets are Individually significant for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. tested All impairment losses are recognised in profit or loss and reflected in an allowance account against receivables. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit and loss. Non-financial assets The carrying amounts of the Group’s non-financial assets, other than inventories, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, recoverable amount is estimated at each reporting date. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash generating unit”). The goodwill acquired in a business combination for the purpose of impairment testing, is allocated to cash-generating units that are expected to benefit from the synergies of the combination. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (i) Employee benefits Defined contribution superannuation funds A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution superannuation funds are recognised as an employee benefit expense in profit or loss in the periods during which services are rendered by employees. 41 Other long term employee benefits The Group’s net obligation in respect of long-term employee benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods plus related on-costs; that benefit is discounted to determine its present value, and the fair value of any related assets is deducted. The discount rate is the yield rate at the reporting date on AA credit rated or government bonds that have maturity dates approximating the terms of the Group’s obligations. Termination benefits Termination benefits are recognised as an expense when the Group is demonstrably committed, without realistic possibility of withdrawal, to a formal detailed plan to terminate employment before the normal retirement date or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognised if the Group has made an offer encouraging voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. Short-term benefits Liabilities for employee benefits for wages, salaries and annual leave represent present obligations resulting from employees’ services provided to reporting date and are calculated at undiscounted amounts based on remuneration wage and salary rates that the Group expects to pay as at reporting date including related on-costs, such as workers remuneration insurance and payroll tax. Non-accumulating non-monetary benefits, such as cars and free or subsidised goods and services, are expensed based on the net marginal cost to the Group as the benefits are taken by the employees. A liability is recognised for the amount expected to be paid under short-term cash bonus plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. Share-based payment transactions The grant date fair value of options granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period in which the employees become unconditionally entitled to the options. The amount recognised as an expense is adjusted to reflect the actual number of share options for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised is based on the number of awards that meet the related service and non- market performance conditions at the vesting date. (j) Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. The unwinding of the discount is recognised as a finance cost. Warranties A provision for warranties is recognised when the underlying products or services are sold. The provision is based on historical warranty data and a weighting of all possible outcomes against their associated probabilities. (k) Revenue Goods sold Revenue from the sale of goods in the course of ordinary activities is measured at the fair value of the consideration received or receivable, net of returns, allowances and trade discounts. Revenue is recognised when persuasive evidence exists usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably. Transfer of risks and rewards vary depending on the individual terms of the contract of sale. When two or more revenue generating activities or deliverables are sold under a single arrangement, each deliverable that is considered to be a separate unit of account is accounted for separately. The consideration from a revenue arrangement is based on the relative fair values of each separate unit. Services Revenue from services rendered is recognised in profit or loss when the services are performed. (l) Lease payments Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Determining whether an arrangement contains a lease At inception of an arrangement, the Group determines whether such an arrangement is or contains a lease. A specific asset is the subject of a lease if fulfilment of the arrangement is dependent on the use of that specified asset. An arrangement conveys the right to use the asset if the arrangement conveys to the Group the right to control the use of the underlying asset. At inception or upon reassessment of the arrangement, the Group separates payments and other consideration required by such an arrangement into those for the lease and those for other elements on the basis of their relative fair values. If the Group concludes for a finance lease that it is impracticable to separate the payments reliably, an asset and a liability are recognised at an amount equal to the fair value of the underlying asset. Subsequently the liability is reduced as payments are made and an imputed finance charge on the liability is recognised using the Group’s incremental borrowing rate. (m) Finance income and expense Finance income comprises interest income and foreign currency gains. Interest income is recognised as it accrues in profit or loss using the effective interest method. Finance expenses comprise interest expense on borrowings, foreign currency losses and impairment losses recognised on financial assets. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognised in profit or loss using the effective interest method. Foreign currency gains and losses are reported on a net basis. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 42 Ainsworth Game Technology Limited NOTES TO THE FINANCIAL STATEMENTS (continued) 3. Significant accounting policies (continued) (n) Income tax Income tax expense comprises current and deferred tax. Current and deferred tax are recognised in profit or loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in other comprehensive income. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognised in respect of temporary differences liabilities between the carrying amounts of assets and for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: initial recognition of goodwill, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. (o) Goods and services tax Revenue, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the Australian Taxation Office (ATO) is included as a current asset or liability in the statement of financial position. Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating cash flows. (p) Earnings per share The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise convertible notes and share options granted to employees. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 (q) Segment reporting Determination and presentation of operating segments As of 1 July 2009 the Group’s determines and presents operating segments based on the information that internally is provided to the CEO, who is the Group’s chief operating decision maker. This change in accounting policy is due to the adoption of IFRS 8 Operating Segments. Previously operating segments were determined and presented in accordance with AASB 114 Segment Reporting. The new accounting policy in respect of segment operating disclosures is presented as follows. An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. All operating segments’ operating results are regularly reviewed by the Group’s CEO to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Comparative segment information has been re-presented in conformity with the transitional requirements of such standard. Since the change in accounting policy only impacts presentation and disclosure aspects, there is no impact on earnings per share. (r) Presentation of financial statements The Group applies revised AASB 101 Presentation of Financial Statements (2007), which became effective as of 1 January 2009. As a result, the Group presents in the consolidated statement of changes in equity all owner changes in equity, whereas all non-owner changes in equity are presented in the consolidated statement of comprehensive income. Comparative information has been re-presented so that it also is in conformity with the revised standard. Since the change in accounting policy only impacts presentation aspects, there is no impact on earnings per share (s) New standard and interpretations not yet adopted The following standards, amendments to standards and interpretations have been identified as those which may impact the entity in the period of initial application. They are available for early adoption at 30 June 2010, but have not been applied in preparing this financial report. • AASB 2009-5 Further amendments to Australian Accounting Standards arising from the Annual Improvements Process affect various AASBs resulting in minor changes for presentation, disclosure, recognition and measurement purposes. The amendments, which become mandatory for the Group’s 30 June 2011 financial statements, are not expected to have a significant impact on the financial statements. • AASB 2010-3 Amendments to Australian Accounting Standards arising from the Annual Improvements Process affect various AASBs resulting in minor changes for presentation, disclosure, recognition and measurement purposes. The amendments, which become mandatory for the Group’s 30 June 2011 financial statements, are not expected to have a significant impact on the financial statements. • AASB 2010-4 Further Amendments to Australian Accounting Standards arising from the Annual Improvements Process affect various AASBs resulting in minor changes for presentation, disclosure, recognition and measurement purposes. The amendments, which become mandatory for the Group’s 30 June 2011 financial statements, are not expected to have a significant impact on the financial statements. 43 • AASB 9 Financial Instruments includes requirements for the classification and measurement of financial assets resulting from the first part of Phase 1 of the project to replace AASB 139 Financial Instruments: Recognition and Measurement. Retrospective application is generally required, although there are exceptions, particularly if the entity adopts the standard for the year ended 30 June 2012 or earlier. The Group has not yet determined the potential effect of the standard. • AASB 124 Related Party Disclosures (revised December 2009) simplifies and clarifies the intended meaning of the definition of a related party and provides a partial exemption from the disclosure requirements for government-related entities. The amendments, which will become mandatory for Group’s 30 June 2012 financial statements, are not expected to have any impact on the financial statements. 4. Determination of fair values A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and / or disclosure purposes based on the following methods. Where applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. Intangible assets The fair value of customer contracts acquired in a business combination is based on the discounted cash flows expected to be derived from the use or eventual sale of these contracts. The fair value of other intangible assets is based on the discounted cash flows expected to be derived from the use and eventual sale of the assets. Trade and other receivables / payables For receivables / payables with a remaining life of less than one year, the notional amount is deemed to reflect the fair value. The fair value of all other receivables / payables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. Non-derivative financial instruments Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. In respect of the liability component of convertible notes, the market rate of interest is determined by reference to similar liabilities that do not have a conversion option. For finance leases the market rate of interest is determined by reference to similar lease agreements. Loans and borrowings Fair value is calculated based on discounted expected future principal and interest cash flows. Finance lease liabilities The fair value is estimated as the present value of future cash flows, discounted at market interest rates for homogeneous lease agreements. The estimated fair values reflect changes in interest rates. Share-based payment transactions The fair value of employee stock options is measured using the Black Scholes and binomial lattice models. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility (based on weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historical experience and general option holder behaviour), expected dividends, and the risk-free interest rate (based on government bonds). Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value. 5. Financial risk management Overview The Company and Group have exposure to the following risks from their use of financial instruments: • Credit risk; • Liquidity risk; and • Market risk. This note presents information about the Company’s and Group’s exposure to each of the above risks, their objectives, policies and processes for measuring and managing risk, and the management of capital. Further quantitative disclosures are included throughout this financial report. Risk management framework The Board of Directors has overall responsibility for the establishment and oversight of the risk management framework. The Board has established processes through the Group Audit Committee, which is responsible for developing and monitoring risk management policies. The Committee reports regularly to the Board of Directors on its activities. Risk management policies are established to identify and analyse the risks faced by the Company and Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company’s and Group’s activities. The Company and Group, through their training and management standards and procedures, aim to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The Group Audit Committee oversees how management monitors compliance with the Company’s and Group’s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Company and Group. The Group Audit Committee is assisted in its oversight role by Internal Audit. Internal Audit undertakes reviews of risk management controls and procedures, the results of which are reported to the Group Audit Committee. Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s and Company’s receivables from customers. Trade and other receivables is The Company’s and Group’s exposure to credit risk influenced mainly by the individual characteristics of each customer, including the default risk of the industry and country in which customers operate. Approximately 2 percent (2009: 2 percent) of the Group’s revenue is attributable to sales transactions in a geographical region with a single distributor. This distributor has been transacting business with the Group for over five years and losses have occurred infrequently. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 44 Ainsworth Game Technology Limited NOTES TO THE FINANCIAL STATEMENTS (continued) 5. Financial risk management (continued) Credit risk (continued) Credit policy guidelines have been introduced under which each new customer is assessed by the compliance division as to suitability and analysed for creditworthiness before the Group’s standard payment and delivery terms and conditions are offered. The Group’s review investigations, external ratings, when available, and in some cases bank references. Purchase limits are established for each customer, which represents the maximum open amount without requiring approval from the Board. Customers that fail to meet the Group’s creditworthiness criteria may only transact with the Group within established limits unless Board approval is received or otherwise only on a prepayment basis. includes In monitoring customer credit risk, customers are grouped according to their credit characteristics, including whether they are an individual or legal entity, whether they are a distributor, operator or customer, geographic location, aging profile, maturity and existence of previous financial difficulties. The Group’s trade and other receivables relate mainly to the Group’s direct customers, operators and established distributors. Customers that are graded as “high risk” require future sales to be made on a prepayment basis with approval of the Chief Executive Officer and Chief Financial Officer up to approved limits and thereafter only with Board approval. Goods are sold subject to retention of title clauses, so that in the event of non-payment the Group may have a secured claim. The Group does not require collateral in respect of trade and other receivables. The Company and Group have established an allowance for impairment that represents their estimate of incurred losses in respect of trade and other receivables. The main components of this allowance are a specific loss component that relates to individually significant exposures. Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. Typically the Group ensures that it has access to sufficient cash on demand to meet expected operational expenses for a period of 60 days, including the servicing of financial obligations; this excludes the potential impact of extreme circumstances that cannot reasonably be predicted, such as natural disasters. In addition, the Group maintains the following lines of credit: • $40 million facility that can be drawn down to meet short-term financing needs; and • $6 million trade facility. Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 Currency risk The Group is exposed to currency risk on sales and purchases that are denominated in a currency other than the respective functional currencies of Group entities, primarily the Australian dollar (AUD), but also the US dollar (USD). The currencies in which these transactions primarily are denominated are AUD, New Zealand dollar (NZD), Euro and USD. The Group regularly monitors and reviews, dependant on available facilities, the hedging of net assets denominated in a foreign currency. The Group has at various times utilised currency call options to hedge its currency risk, most with a maturity of less than six months. No currency call options were utilised throughout the reporting period. In respect of other monetary assets and liabilities denominated in foreign currencies, the Group monitors its net exposure to address short-term imbalances. Interest rate risk The Group’s borrowing rates are fixed and no interest rate risk exists. Capital management Capital is defined as the total equity of the Group. The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Board continues to monitor group performance so as to ensure a turnaround is affected, an acceptable return on capital is achieved and that dividends will be provided to ordinary shareholders in the medium term. The Board continues to review alternatives to ensure present employees will hold at least 5% of the Company’s ordinary shares. This is expected to be achieved assuming all outstanding share options issued vest and/or are exercised. These share options were issued to all Australian employees over a portion of the Executive Chairman’s shareholding under a share option incentive plan provided on 2 July 2007. Refer Note 24. There were no changes in the Group’s approach to capital management during the year. Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements. 6. Segment reporting The Group has nine reportable segments as identified below, which are the Group’s strategic business units. For each of the strategic business units, the Chief Executive Officer (CEO) reviews internal management reports on a monthly basis. The Group’s corporate head office is located in New South Wales, Australia where all design and development is undertaken and manufacturing facilities are operated. Sales offices are operated in New South Wales, Queensland and the Americas (Florida). Information regarding the results of each reportable segment is included below. Performance is measured based on segment profit before financing costs and income tax as included in the internal management reports that are reviewed by the Group’s CEO. Segment profit is used to measure performance as management believes that such information is the most relevant in evaluating the results of certain segments relative to other entities that operate within these industries. Inter- segment pricing is determined on an arm’s length basis. Comparative segment information has been represented in conformity with the requirement of AASB 8 Operating Segments. d e t a d i l o s n o C r e h t O / e p o r u E d n a l a e Z w e N a i s A a c i r e m A h t u o S a c i r e m A h t r o N 2 5 3 2 , 3 4 2 7 , 2 9 6 9 , A S 8 5 2 I C V D L Q W S N 1 0 0 4 , 1 5 6 5 , 9 5 0 3 1 , D U A f o s d n a s u o h t n I e u n e v e r t n e m g e S s a c i r e m A a i l a r t s u A . s r e m o t s u c f o n o i t a c o l l a c i h p a r g o e g e h t n o d e s a b s i e u n e v e r t n e m g e s , s t n e m g e s e b a t r o p e r l f o s i s a b e h t n o n o i t a m r o f n i g n i t n e s e r p n I 9 0 0 2 e n u J 0 3 d e d n e d o i r e p e h t r o F s t n e m g e s e l b a t r o p e r t u o b a n o i t a m r o f n I ) d e u n i t n o c ( g n i t r o p e r t n e m g e S . 6 45 4 6 1 5 4 , 7 5 4 2 , ) 8 9 9 0 1 ( , ) 8 0 1 ( 1 5 4 ) 9 3 ( ) 7 0 4 ( ) 9 3 6 ( ) 8 9 4 ( ) 2 4 5 2 1 ( , 7 5 0 1 8 , 7 5 0 1 8 , ) 2 8 9 3 6 ( , ) 2 8 9 3 6 ( , ) 6 9 5 1 ( , ) 5 4 0 3 ( , 6 2 3 1 , 7 0 7 2 , 1 7 1 - - - - - - - - - 8 8 3 7 , - ) 3 9 6 ( - - - - - - - - - - - - ) 0 5 3 ( ) 6 4 7 1 ( , ) 7 5 4 6 ( , ) 1 6 1 ( 8 8 ) 5 7 8 ( ) 0 5 3 1 ( , t l u s e r t n e m g e S - - - - - - - - - - - - - - - - - - - - - - - - - - ) 9 4 4 ( 5 6 5 5 6 5 ) 6 1 5 ( ) 6 1 5 ( - 0 6 - 7 5 4 4 1 , ) 9 2 3 4 1 ( , - - - - - - - - - - - - - - - - - - - - - - - - - - - 8 4 8 4 - - - - - - - ) 7 0 4 ( - ) 9 4 ( 4 4 4 0 8 , 4 4 4 0 8 , ) 6 6 4 3 6 ( , ) 6 6 4 3 6 ( , ) 1 4 4 3 2 ( , ) 5 4 0 3 ( , 8 4 3 6 1 , 1 7 1 7 4 6 2 , s e e t s e v n i d e t n u o c c a y t i u q e n i ) s e s s o l ( f o e r a h S s t s o c g n c n a n i i f t e N e s n e p x e x a t e m o c n I d o i r e p e h t r o f ) s s o L ( s t e s s a t n e m g e S s t e s s a l a t o T s e i t i v i t c a g n i t a r e p o m o r f s w o l f h s a C s e i t i v i t c a g n i t s e v n m o r f i s w o l f h s a C s e i t i v i t c a g n c n a n i i f m o r f s w o l f h s a C e r u t i d n e p x e l a t i p a C s e i t i l i b a i l l a t o T s e i t i l i b a i l t n e m g e S s e s s o l t n e m r i a p m I AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 46 d e t i i l m L y g o o n h c e T e m a G h t r o w s n A i . s r e m o t s u c f o n o i t a c o l l a c i h p a r g o e g e h t n o d e s a b s i e u n e v e r t n e m g e s , s t n e m g e s e b a t r o p e r l f o s i s a b e h t n o n o i t a m r o f n i g n i t n e s e r p n I s t n e m g e s e l b a t r o p e r t u o b a n o i t a m r o f n I ) d e u n i t n o c ( g n i t r o p e r t n e m g e S . 6 ) d e u n i t n o c ( S T N E M E T A T S I L A C N A N F I E H T O T S E T O N d e t a d i l o s n o C r e h t O / e p o r u E d n a l a e Z w e N a i s A a c i r e m A h t u o S a c i r e m A h t r o N A S I C V s a c i r e m A a i l a r t s u A D L Q W S N 4 1 7 7 2 0 2 , 7 4 2 0 1 , 1 1 9 7 , 6 9 7 1 , 4 6 3 6 , 2 6 6 1 1 , 4 1 4 8 2 , 0 1 0 2 e n u J 0 3 d e d n e d o i r e p e h t r o F D U A f o s d n a s u o h t n I e u n e v e r t n e m g e S AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 8 7 2 9 6 , 8 8 5 4 , - ) 4 5 9 6 ( , ) 5 5 3 ( ) 1 2 7 2 ( , 4 6 2 5 8 , 4 6 2 5 8 , ) 1 3 1 0 7 ( , ) 1 3 1 0 7 ( , 1 2 6 0 1 , ) 3 5 0 4 ( , ) 5 8 2 1 ( , 1 7 1 7 1 5 3 , 3 4 1 3 1 - - - - - - - - - - - - 3 6 1 ) 4 9 ( ) 9 7 1 1 ( , ) 9 8 9 1 ( , 9 4 1 1 6 7 1 , 1 2 4 2 , 3 4 3 3 , t l u s e r t n e m g e S - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ) 5 4 3 ( 3 1 4 1 , 3 1 4 1 , ) 7 4 3 1 ( , ) 7 4 3 1 ( , - 8 0 7 9 , ) 5 3 7 8 ( , - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2 8 1 2 8 1 - - - - - - - - - ) 0 1 ( 9 6 6 3 8 , 9 6 6 3 8 , ) 4 8 7 8 6 ( , ) 4 8 7 8 6 ( , 3 1 9 ) 3 5 0 4 ( , 0 5 4 7 , 7 1 5 3 , 1 7 1 s e e t s e v n i d e t n u o c c a y t i u q e n i ) s e s s o l ( f o e r a h S s t s o c g n c n a n i i f t e N e s n e p x e x a t e m o c n I d o i r e p e h t r o f ) s s o L ( s t e s s a t n e m g e S s t e s s a l a t o T s e i t i v i t c a g n i t a r e p o m o r f s w o l f h s a C s e i t i v i t c a g n i t s e v n m o r f i s w o l f h s a C s e i t i v i t c a g n c n a n i i f m o r f s w o l f h s a C e r u t i d n e p x e l a t i p a C s e i t i l i b a i l l a t o T s e i t i l i b a i l t n e m g e S s e s s o l t n e m r i a p m I 47 Note Consolidated Company 2010 64,051 5,227 69,278 2009 44,285 879 45,164 2010 63,637 390 64,027 2009 43,960 - 43,960 7. Revenue In thousands of AUD Sales Services 8. Other income In thousands of AUD Dividends received and income from subsidiaries Other - 198 198 - 161 161 - 197 197 219 148 367 9. Personnel expenses In thousands of AUD Wages and salaries Contributions to defined contribution superannuation funds Increase in liability for annual leave Increase in liability for long service leave Termination benefits Equity settled share-based payment transactions 23 23 20,030 1,466 18,629 1,218 13,393 1,227 14,124 1,181 281 208 29 88 399 280 121 146 34 152 29 88 223 137 121 146 22,102 20,793 14,923 15,932 10. Auditors’ remuneration In AUD Audit services: Auditors of the Company KPMG Australia Audit and review of financial reports 179,750 200,000 179,750 200,000 All amounts payable to the Auditors of the Group were paid by the parent of the Group. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 48 Ainsworth Game Technology Limited NOTES TO THE FINANCIAL STATEMENTS (continued) 11. Finance income and expense In thousands of AUD Interest income on trade receivables Interest income on bank deposits Net foreign exchange gain Financial income Interest expense on financial liabilities Net foreign exchange loss Financial expenses Net financing (expenses) 12. Income tax expense Recognised in the income statement In thousands of AUD Current tax expense Current period Effect of tax losses recognised Deferred tax expense Origination and reversal of temporary differences Effect of tax losses recognised Consolidated Company 2010 2009 2010 2009 739 59 - 798 (7,252) (500) (7,752) (6,954) 355 - 355 - - - 740 27 5,256 6,023 (6,662) - (6,662) (639) 498 - 498 - - - 730 59 - 789 (7,202) (527) (7,729) (6,940) - - - - - - - 740 27 5,256 6,023 (6,656) - (6,656) (633) - - - - - - - Total income tax expense 355 498 Numerical reconciliation between tax expense and pre-tax net (loss) (Loss) for the period Total income tax expense (Loss) excluding income tax (2,721) 355 (2,366) (12,542) 498 (12,044) (3,760) (12,559) - - (3,760) (12,559) Income tax using the Company’s domestic tax rate of 30% (2009 30%) (710) (3,613) (1,128) (3,768) Non-deductible expenses Non-assessable income and concessions Deferred tax not recognised 3,593 (4,669) 2,141 355 4,583 (3,485) 3,013 498 3,548 (4,669) 2,249 - 4,583 (3,557) 2,742 - AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 49 13. Earnings per share Basic earnings per share The calculation of basic earnings per share at 30 June 2010 was based on the loss attributable to ordinary shareholders of $2,721,000 (2009: loss of $12,542,000) and a weighted average number of ordinary shares outstanding during the financial year ended 30 June 2010 of 278,942,000 (2009: 278,942,000), calculated as follows: (Loss) attributable to ordinary shareholders In thousands of AUD (Loss) for the period (Loss) attributable to ordinary shareholders Weighted average number of ordinary shares In thousands of shares Issued ordinary shares at 1 July Weighted average number of ordinary shares at 30 June Note Consolidated 2010 (2,721) (2,721) 2009 (12,542) (12,542) 26 278,942 278,942 238,492 238,492 Diluted earnings per share The calculation of diluted earnings per share at 30 June 2010 was based on the loss attributable to ordinary shareholders of $2,721,000 (2009: loss of $12,542,000) and a weighted average number of ordinary shares outstanding during the financial year ended 30 June 2010 of 278,942,000 (2009: 278,942,000), calculated as follows: (Loss) attributable to ordinary shareholders (diluted) In thousands of AUD (Loss) attributable to ordinary shareholders Interest expense on convertible notes, net of tax (Loss) attributable to ordinary shareholders (diluted) Weighted average number of ordinary shares (diluted) In thousands of shares Weighted average number of ordinary shares at 30 June Effect of conversion of convertible notes Effect of share options on issue Weighted average number of ordinary shares (diluted) at 30 June (a) (a) (a) 2010 (2,721) - 2009 (12,542) - (2,721) (12,542) 278,942 278,942 - - - - 278,942 278,942 (a) For the year ended 30 June 2010 the effect of the convertible notes was anti-dilutive as the Group recorded a loss for the period. For the year ended 30 June 2010, the calculation of loss attributable to ordinary shareholders (diluted) and weighted average number of ordinary shares (diluted) also excludes the after-tax effect of interest on convertible notes (see note 22) and the effect of conversion of convertible notes, respectively, as the effect would be anti-dilutive. The outstanding share options on issue were not considered to be potential ordinary shares for the year ended 30 June 2010 or 30 June 2009 as they were anti-dilutive. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 50 Ainsworth Game Technology Limited NOTES TO THE FINANCIAL STATEMENTS (continued) 14. Cash and cash equivalents In thousands of AUD Bank balances Cash and cash equivalents in the statements of cash flows Note Consolidated Company 2010 6,144 6,144 2009 958 958 2010 5,091 5,091 2009 804 804 The Group’s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities are disclosed in note 32. 15. Receivables and other assets In thousands of AUD Current Trade receivables Less impairment losses Other assets Non-current Term receivables Other Receivables due from subsidiaries Less impairment losses 18,967 (351) 18,616 87 18,703 23,574 (4,268) 19,306 324 19,630 10,230 7,999 33 95 - - - - - 18,209 (287) 17,922 88 18,010 10,230 95 4,261 (920) 22,990 (4,219) 18,771 30 18,801 7,999 - 4,290 - 10,325 7,999 13,666 12,289 Impairment losses on receivables and other assets realised by the Company for the year ended 30 June 2010 were $1,199 thousand (2009: $Nil). The Group realised impairment losses of $351 thousand (2009: $Nil) for the year ended 30 June 2010. Receivables denominated in currencies other than the functional currency comprise $20,116 thousand of trade receivables denominated in US dollars (2009: $25,371 thousand), $Nil in Euro (2009: $145 thousand) and $560 thousand in New Zealand Dollars (2009: $237 thousand). The Group’s exposure to credit and currency risks and impairment losses related to trade and other receivables are disclosed in note 32. 16. Inventories In thousands of AUD Raw materials and consumables Finished goods Stock in transit Inventories stated at the lower of cost and net realisable value Consolidated Company 2010 6,749 6,041 301 13,091 2009 6,647 10,770 114 17,531 2010 6,461 6,041 301 12,803 2009 6,357 10,770 114 17,241 During the year ended 30 June 2010 raw materials, consumables and changes in finished goods and work in progress recognised as cost of sales amounted to $26,951 thousand (2009: $18,493 thousand). During the year ended 30 June 2010 the write-down of inventories to net realisable value amounted to $350 thousand (2009: $1,658 thousand). The write-down is included in cost of sales. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 - ) 7 0 4 ( ) 7 0 4 ( - - - - ) 1 6 5 4 ( , ) 1 6 5 4 ( , - 4 5 1 4 , 4 5 1 4 , - 4 5 2 2 , 4 5 2 2 , - 5 1 2 1 , 5 1 2 1 , - 9 3 0 1 , 9 3 0 1 , 0 3 1 8 3 3 2 , 8 6 4 2 , - - - - - - - - - - - - - - - - - - 0 3 1 7 7 4 1 , 7 0 6 1 , - - - - 1 6 8 1 6 8 - - - % 9 4 % 9 4 - - ) s s o l ( / t i f o r P s e s n e p x E s e u n e v e R l a t o T s e i t i l i b a i l s e i t i l i b a i l t n e r r u c - n o N t n e r r u C s e i t i l i b a i l l a t o T s t e s s a s t e s s a t n e r r u c - n o N s t e s s a t n e r r u C i p h s r e n w O : s m e t i i g n w o l l o f e h t f o t c e p s e r n i 9 0 0 2 2 7 4 2 , 4 4 6 2 3 , 6 1 1 5 3 , 0 1 0 2 5 2 9 1 , 0 3 1 7 3 , 5 5 0 9 3 , 9 0 0 2 5 7 4 2 , 5 0 9 2 3 , 0 8 3 5 3 , 0 1 0 2 5 5 9 1 , 9 8 3 7 3 , 4 4 3 9 3 , y n a p m o C d e t a d i l o s n o C i ) e t a c o s s a ( i d t L y t P s e t a c o s s A & r e k a B R & E R i ) e t a c o s s a ( d t L y t P s e n h c a M A & J i D U A f o s d n a s u o h t n I 9 0 0 2 i ) e t a c o s s a ( i d t L y t P s e t a c o s s A & r e k a B R & E R i ) e t a c o s s a ( d t L y t P s e n h c a M A & J i 0 1 0 2 d e s i n g o c e r n e e b t o n e v a h s t e s s a x a t d e r r e f e D s t e s s a x a t d e r r e f e d d e s i n g o c e r n U s e i t i l i b a i l d n a s t e s s a x a T . 8 1 D U A f o s d n a s u o h t n I i s e c n e r e ff d y r a r o p m e t e b i t c u d e D l s e s s o l x a T . e t a d s i h t m o r f s t l u s e r p u o r G o t n i d e t a d i l i o s n o c s a w h c h w 9 0 0 2 y a M 1 3 t a s a s e e t s e v n i d e t n u o c c a y t i u q e r o f n o i t a m r o n f i l i a c n a n i f y r a m m u S , . ) ) 0 0 0 7 0 4 $ ( : 9 0 0 2 ( l i N $ s a w r a e y e h t r o f s e e t s e v n i d e t n u o c c a y t i u q e s t i n i t i f o r p / ) s e s s o l ( f ’ o e r a h s s p u o r G e h T s e e t s e v n i d e t n u o c c a y t i u q E 7. 1 51 l t a h t e b a b o r p t o n s i t i e s u a c e b s m e t i e s e h t f o t c e p s e r n i d e s i n g o c e r n e e b t o n e v a h s t e s s a x a t d e r r e f e D . n o i t a l s i g e l x a t t n e r r u c r e d n u e r i p x e t o n o d s e s s o l x a t d n a s e c n e r e f f i d y r a r o p m e t e b i t c u d e d e h T l . m o r f s t i f e n e b e h t e s i l i t u n a c p u o r G e h t h c h w i i t s n a g a e b a l l i a v a e b l l i w t i f l o r p e b a x a t e r u t u f AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 52 l a t o T l d o h e s a e L s t n e m e v o r p m i d n a t n a l P t n e m p u q e i y n a p m o C d n a d n a L s g n d i l i u b l a t o T l d o h e s a e L s t n e m e v o r p m i d n a t n a l P t n e m p u q e i d e t a d i l o s n o C s g n d i l i u b d n a d n a L i t n e m p u q e d n a t n a l p , y t r e p o r P . 9 1 ) d e u n i t n o c ( S T N E M E T A T S I L A C N A N F I E H T O T S E T O N d e t i i l m L y g o o n h c e T e m a G h t r o w s n A i 1 4 4 1 3 , 4 2 - - 7 9 9 1 , ) 8 1 2 1 ( , 0 2 2 2 3 , 0 2 2 2 3 , - 4 1 0 2 , ) 5 5 7 ( - - ) 4 1 ( - 0 1 0 1 - - - 9 7 4 3 3 , 0 1 - 6 8 1 2 1 , - 2 1 2 1 , ) 4 0 2 1 ( , 4 9 1 2 1 , 4 9 1 2 1 , - 4 1 0 2 , ) 5 5 7 ( 3 5 4 3 1 , - 5 8 7 - - 1 3 2 9 1 , 6 1 0 0 2 , 6 1 0 0 2 , - - - 6 1 0 0 2 , 9 4 8 1 3 , 9 4 6 0 6 0 2 , ) 8 1 2 1 ( , 6 6 6 0 4 3 3 , 6 0 4 3 3 , 5 6 3 2 , ) 6 6 1 1 ( , ) 5 2 ( 0 8 5 4 3 , - 6 7 5 3 ) 4 1 ( 0 1 7 0 1 7 0 1 - - ) 5 ( 2 0 1 2 4 5 2 1 , 9 4 6 0 4 2 1 , ) 4 0 2 1 ( , 6 5 3 8 2 3 1 , 3 8 2 3 1 , 5 6 3 2 , ) 6 6 1 1 ( , ) 0 2 ( 2 6 4 4 1 , - 5 8 7 - - 1 3 2 9 1 , 6 1 0 0 2 , 6 1 0 0 2 , - - - i s n o i t a n b m o c s s e n i s u b h g u o r h t s n o i t i s i u q c A e g n a h c x e n g e r o i f n i s t n e m e v o m f o t c e f f E 9 0 0 2 e n u J 0 3 t a e c n a a B l s n o i t i d d A s l a s o p s i D e g n a h c x e n g e r o i f n i s t n e m e v o m f o t c e f f E s n o i t i d d A s l a s o p s i D l 9 0 0 2 y u J 1 t a e c n a a B l D U A f o s d n a s u o h t n I t s o C l 8 0 0 2 y u J 1 t a e c n a a B l 6 1 0 0 2 , 0 1 0 2 e n u J 0 3 t a e c n a a B l AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 l a t o T 1 4 7 8 , 8 3 6 1 , ) 2 1 8 ( - 7 6 5 9 , - 7 6 5 9 , 3 4 2 2 , ) 1 3 5 ( 5 1 1 ) 6 ( - 0 1 0 1 - - - 9 7 2 1 1 , 0 1 0 0 7 2 2 , 3 5 6 2 2 , 3 5 6 2 2 , 0 0 2 2 2 , 9 - - - l d o h e s a e L s t n e m e v o r p m i d n a t n a l P t n e m p u q e i y n a p m o C d n a d n a L s g n d i l i u b 4 2 4 7 , 8 8 2 1 , ) 6 0 8 ( - 6 0 9 7 , 6 0 9 7 , 0 9 8 1 , ) 1 3 5 ( - 5 6 2 9 , 2 6 7 4 , 8 8 2 4 , 8 8 2 4 , 8 8 1 4 , - - 9 4 3 2 0 3 1 , 1 5 6 1 , 3 5 3 1 5 6 1 , - - 4 0 0 2 , 9 2 9 7 1 , 5 6 3 8 1 , 5 6 3 8 1 , 2 1 0 8 1 , d e t a d i l o s n o C l a t o T 8 6 9 8 , 8 6 7 1 , ) 2 1 8 ( 6 3 0 6 9 9 , 0 6 9 9 , 3 4 4 2 , ) 0 6 8 ( ) 8 1 ( 5 2 5 1 1 , 1 8 8 2 2 , 6 4 4 3 2 , 6 4 4 3 2 , 5 5 0 3 2 , l d o h e s a e L s t n e m e v o r p m i d n a t n a l P t n e m p u q e i d n a d n a L s g n d i l i u b 4 2 0 3 ) 6 ( 2 0 5 0 5 1 3 - ) 2 ( 9 7 2 5 7 5 7 5 3 2 2 4 6 7 , 9 8 3 1 , ) 6 0 8 ( 4 3 9 5 2 8 , 9 5 2 8 , 9 5 0 2 , ) 0 6 8 ( ) 6 1 ( 2 4 4 9 , 0 0 9 4 , 4 2 0 5 , 4 2 0 5 , 0 2 0 5 , - - 9 4 3 2 0 3 1 , 1 5 6 1 , 3 5 3 1 5 6 1 , - - 4 0 0 2 , 9 2 9 7 1 , 5 6 3 8 1 , 5 6 3 8 1 , 2 1 0 8 1 , s e s s o l t n e m r i a p m i d n a n o i t a i c e r p e D D U A f o s d n a s u o h t n I l 8 0 0 2 y u J 1 t a e c n a a B l r a e y e h t r o f e g r a h c n o i t a c e r p e D i e g n a h c x e n g e r o i f n i s t n e m e v o m o t c e f f E f s l a s o p s i D 9 0 0 2 e n u J 0 3 t a e c n a a B l l 9 0 0 2 y u J 1 t a e c n a a B l r a e y e h t r o f e g r a h c n o i t a c e r p e D i e g n a h c x e n g e r o i f n i s t n e m e v o m o t c e f f E f s l a s o p s i D 0 1 0 2 e n u J 0 3 t a e c n a a B l s t n u o m a g n i y r r a C l 8 0 0 2 y u J 1 t A 9 0 0 2 e n u J 0 3 t A l 9 0 0 2 y u J 1 t A 0 1 0 2 e n u J 0 3 t A i t n e m p u q e d n a t n a p d e s a e L l 53 f o s n a e m y b , i l s e c h e v r o t o m d n a t n e m p u q e r e t u p m o c g n d u c n l i i i i t n e m p u q e d n a t n a p l f o n o i t i s i u q c A . s n o i t a g i l b o e s a e l e r u c e s d e h s i l b a t s e s e e t n a r a u g d n a t n e m p u q e d e s a e i l e h T . e c i r p l i a c fi e n e b , . ) 0 0 0 6 6 9 1 $ , : , 9 0 0 2 ( 0 0 0 1 4 1 2 $ s a w , i t n e m p u q e d n a t n a p d e s a e l l f o t n u o m a g n y r r a c t e n e h t i , 0 1 0 2 e n u J 0 3 t A , . ) 0 0 0 6 4 2 $ : , 9 0 0 2 ( 0 0 0 9 1 9 $ o t d e t n u o m a s t n e m e e r g a e s a h c r u p e r i h . i s g n w o r r o b d n a s n a o l e r u c e s o t e g a g t r o m e r u t n e b e d a o t j t c e b u s s i , ) 0 0 0 5 6 3 8 1 $ , : 9 0 0 2 ( 0 0 0 2 1 0 8 1 $ f , , o t n u o m a g n y r r a c a h t i i w y t r e p o r p a 0 1 0 2 e n u J 0 3 t A y t i r u c e S a t a i t n e m p u q e e h t e s a h c r u p o t n o i t p o e h t s a h p u o r G e h t s t n e m e e r g a e s e h t f o h c a e f o d n e e h t t A . s t n e m e e r g a e s a h c r u p e r i h r e d n u s e c h e v l i r o t o m d n a i t n e m p u q e d n a l t n a p s e s a e l p u o r G e h T AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 6 3 8 9 5 6 3 1 , 6 3 8 9 5 6 3 1 , 54 y n a p m o C d e t a d i l o s n o C ) d e u n i t n o c ( S T N E M E T A T S I L A C N A N F I E H T O T S E T O N l s t e s s a e b g n a t n i I . 0 2 d e t i i l m L y g o o n h c e T e m a G h t r o w s n A i a d a v e N l a u t c e l l e t n I t n e m p o e v e D l l a t o T s t s o c e c n e c i l y t r e p o r p * s t s o c l l i w d o o G l a t o T e c i v r e S s t c a r t n o c s t s o c e c n e c i l y t r e p o r p * s t s o c a d a v e N l a u t c e l l e t n I t n e m p o e v e D l l l i w d o o G D U A f o s d n a s u o h t n I t s o C 0 6 6 5 1 , ) 3 2 8 ( - - 8 1 0 1 , 8 1 0 1 , 8 4 0 2 , - 3 0 9 7 1 , 8 1 0 1 , 3 0 9 7 1 , 8 1 0 1 , ) 5 6 0 1 ( , - 7 1 5 3 , - 2 4 5 2 4 5 - - - 6 3 8 6 3 8 - - - - - 8 4 0 2 , 7 0 7 5 1 , 7 0 7 5 1 , ) 5 6 0 1 ( , - 7 1 5 3 , 9 5 1 8 1 , 5 6 1 1 , ) 3 2 8 ( - - 2 4 3 2 4 3 - - - ) 3 2 8 ( 1 7 2 3 , 8 4 0 2 , - - - 6 6 0 7 1 , 3 2 2 1 , - - - 8 1 0 1 , 2 6 5 1 2 , 3 2 2 1 , 8 1 0 1 , 2 6 5 1 2 , 3 2 2 1 , 8 1 0 1 , ) 5 6 0 1 ( , 2 4 5 7 1 5 3 , - - - - - 2 4 5 - - - 6 3 8 6 3 8 - - - 7 9 8 0 2 , 0 6 5 1 , 6 3 8 2 4 3 6 5 5 4 2 , 3 2 2 1 , 0 6 5 1 , 6 3 8 - - 8 4 0 2 , 7 0 7 5 1 , 7 0 7 5 1 , ) 5 6 0 1 ( , - 7 1 5 3 , 9 5 1 8 1 , 8 4 3 1 , ) 3 2 8 ( 3 5 2 2 , - 8 7 7 2 , 8 7 7 2 , - - - d e s i l a t i p a c s t s o c t n e m p o e v e D l s t s o c t n e m p o e v e d l t s o c t a – n o i t i s i u q c A 9 0 0 2 e n u J 0 3 t a e c n a a B l r a e y e h t g n i r u d l 9 0 0 2 y u J 1 t a e c n a a B l s t s o c n w o d n e t t i r w y l l u f k c a b e t i r W d e s i l a t i p a c s t s o c t n e m p o e v e D l r a e y e h t g n i r u d t s o c t a – n o i t i s i u q c A n w o d n e t t i r w y l l u f k c a b e t i r W l 8 0 0 2 y u J 1 t a e c n a a B l 8 7 7 2 , 0 1 0 2 e n u J 0 3 t a e c n a a B l . i s g n d n fi h c r a e s e r f l o t n e m p o e v e d o t e t a e r e s e h T * l AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 y n a p m o C d e t a d i l o s n o C l a t o T s t s o c e c n e c i l a d a v e N y t r e p o r p l a u t c e l l e t n I * s t s o c t n e m p o e v e D l l l i w d o o G l a t o T e c i v r e S s t c a r t n o c s t s o c e c n e c i l y t r e p o r p * s t s o c a d a v e N l a u t c e l l e t n I t n e m p o e v e D l l l i w d o o G t n e m r i a p m i d n a n o i t a s i t r o m A s e s s o l D U A f o s d n a s u o h t n I 1 5 5 7 , ) 3 2 8 ( 2 3 0 3 , 1 7 1 1 3 9 9 , 1 3 9 9 , ) 4 6 0 1 ( , 1 7 1 2 1 7 1 , 0 5 7 0 1 , - - - - - - - - - - 9 0 1 8 , 2 7 9 7 , 2 7 9 7 , 7 4 1 0 1 , - 8 1 0 1 , 8 1 0 1 , 0 6 5 1 , 4 8 - 3 8 - 7 6 1 7 6 1 - 4 8 - 1 5 2 2 5 7 9 6 6 9 6 6 5 8 5 4 4 6 6 , - 9 4 9 2 , - 3 9 5 9 , 3 9 5 9 , 8 2 6 1 , ) 4 6 0 1 ( , - 7 5 1 0 1 , 5 1 0 7 , 4 1 1 6 , 4 1 1 6 , 2 0 0 8 , 3 2 8 6 8 0 8 , 5 3 5 - 1 7 1 1 7 1 1 7 1 - - 1 7 1 2 4 3 2 4 3 1 7 1 1 7 1 - ) 3 2 8 ( ) 3 2 8 ( 5 8 1 3 , 1 7 1 - - 3 5 1 9 1 6 0 1 , 8 8 6 9 1 6 0 1 , 8 8 6 ) 4 6 0 1 ( , - 1 7 1 4 6 8 1 , - 2 5 1 0 9 5 1 1 , 0 4 8 0 8 9 8 , 3 4 9 0 1 , 3 4 9 0 1 , 6 6 9 2 1 , 8 8 6 5 3 5 5 3 5 3 8 3 - - - - - - - - - - - 8 1 0 1 , 8 1 0 1 , 0 6 5 1 , 3 8 9 0 0 2 9 4 9 2 , 2 3 0 3 , 4 8 - 3 8 - 7 6 1 7 6 1 - 4 8 - 1 5 2 2 5 7 9 6 6 9 6 6 5 8 5 4 4 6 6 , - 9 4 9 2 , - 3 9 5 9 , 3 9 5 9 , 8 2 6 1 , ) 4 6 0 1 ( , - 7 5 1 0 1 , 5 1 0 7 , 4 1 1 6 , 4 1 1 6 , 2 0 0 8 , 3 2 8 ) 3 2 8 ( - 1 7 1 1 7 1 1 7 1 - - 1 7 1 2 4 3 5 2 5 7 0 6 2 , 7 0 6 2 , 6 3 4 2 , y l l u f n o n o i t a s i t r o m a k c a b e t i r W l 8 0 0 2 y u J 1 t a e c n a a B l l s t s o c t n e m p o e v e d n w o d n e t t i r w r a e y e h t r o f n o i t a s i t r o m A y l l u f 9 0 0 2 e n u J 0 3 t a e c n a a B l n o n o i t a s i t r o m a k c a b e t i r W s t s o c n w o d n e t t i r w r a e y e h t r o f n o i t a s i t r o m A l 9 0 0 2 y u J 1 t a e c n a a B l s e s s o l t n e m r i a p m I s e s s o l t n e m r i a p m I t n e m r i a p m i d n a n o i t a s i t r o m A 0 1 0 2 e n u J 0 3 t a e c n a a B l 9 0 0 2 e n u J 0 3 t A l 9 0 0 2 y u J 1 t A 0 1 0 2 e n u J 0 3 t A l 8 0 0 2 y u J 1 t A s e s s o l . i s g n d n fi h c r a e s e r f l o t n e m p o e v e d o t e t a e r e s e h T * l s s o l t n e m r i a p m i d n a e g r a h c n o i t a s i t r o m A y n a p m o C : t n e m e t a t s e m o c n i d e t a d i l o s n o C e h t n i s m e t i e n i l i g n w o l l o f e h t n i 4 8 0 1 0 2 8 2 6 1 , 2 1 7 1 , 3 8 9 0 0 2 2 0 1 3 , 5 8 1 3 , 4 8 0 1 0 2 0 8 7 1 , 4 6 8 1 , d e s i n g o c e r s i e g r a h c n o i t a s i t r o m a e h T D U A f o s d n a s u o h t n I s e s n e p x e g n i t a r e p o r e h t O l s e a s f o t s o C 55 . e m o c n i e v i s n e h e r p m o c f o t n e m e t a t s e h t n i s e s n e p x e n o i t a r t s i n m d a n i i d e s i n g o c e r e r a ) 0 0 0 1 7 1 $ , : 9 0 0 2 ( 0 0 0 1 7 1 $ f , o s e s s o l t n e m r i a p m i e h T AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 56 Ainsworth Game Technology Limited NOTES TO THE FINANCIAL STATEMENTS (continued) 20. Intangible assets (continued) Recoverability of development costs The carrying amount of the Group’s development expenditure amounts to $8,003,000. An impairment test was triggered in the year due to the loss experienced by the Group for the year ended 30 June 2010. The recoverable amount of each cash generating unit was estimated based on its value in use, and using a pre-tax discount rate of 20%. Development costs were segregated into their respective cash generating units, on a geographical or customer specific basis, where possible.  The remainder of development costs were allocated based on the jurisdictional/customer specific revenue they are expected to generate. The recoverable amount of each cash generating unit was estimated to be higher than the carrying amount of the unit and as such no impairment was required. Value in use for individual cash generating units, excluding North America, were determined by discounting the future cash flows generated from the continuing use of the development and based on the following key assumptions: • Cash inflows of $72 million in the 2011 year from the sale of the Group’s products and services. These cash inflows were determined through board approved budgets, historical experience and actual operating results; Annual revenue growth of between 2 and 7.5% throughout the useful life of the development based on current actual performance, • market conditions and strategic actions included in the Company’s three year Business Plan; • • The development will generate cash flows for 5 years; and Discount rate of 20% based on the weighted average cost of capital adjusted for volatility of regulatory conditions. The carrying amount of the North American cash generating unit was $3,839,000, comprising of $1,070,000 development costs, $1,209,000 other assets and $1,560,000 Nevada licence costs. The assessment of any related impairment for this cash generating unit was based on the projected forecasts included in the Group’s 2011 budget and 2012-2013 Business Plan and included the following key assumptions: • • • • • • Cash inflows of $16 million in the 2011 year from the sale of the of the Group’s products and services. These cash inflows were determined through a comprehensive review of the market undertaken as part of the budget and business planning process; Revenue growth to $27 million and $43 million in 2012 and 2013, respectively. This growth is based on the planned expansion and the establishment of activities in the Americas and the resultant growth from recent development undertaken. Annual revenue growth of 5% subsequent to 2013 for the remaining useful life of the development; Increased market share resulting from higher performance through recently developed product initiatives; Access to new markets following the recent granting of licences in North America and the release of the newly developed gaming machines in these markets; The development will generate cash flows for 5 years; and Discount rate of 20% based on the weighted average cost of capital adjusted for volatility of regulatory conditions. The value in use will be re-assessed at each reporting date for which an indicator of impairment exists. Should the above assumptions not remain valid, an impairment may be required. Impairment testing for Nevada licence costs The Nevada licence costs capitalised are classified as an intangible asset with an indefinite life, and as such the recoverable amount is assessed at each reporting date. The carrying amount of $1,560,000 was allocated to the North American cash generating unit which was assessed for impairment under the key assumptions noted above. As the recoverable amount of the North American cash generating unit was estimated to be higher than the carrying amount of the unit, no impairment was considered necessary. Impairment testing for goodwill Goodwill relates to acquired business and entities. The recoverable amount is assessed using calculation methodologies based on value-in-use calculations which utilise projected cashflows from financial budgets approved by the Board of Directors. The cashflow models consider growth over the medium term, being five years, discounted to present value using a discount rate determined by reference to its weighted average cost of capital (WACC) adjusted if necessary to reflect the specific characteristics of each entity. A capitalisation multiple is then applied to this medium term cumulative discounted cashflow and an acceptable valuation range is formulated and tested against the carrying value of goodwill associated with each business and entity. The recoverable amount was estimated to be lower than the carrying amount of the goodwill on a previous acquisition due to product transition to new generation gaming machines, and an impairment of $171,000 was required in the current period. The carrying amount as at the report date was $Nil (2009: $171,000). The recoverable amount of the Australian service cash-generating unit was based on its value in use. Value in use was determined by discounting the future cash flows generated from the continuing use of the service unit and was based on the following key assumptions: AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 57 • • Cash flows were projected based on actual operating results and a projected four year period. Cash flows for a further 10 year period were extrapolated using a constant growth rate of 5 percent, which does not exceed the long term average growth rate for the industry. Management believes that this forecast period was justified due to the long term nature of the service business; and Revenue was projected at about $4,214,000 in the first year with anticipated annual revenue growth included in the cash flow projections of 5 percent for the years 2010 to 2013. Management plans to achieve annual revenue of $4,886,000 by the fourth year. The values assigned to the key assumptions represent management’s assessment of future trends in the service industry and are based on internal sources via historical data. The above estimates are particularly sensitive in the following areas: • An increase of 1 percentage point in the discount rate used would have reduced the recoverable amount of the cash generating unit by $167,000 and no impairment would have resulted; and A 5 percent decrease in future planned revenues would have resulted in an impairment loss of $1,338,000. • 21. Trade and other payables In thousands of AUD Current Trade payables Other payables and accrued expenses Amount payable to director/shareholder controlled entities Non Current Payables due to subsidiaries 33 Note Consolidated 2009 2010 2,682 4,094 99 6,875 - - 2,813 4,918 33 7,764 - - Company 2010 2,353 2,934 99 5,386 388 388 2009 2,535 3,108 33 5,676 1,169 1,169 The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 32. Payables denominated in currencies other than the functional currency comprise $2,688 thousand of payables denominated in US Dollars (2009 $3,439 thousand), $Nil of payables denominated in Pounds Sterling (2009: $1 thousand), $14 thousand of payables denominated in Euro (2009: $Nil), $2 thousand of payables denominated in NZD (2009: $2 thousand), $Nil of payables denominated in Canadian Dollars (2009: $26 thousand) and $Nil of payables denominated in Japanese Yen (2009: $48 thousand). 22. Loans and borrowings This note provides information about the contractual terms of the Company’s and Group’s interest-bearing loans and borrowings, which are measured at amortised cost. For more information about the Company’s and Group’s exposure to interest rate, foreign currency and liquidity risk, see note 32. In thousands of AUD Current Current portion of finance lease liabilities Amount payable to director / shareholder controlled entities Loan from director / shareholder controlled entity - unsecured Non Current Finance lease liabilities Amount payable to director / shareholder controlled entity Loan from director / shareholder controlled entity - unsecured Loan from director / shareholder controlled entity - secured Convertible notes Consolidated 2009 2010 820 4,992 350 6,162 882 12,970 3,380 11,667 25,343 54,242 768 2,193 350 3,311 725 10,855 2,915 10,917 25,020 50,432 Company 2010 620 4,992 350 5,962 489 12,970 3,380 11,667 25,343 53,849 2009 593 2,193 350 3,136 413 10,855 2,915 10,917 25,020 50,120 AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 58 Ainsworth Game Technology Limited NOTES TO THE FINANCIAL STATEMENTS (continued) 22. Loans and borrowings (continued) Terms and debt repayment schedule Terms and conditions of outstanding loans were as follows: In thousands of AUD Consolidated Nominal interest rate Currency Year of maturity Face value Carrying amount Face value Carrying amount 30 June 2010 30 June 2009 Amount payable to director / shareholder Amount payable to director / shareholder Loans from director / shareholder controlled entity Convertible notes AUD AUD AUD AUD 8% 8% 8% 2011 2014 5,173 4,992 2,193 2,193 12,970 12,970 10,855 10,855 2014 18,507 15,397 18,507 14,182 8-10% 2011-2014 25,629 25,343 25,629 25,020 Finance lease liabilities AUD 4.4-12.8% 2010 - 2013 1,702 1,702 1,493 1,493 Total interest-bearing liabilities 63,981 60,404 58,677 53,743 In thousands of AUD Company Nominal interest rate Currency Year of maturity Face value Carrying amount Face value Carrying amount 30 June 2010 30 June 2009 Amount payable to director / shareholder Amount payable to director / shareholder Loans from director / shareholder controlled entity Convertible notes AUD AUD AUD AUD 8% 8% 8% 2011 2014 5,173 4,992 2,193 2,193 12,970 12,970 10,855 10,855 2014 18,507 15,397 18,507 14,182 8 - 10% 2011-2014 25,629 25,343 25,629 25,020 Finance lease liabilities AUD 4.4-12.8% 2010-2013 1,109 1,109 1,006 1,006 Total interest-bearing liabilities 63,380 59,811 58,190 53,256 AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 Financing facilities In thousands of AUD Trade/credit facility Loan from director / shareholder controlled entity Facilities utilised at reporting date Trade/credit facility Loan from director / shareholder controlled entity Facilities not utilised at reporting date Trade/credit facility Loan from director / shareholder controlled entity 59 Consolidated 2009 2010 6,000 40,000 46,000 5,036 13,706 18,742 964 26,294 27,258 5,000 40,000 45,000 2,132 13,706 15,838 2,868 26,294 29,162 Company 2010 6,000 40,000 46,000 5,036 13,706 18,742 964 26,294 27,258 2009 5,000 40,000 45,000 2,132 13,706 15,838 2,868 26,294 29,162 Trade/credit facility A trade facility of $6 million has been established from a director / shareholder controlled entity under more favourable terms than those that could be achieved from the Company’s bankers and at arms length in the open market. Refer note 33. Loan from director/shareholder controlled entity The loan facility is provided by an entity controlled by Mr LH Ainsworth, a director and shareholder of the Company. This facility is secured by a debenture mortgage over the Group’s freehold land and buildings at 10 Holker Street, Newington, NSW and a fixed and floating charge over the Company. The facilities of $13,706,000 utilised at the reporting date exclude interest payable of $12,179,000. A further unsecured loan of $4,801,000 has been provided to expand the Company’s Sydney facility and relocate all manufacturing operations from leased premises in Melbourne. This loan is under similar terms and conditions to the above facility with interest accruing from an agreed date at the rate of 8.0% per annum. The proposed terms of reimbursement are that an annual principal amount of $350,000 will be repaid monthly in arrears or as mutually agreed with the full repayment of the remaining balance and interest not required to be paid until the Company has sufficient operating cashflows to do so and until amounts owing on the $40 million facility has been repaid. Convertible notes In thousands of AUD Proceeds from issue of 19,714,717 convertible notes on 20 December 2004 Transaction costs Net proceeds Amount classified as equity Transaction costs classified as equity Accreted interest capitalised Carrying amount of liability at 30 June Consolidated 2009 2010 25,629 (1,085) 24,544 (2,842) 121 3,520 25,343 25,629 (1,085) 24,544 (2,842) 121 3,197 25,020 Company 2010 25,629 (1,085) 24,544 (2,842) 121 3,520 25,343 2009 25,629 (1,085) 24,544 (2,842) 121 3,197 25,020 In December 2011 note holders have the option to extend their notes for a further 3 years to 31 December 2014. The Company has the right to redeem the convertible notes on 31 December 2011 or at the end of every six months from 31 December 2011 until the final maturity date of 31 December 2014. If the Company notifies a holder of convertible notes of its intention to redeem their convertible notes, the noteholder may elect to convert their notes on the proposed redemption date. Notes that are not converted to ordinary shares will be redeemed at face value on either 31 December 2011 or 2014 subject to the early redemption by the Company. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 60 Ainsworth Game Technology Limited NOTES TO THE FINANCIAL STATEMENTS (continued) 22. Loans and borrowings (continued) Loans – secured This loan was recorded at fair value at 1 July 2005, given that the interest rate applied to the facility is lower than that which could be obtained commercially and was subsequently carried at amortised cost. The maturity date of the loan was extended during the current period and as such the loan was restated to its fair value, based on the extended terms. Subsequent to the restatement on 23 May 2008, the loan will be carried at amortised cost (refer note 3(c)). In thousands of AUD Fair value of the loan at 1 July Additional borrowings Repayment of borrowings Set-off arrangement Net proceeds Amount classified as equity Accreted interest capitalised Carrying amount of liability at 30 June Consolidated 2009 2010 10,917 500 (500) - 10,917 (97) 847 11,667 13,513 2,450 (250) (2,616) 13,097 (2,853) 673 10,917 Company 2010 10,917 500 (500) - 10,917 (97) 847 11,667 2009 13,513 2,450 (250) (2,616) 13,097 (2,853) 673 10,917 Loans – unsecured These loans are recorded at fair value, given that the interest rate applied is lower than that which could be obtained commercially. Subsequently these loans will be carried at amortised cost (refer note 3(c)). In thousands of AUD Fair value of the loan at 1 July Borrowings for building improvements Borrowings under trade facility established Repayment on borrowings Net borrowings Amount classified as equity Accreted interest capitalised Carrying amount of liability at 30 June (a) Consolidated 2009 2010 5,435 - 7,320 (4,373) 8,382 (623) 942 8,701 - 4,801 2,331 - 7,132 (2,210) 513 5,435 Company 2010 5,435 - 7,320 (4,373) 8,382 (623) 942 8,701 2009 - 4,801 2,331 - 7,132 (2,210) 513 5,435 (a) Amount classified as equity relates to the restatement of borrowings to fair value. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 61 Finance lease liabilities Finance lease liabilities of the Group entity are payable as follows: Consolidated In thousands of AUD Less than one year Between one and five years Future minimum lease payments Interest 2010 2010 Present value of minimum lease payments 2010 Future minimum lease payments 2009 Interest 2009 Present value of minimum lease payments 2009 939 976 1,915 118 95 213 821 881 1,702 873 798 1,671 105 73 178 768 725 1,493 Company In thousands of AUD Less than one year Between one and five years Future minimum lease payments Interest 2010 2010 Present value of minimum lease payments 2010 Future minimum lease payments 2009 Interest 2009 Present value of minimum lease payments 2009 687 547 1,234 68 57 125 619 490 1,109 660 445 1,105 67 32 99 593 413 1,006 The Company and Group lease plant and equipment under finance leases expiring from three to five years. At the end of the lease term, there is the option to purchase the equipment at a discount of market value, a price deemed to be a bargain purchase option. The terms of the leases require that additional debt and further leases are not undertaken without prior approval of the lessor. 23. Employee benefits In thousands of AUD Current Salaries and wages accrued Liability for annual leave Liability for long service leave Non Current Liability for long service leave Consolidated 2009 2010 Company 2010 2009 40 1,763 484 2,287 425 425 76 1,482 229 1,787 472 472 19 1,212 337 1,568 316 316 74 1,178 229 1,481 272 272 AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 62 Ainsworth Game Technology Limited NOTES TO THE FINANCIAL STATEMENTS (continued) 24. Share-based payments The Company has in place an ESOP approved on 30 July 2001. The terms and conditions of the grants are as follows, whereby all options are settled by physical delivery of shares: Grant date / employee entitled Number of instruments Vesting conditions Option grant to key management at 2 July 2007 200,000 Three years of service as per ESOP below Option grant to senior employees at 2 July 2007 331,060 Three years of service as per ESOP below Contractual life of options 5 years 5 years Total share options 531,060 To be eligible to participate in the ESOP the employee must be selected by the directors and reviewed by the Remuneration and Nomination Committee. Options may be exercised within a five-year period, starting on the first anniversary of the issue of the options (subject to earlier exercise where a takeover offer or takeover announcement is made, or a person becomes the holder of a relevant interest in 50% or more of the Company’s voting shares). The ESOP provides for employees to receive options for no consideration. Each option is convertible to one ordinary share. There are no voting or dividend rights attached to the unissued ordinary shares. Voting and dividend rights will be attached to the unissued ordinary shares when the options have been exercised. The exercise price of the options is determined in accordance with the rules of the ESOP. The ability to exercise the options is conditional on the achievement of performance hurdles. Accordingly, the plan does not represent remuneration for past services. The vesting and performance conditions of the share options issued on 2 July 2007 are as follows: Date First Anniversary of Grant Date Second Anniversary of Grant Date Third Anniversary of Grant Date Vesting Condition (% of Options vesting) Performance Condition (VWAP* must equal or exceed) % of Exercise Price 20% 20% 60% 200% 250% 300% * The performance conditions measure the volume weighted average price at which Shares traded on the ASX for the most recent 20 Business Days upon each of which any shares were traded on ASX within 60 business days immediately preceding the relevant vesting date of those Options.. In addition to the share options issued by the Company an incentive plan was introduced whereby share options were granted to all Australian employees, excluding directors and four key management personnel. The share options granted to Australian employees on 2 July 2007 totalled 10,994,707 and were granted over a portion of the personal shareholding of the Company’s Executive Chairman, Mr LH Ainsworth. During the year 380,035 share options expired as a result of cessation of employment with the Company and Group leaving 7,464,952 share options outstanding as at 30 June 2010. The number and weighted average exercise prices of share options is as follows: In thousands of options Outstanding at the beginning of the period Forfeited during the period Exercised during the period Granted during the period Outstanding at the end of the period Exercisable at the end of the period Weighted average exercise price 2010 Number of options 2010 Weighted average exercise price 2009 Number of options 2009 $0.56 $0.61 - - $0.50 1,156 (625) - - 531 - $0.59 $0.66 - - $0.56 1,736 (580) - - 1,156 - The options outstanding at 30 June 2010 have an exercise price of $0.50 and a remaining life of 2.0 years. During the 2010 financial year, no share options were exercised or granted. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 63 The fair value of services received in return for share options granted are measured by reference to the fair value of share options granted. The estimate of the fair value of the services received is measured based on the Black Scholes and binomial lattice models. The contractual life of the option is used as an input into this model. Expectations of early exercise are incorporated into these models. The expected volatility is based on the historic volatility (calculated based on the weighted average remaining life of the share options), adjusted for any expected changes to future volatility due to publicly available information. Share options are granted under a service condition and, for grants to key management personnel, market and non-market performance conditions. Non-market performance conditions are not taken into account in the grant date fair value measurement of the services received. 25. Provisions In thousands of AUD Restructuring Service/warranties Legal Movements during the year Restructuring Balance at 1 July Provisions made during the year Provisions used during the year Balance at 30 June In thousands of AUD Service / Warranties Balance at 1 July Provisions made during the year Provisions used during the year Balance at 30 June In thousands of AUD Legal Balance at 1 July Provisions made during the year Provisions used during the year Balance at 30 June Consolidated 2009 2010 Company 2010 2009 - - 140 140 - - - - 216 - (216) - - 140 - 140 - 216 - 216 403 - (403) - 359 60 (203) 216 - - - - - 216 140 140 - - - - 216 - (216) - - 140 - 140 - 216 - 216 403 - (403) - 359 60 (203) 216 - - - - Legal The Group provided for $140,000 which is the maximum exposure under the Company’s insurance relating to a claim made by a former contractor. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 64 Ainsworth Game Technology Limited NOTES TO THE FINANCIAL STATEMENTS (continued) 26. Capital and reserves Share capital In thousands of shares On issue at 1 July On issue at 30 June – fully paid Company Ordinary Shares 2010 278,942 278,942 2009 278,942 278,942 The Group has also issued share options (see note 24). The Company does not have authorised capital or par value in respect of its issued shares. The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. All shares rank equally with regard to the Company’s residual assets. Equity compensation reserve The equity compensation reserve represents the cost of share options issued to employees that the Group is required to include in the consolidated financial statements. Fair value reserve The fair value reserve comprises the cumulative net change in fair value of related party loans and borrowings where interest is charged below market value. Translation reserve The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations where their functional currency is different to the presentation currency of the reporting entity, as well as from the translation of liabilities that hedge the Company’s net investment in a foreign subsidiary. Dividends No dividends were recommended or paid during or since the end of the financial year (2009: Nil). 27. Operating leases Leases as lessee Non-cancellable operating lease rentals are payable as follows: In thousands of AUD Less than one year Between one and five years Consolidated 2009 338 127 2010 187 510 697 465 Company 2010 31 32 63 2009 29 63 92 The Group leases a number of warehouse and office facilities under operating leases. The leases typically run for a period of 1-5 years, with an option to renew the lease after that date. Lease payments are increased every five years to reflect market rentals. None of the leases includes contingent rentals. During the financial year ended 30 June 2010, $455,000 was recognised as an operating expense in the income statement in respect of operating leases (2009: $465,000). The warehouse and office leases are combined leases of land and buildings. When the Group adopted AASBs at 1 July 2004, it was not possible to obtain a reliable estimate of the split of the fair values of the lease interest between land and buildings at inception of the leases. Therefore, in determining lease classification, the Group evaluated whether both parts were clearly operating leases or finance leases. Firstly, land title does not pass. Secondly, because the rent paid to the landlord for the building is increased to market rent at regular intervals, and the Group does not participate in the residual value of the building, it was judged that substantially all the risks and rewards of the building are with the landlord. Based on these qualitative factors it was concluded that the leases are operating leases. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 65 Consolidated Company 2010 2009 2010 2009 28. Other commitments In thousands of AUD Employee compensation commitments Key management personnel Commitments under non-cancellable employment contracts not provided for in the financial statements and payable: Within one year 376 350 352 330 29. Regulatory matters The manufacture and distribution of gaming machines and associated products are subject to extensive local and foreign laws, regulations and taxes. Many of these jurisdictions require licences, registrations, findings of suitability, permits, documentation and qualification and other forms of approval for manufacturers of gaming machines. No matter is currently the subject of investigation by any regulatory authorities. 30. Group Entities Parent entity Ainsworth Game Technology Limited Subsidiaries AGT Pty Ltd Ainsworth Game Technology Inc AGT Service Pty Ltd AGT Service (NSW) Pty Ltd J & A Machines Pty Ltd RE & R Baker & Associates Pty Ltd Bull Club Services Pty Ltd Country of Incorporation Ownership interest 2010 2009 Australia - - Australia USA Australia Australia Australia Australia Australia 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% In the financial statements of the Company, investments in subsidiaries are measured at cost. The Company’s investment in controlled entities amounted to $2. This investment is included in other assets. Investments in associates are also accounted for at cost value. The Company has no jointly controlled entities. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 66 Ainsworth Game Technology Limited NOTES TO THE FINANCIAL STATEMENTS (continued) 31. Reconciliation of cash flows from operating activities In thousands of AUD Note 2010 2009 2010 2009 Consolidated Company Cash flows from operating activities (Loss) for the period Adjustments for: Depreciation Amortisation of intangible assets Impairment losses on intangible assets Net finance costs Share of loss of equity accounted investees Loss on sale of property, plant and equipment Equity-settled share-based payment transactions Income tax expense Operating profit / (loss) before changes in working capital and provisions Change in trade and other receivables Change in inventories Change in other assets Change in trade and other payables Change in provisions and employee benefits 19 20 20 11 17 9 12 Interest paid Net cash from operating activities 32. Financial instruments (2,721) (12,542) (3,760) (12,559) 2,443 1,864 171 6,954 - 30 88 355 9,184 2,760 4,276 (95) 734 (3,375) 13,484 (2,863) 10,621 1,769 3,185 171 639 407 133 146 498 (5,594) 2,210 3,758 (110) 819 (190) 893 (2,489) (1,596) 2,243 1,712 171 6,940 - 14 88 - 7,408 2,945 4,273 (96) 2,051 (3,712) 12,869 (2,804) 10,065 1,638 3,032 171 633 - 133 146 - (6,806) 6,372 4,049 (283) 762 (538) 3,556 (2,475) 1,081 Credit risk Exposure to credit risk The carrying amount of the Group’s financial assets represents the maximum credit exposure. The Group’s maximum exposure to credit risk at the reporting date was: In thousands of AUD Receivables Note 15 Carrying amount 2010 28,846 28,846 2009 27,305 27,305 The Company’s maximum exposure to credit risk at the reporting date was $28,846 thousand (2009: $27,305 thousand) for receivables. The Group’s gross maximum exposure to credit risk for trade receivables at the reporting date by geographic region was: Carrying amount 2010 8,488 20,116 - 560 33 - 29,197 2009 5,183 24,267 145 242 705 1,031 31,573 In thousands of AUD Australia Americas Europe New Zealand Asia Africa AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 67 The Company’s gross maximum exposure to credit risk for receivables at the reporting date by geographic region was $20,116 thousand (2009: $24,267 thousand) for Americas, $8,488 thousand (2009: $5,183 thousand) for Australia, $Nil thousand (2009: $145 thousand) for Europe, $33 thousand (2009: $705 thousand) for Asia and $560 thousand (2009: $1,273 thousand) for New Zealand, totalling $29,197 thousand (2009: $31,573 thousand). The Group’s most significant customer, a distributor within South America, accounts for $10,239 thousand of the trade receivables carrying amount at 30 June 2010 (2009: $10,423 thousand). Two subsidiaries account for $1,176 thousand and $2,016 thousand (2009: $2,096 thousand and $2,194 thousand) of the Company’s receivables carrying amount. Impairment losses The aging of the Group’s trade receivables at the reporting date was: In thousands of AUD Not past due Past due 0-30 days Past due 31-120 days Past due 121 days to one year More than one year Gross 2010 Impairment 2010 Gross 2009 Impairment 2009 26,711 736 125 91 1,534 29,197 - - - - 351 351 19,152 744 2,238 3,254 6,185 31,573 - - - 49 4,219 4,268 2009 4,086 (558) - 740 4,268 The movement in the allowance for impairment in respect of trade receivables during the year was as follows: In thousands of AUD Balance at 1 July Impairment loss Provision during the year Effect of exchange rate fluctuations Balance at 30 June 2010 4,268 (4,638) 292 429 351 The impairment loss of $292,000 (2009: $Nil) was recognised in sales, service and marketing expenses in the income statement. Based on historic default rates and current repayment plan in place, the Group believes that no impairment is necessary in respect of trade receivables not past due or on amounts past due up to 120 days as these relate to known circumstances that are not considered to impact collectibility. An impairment allowance of $351,000 has been provided for past due amounts more than 121 days and relates to customers and distributors where the Group has either commenced legal action or has assessed potential collectability issues. The remaining balance where no impairment allowance has been provided relate to negotiated repayment plans from long standing customers and distributors who have met or had their obligations re-negotiated during the period. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 68 Ainsworth Game Technology Limited NOTES TO THE FINANCIAL STATEMENTS (continued) 32. Financial instruments (continued) Liquidity risk The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements: Consolidated 30 June 2010 In thousands of AUD Non-derivative financial liabilities Convertible notes Payable to director/shareholder controlled entities Other note holders Finance lease liabilities Amounts payable to director/shareholder controlled entities Loans from director/shareholder controlled entity Trade and other payables 30 June 2009 In thousands of AUD Non-derivative financial liabilities Convertible notes Payable to director/shareholder controlled entities Other note holders Finance lease liabilities Amounts payable to director/shareholder controlled entities Loans from director/shareholder controlled entity Trade and other payables Carrying amount Contractual cash flows 6 months or less 6-12 months 1-2 years 2-5 years More than 5 years 15,687 9,656 1,702 (23,001) (11,214) (1,915) (790) (492) (675) (790) (492) (263) (1,580) (19,841) (10,230) (476) - (501) 17,962 (18,143) (5,173) - 15,397 6,875 67,279 (18,507) (6,875) (79,655) (175) (6,875) (175) - (14,180) (1,720) (12,286) (51,469) - - - (12,970) (18,157) - Carrying amount Contractual cash flows 6 months or less 6-12 months 1-2 years 2-5 years More than 5 years 13,180 11,840 1,493 (20,791) (15,779) (1,671) (540) (485) (473) (675) (606) (400) (1,350) (1,213) (437) 13,048 (13,048) (2,193) - 14,182 7,807 61,550 (18,507) ( 7,807) (77,603) (175) (7,807) (175) - (11,673) (1,856) (3,000) (61,074) (18,226) (13,475) (361) (10,855) (18,157) - - - - - - - - - - - - - - - - - - AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 Company 30 June 2010 In thousands of AUD Non-derivative financial liabilities Convertible notes Payable to director/shareholder controlled entities Other note holders Finance lease liabilities Amounts payable to director/shareholder controlled entities Loans from director/shareholder controlled entity Trade and other payables 30 June 2009 In thousands of AUD Non-derivative financial liabilities Convertible notes Payable to director/shareholder controlled entities Other note holders Finance lease liabilities Amounts payable to director/shareholder controlled entities Loans from director/shareholder controlled entity Trade and other payables 69 Carrying amount Contractual cash flows 6 months or less 6-12 months 1-2 years 2-5 years More than 5 years 15,687 9,656 1,109 (23,001) (11,214) (1,234) (790) (492) (539) (790) (492) (148) (1,580) (19,841) (10,230) (254) - (293) 17,962 (18,143) (5,173) - 15,397 5,386 65,197 (18,507) (5,386) (77,485) (175) (5,386) (175) - (12,555) (1,605) (12,064) (51,261) - - - (12,970) (18,157) - Carrying amount Contractual cash flows 6 months or less 6-12 months 1-2 years 2-5 years More than 5 years 13,180 11,840 1,006 (20,791) (15,779) (1,105) (540) (485) (358) (675) (606) (302) (1,350) (1,213) (298) 13,048 (13,048) (2,193) - 14,182 5,717 58,973 (18,507) ( 5,717) (74,947) (175) ( 5,717) (9,468) (175) - (1,758) (2,861) (60,860) (18,226) (13,475) (147) (10,855) (18,157) - - - - - - - - - - - - - - - - - - AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 70 Ainsworth Game Technology Limited NOTES TO THE FINANCIAL STATEMENTS (continued) 32. Financial instruments (continued) Currency risk The Group is exposed to foreign currency risk on sales and purchases that are denominated in a currency other than the AUD. The Group monitors and assesses under its Treasury Risk policy and facilities available whether hedging of all trade receivables and trade payables denominated in a foreign currency from time to time is considered appropriate. The Group uses foreign currency call options to hedge its foreign currency risk. Most of the foreign currency call options have maturities of less than one year after the balance date. No foreign currency call options were in place at the reporting date due to expiry in the current period. Exposure to currency risk The Group’s significant exposure to foreign currency risk at balance date was as follows, based on notional amounts: In thousands of AUD Trade receivables Trade payables Net exposure in statement of financial position USD Euro 30 June 2010 20,116 (2,688) 17,428 - (14) (14) NZD 560 (2) 558 USD Euro 30 June 2009 25,665 (3,439) 22,226 145 - 145 The Company’s exposure to foreign currency risk was as follows, based on notional amounts: In thousands of AUD Trade receivables Trade payables Net exposure in statement of financial position USD Euro 30 June 2010 20,116 (1,549) 18,567 - (14) (14) NZD 560 (2) 558 USD Euro 30 June 2009 25,371 (1,926) 23,445 145 - 145 NZD 237 (2) 235 NZD 237 (2) 235 The following significant exchange rates applied during the year: AUD USD Euro NZD GBP Average rate Reporting date spot rate 2010 0.8895 0.6526 1.2770 0.5697 2009 0.7469 0.5461 1.2445 0.4680 2010 0.8567 0.7019 1.2309 0.5686 2009 0.8117 0.5810 1.2574 0.4930 AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 Sensitivity analysis In managing currency risks the Group aims to reduce the impact of short-term fluctuations on the Group earnings. Over the longer-term, however, permanent changes in foreign exchange will have an impact on profit/(loss). A 10 percent strengthening of the Australian dollar against the following currencies at 30 June would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables remain constant. The analysis is performed on the same basis for 2009. 71 Effect in thousands of AUD 30 June 2010 USD Euro NZD 30 June 2009 USD Euro NZD Consolidated Company Equity Profit or (loss) Equity Profit or (loss) (1,591) (1,585) (1,688) (1,688) 1 (51) 1 (51) 1 (51) 1 (51) (2,026) (2,021) (2,132) (2,132) (13) (21) (13) (21) (13) (21) (13) (21) A 10 percent weakening of the Australian dollar against the following currencies at 30 June would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables remain constant. The analysis is performed on the same basis for 2009. Effect in thousands of AUD 30 June 2010 USD Euro NZD 30 June 2009 USD Euro NZD Consolidated Company Equity Profit or (loss) Equity Profit or (loss) 1,750 1,743 1,857 1,857 (1) 56 (1) 56 (1) 56 (1) 56 2,228 2,223 2,345 2,345 14 23 14 23 14 23 14 23 AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 72 Ainsworth Game Technology Limited NOTES TO THE FINANCIAL STATEMENTS (continued) 32. Financial instruments (continued) Fair values The fair values of financial assets and liabilities, together with the carrying amounts shown in the statement of financial position, are as follows: Consolidated In thousands of AUD Assets carried at amortised cost Receivables and other assets Cash and cash equivalents Liabilities carried at amortised cost Trade and other payables Finance liabilities Convertible notes Amount payable to director/shareholder controlled entity Loans from director / shareholder controlled entity - unsecured Loans from director / shareholder controlled entity - secured Note Carrying amount 2010 Fair value 2010 Carrying amount 2009 15 14 21 22 22 22 22 22 28,933 6,144 35,077 Carrying amount 2010 6,875 1,702 25,343 17,962 3,730 11,667 67,279 28,933 6,144 35,077 Fair value 2010 6,875 1,702 25,343 17,962 3,730 11,667 67,279 28,179 958 29,137 Carrying amount 2009 7,764 1,493 25,020 13,048 3,265 10,917 61,507 Fair value 2009 28,179 958 29,137 Fair value 2009 7,764 1,493 25,020 13,048 3,265 10,917 61,507 Estimates of fair values The methods used in determining the fair values of financial instruments are discussed in note 4. Interest rates used for determining fair value The interest rates used to discount estimated cash flows, where applicable, are based on the government yield curve as of 30 June 2010 plus an adequate constant credit spread and are as follows: Loans and borrowings Receivables Leases 2010 11.7% - 22.3% 4.7% 4.4% - 12.8% 2009 11.7% - 27.2% 3.2% 7.4% - 10.4% AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 73 33. Related parties The following were key management personnel of the Group at any time during the reporting period and unless otherwise indicated were key management personnel for the entire period: Non-executive directors Mr SL Wallis Mr GJ Campbell Mr MB Yates (Appointed 15 December 2009) Executive directors Mr LH Ainsworth (Executive Chairperson) Mr DE Gladstone (Executive Director and Chief Executive Officer, Ainsworth Game Technology Limited), appointed Executive Director on 25 February 2010 Executives Mr DE Gladstone (Chief Executive Officer, Ainsworth Game Technology Limited), for period up to appointment as Executive Director on 25 February 2010 Mr ML Ludski (Chief Financial Officer and Company Secretary, Ainsworth Game Technology Limited) Mr V Bruzzese (General Manager Technical Services, Ainsworth Game Technology Limited) Mr I Cooper (General Manager Manufacturing, Ainsworth Game Technology Limited) Mr M Cuadros (Vice President Operations Finance & HR Americas, Ainsworth Game Technology Inc) classified as key management on 1 May 2010 Former Mr R Meitzler (Senior VP Sales and Operations, Ainsworth Game Technology Inc.), ceased employment on 30 April 2010 Key management personnel compensation The key management personnel compensation included in ‘personnel expenses’ (see note 9) is as follows: In AUD Short-term employee benefits Post-employment benefits Termination benefits Share based payments Consolidated 2009 2010 Company 2010 2009 2,451,040 2,468,901 1,993,124 1,893,430 135,749 126,359 127,978 1,348 367 26,640 3,420 - - 120,310 26,640 - 2,588,504 2,625,320 2,121,102 2,040,380 The key management personnel receive no compensation in relation to the management of the Company. The compensation disclosed above represents an allocation of the key management personnel’s estimated compensation from the Group in relation to their services rendered to the Company. Individual directors and executives compensation disclosures Information regarding individual directors and executives compensation and some equity instruments disclosures as permitted Corporations Regulations 2M.3.03 and 2M.6.04 is provided in the Remuneration Report section of the Directors’ Report. Apart from the details disclosed in this note, no director has entered into a material contract with the Company or the Group since the end of the previous financial year and there were no material contracts involving directors’ interests existing at year-end. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 74 Ainsworth Game Technology Limited NOTES TO THE FINANCIAL STATEMENTS (continued) 33. Related parties (continued) Other key management personnel transactions A number of key management persons, or their related parties, hold positions in other entities that result in them having control or significant influence over the financial or operating policies of those entities. A number of these entities transacted with the Company or its subsidiaries in the reporting period. Other than as described below the terms and conditions of the transactions with management persons and their related parties were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to non-director related entities on an arm’s length basis. The aggregate amounts recognised during the year relating to key management personnel and their related parties were as follows: In AUD Key management persons Mr LH Ainsworth Transaction Leased property and equipment Mr LH Ainsworth Sales revenue Mr LH Ainsworth Purchases and other charges for payments made on behalf of the Company Mr LH Ainsworth Consultancy services Mr LH Ainsworth Interest paid/payable on financing facilities Mr LH Ainsworth Convertible note interest Transactions value year ended 30 June 2010 2009 Note Balance receivable / (payable) as at 30 June 2009 2010 (i) (ii) (ii) (iii) (iv) (v) 87,400 134,400 73,676 2,281,146 (6,250) 26,085 - (30,117) 99,066 230,000 226,593 230,000 (99,066) (226,593) - - 2,542,007 1,997,862 (13,129,507) (10,613,452) 1,214,708 1,076,967 (3,699) (2,959) Mr LH Ainsworth Loan from director / shareholder controlled entity (vi) - 703,043 (3,729,164) (3,265,352) (i) (ii) The Company leased associated plant and equipment and reimbursed financial consultancy costs incurred from and to an entity controlled by Mr LH Ainsworth on normal commercial terms and conditions. Transactions were with Ainsworth (UK) Ltd, an entity controlled by Mr LH Ainsworth. These sales and purchases/charges were on normal commercial terms and conditions. (iii) Mr LH Ainsworth received fees during the financial year for the provision of services under a consultancy agreement in relation to his role as Executive Chairman. (iv) As disclosed in note 22 a company controlled by Mr LH Ainsworth has extended a loan to the company. The maturity date of this loan was amended on 21 October 2008 until a date that is 4 years after the will of Mr LH Ainsworth coming into effect. The terms of this loan are more favourable than could be obtained from the Group’s bankers and at arms length in the open market. (v) Interest paid/payable during the financial year to Mr LH Ainsworth and entities controlled by him for convertible notes held. This interest was under the same terms and conditions as all convertible note holders. (vi) An additional, unsecured loan was provided by a company controlled by Mr LH Ainsworth. This loan was unsecured and is under similar terms and conditions to the loan identified in (iv) above. Agreement has been reached that $350,000 per annum is to be repaid monthly in arrears or as mutually agreed. The full repayment of the remaining balance and interest is not required to be paid until such time as the Company or Group has sufficient operating cash flows to do so, and until the $46 million facility has been repaid. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 75 Amounts receivable from and payable to key management personnel at reporting date arising from these transactions were as follows: In AUD Assets and liabilities arising from the above transactions Current trade and other payables Consolidated 2009 2010 Company 2010 2009 Amount payable to director/shareholder controlled entities 98,735 33,076 98,735 33,076 Current loans and borrowings Amount payable to director/shareholder controlled entities Loan from director / shareholder controlled entity - unsecured 4,992,444 350,000 2,193,225 350,000 4,992,444 350,000 2,193,225 350,000 Non-current loans and borrowings Amount payable to director/shareholder controlled entity Loan from director/shareholder controlled entity - unsecured Loan from director/shareholder controlled entity - secured 12,970,273 3,380,000 11,666,785 10,855,396 2,915,352 10,917,466 12,970,273 3,380,000 11,666,785 10,855,396 2,915,352 10,917,466 Convertible notes 13,802,467 13,179,989 13,802,467 13,179,989 Options and rights over equity instruments The movement during the reporting period in the number of options over ordinary shares in Ainsworth Game Technology Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows: Held at 1 July 2009 Granted as remuneration Exercised Other changes* Held at 30 June 2010 Vested during the year Vested and exercisable at 30 June 2010 Directors Executives Current Mr ML Ludski Mr M Cuadros Former Mr R Meitzler (resigned 30/04/10) Directors Executives Current Mr ML Ludski Mr R Meitzler Former Mr K Orchard (retired 30/06/08) Mr PW Walford 50,000 200,000 200,000 - - - - - (50,000) - - 200,000 - 40,000 - (200,000) - 40,000 - - - Held at 1 July 2008 Granted as remuneration Exercised Other changes* Held at 30 June 2009 Vested during the year Vested and exercisable at 30 June 2009 50,000 200,000 315,375 140,000 - - - - - - - - - - 50,000 200,000 - 40,000 (315,375) (140,000) - - - - - - - - * Other changes represent options that expired or were forfeited during the year. No options held by key management personnel are exercisable at 30 June 2009 or 2010 as performance hurdles have not been achieved. No options were held by key management person related parties. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 76 Ainsworth Game Technology Limited NOTES TO THE FINANCIAL STATEMENTS (continued) 33. Related parties (continued) Movements in shares The movement during the reporting period in the number of options over ordinary shares in Ainsworth Game Technology Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows: Held at 1 July 2009 Purchases Note (1) Received on exercise of options Sales Note (1) Held at 30 June 2010 Directors Current Mr LH Ainsworth Mr SL Wallis Mr GJ Campbell Mr D Gladstone Executives Current Mr I Cooper Mr M Cuadros Mr V Bruzzese Former Mr R Meitzler Directors Current Mr LH Ainsworth Mr SL Wallis Mr GJ Campbell Executives Current Mr D Gladstone Mr V Bruzzese 212,556,330 629,980 289,674 100,000 9,095,533 92,423 200,000 - - 15,000 50,000 - 30,000 - - 37,000 - - - - - - - - (8,333,333) - - - 213,318,530 722,403 489,674 100,000 - - (47,300) (37,000) 30,000 15,000 2,700 - Held at 1 July 2008 Purchases Received on exercise of options Sales Held at 30 June 2009 211,428,611 629,980 87,500 1,127,719 - 202,174 - - 100,000 50,000 - - - - - - - - - - 212,556,330 629,980 289,674 100,000 50,000 NOTE (1) Included in purchases and sales during the current period were 8,333,333 ordinary shares transacted between Ainsworth family members. No shares were granted to key management personnel during the reporting period as compensation in 2009 or 2010. There were no changes in key management in the period after the reporting date and prior to the date when the Financial Report is authorised for issue occurred. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 77 Non-key management personnel disclosures Subsidiaries Loans operate between the Company and wholly owned subsidiaries for trading purposes. At 30 June 2010, the amount owed to the Company from controlled entities was $4,261,107 (2009: $4,290,000). At 30 June 2010, the amount owed by the Company to controlled entities was $388,126 (2009: $1,169,000). Loans outstanding between the Company and its controlled entities are interest free and repayable on demand. During the year ended 30 June 2010 the Company was provided management services from controlled entities. Management fees charged during the year by controlled entities were $8,032,115 (2009: $8,338,496). The Company provided management services to a controlled entity of $10,000 (2009: $15,000). The Company utilised the services of controlled entities in the amount of $939,934 (2009: $48,936). Transactions with these controlled entities were priced on an arm’s length basis and were related to service and installation of machines at gaming venues. Equity accounted investees During the financial year ended 30 June 2010, equity accounted investees purchased goods from the Group in the amount of $Nil (2009: $36,345) and provided services to the Group in the amount of $Nil (2009: $388,328). Transactions with equity accounted investees are priced on an arm’s length basis and in the financial year ended 30 June 2009 relate to the 11 month period to 31 May 2009 at which date effective control and consolidation of these equity investees occurred. 34. Subsequent events There has not arisen in the interval between the end of the financial year and the date of this report any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the Company, to affect significantly the operations of the Group, the results of those operations, or the state of affairs of the Group, in future financial years. AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 78 DIRECTORS’ DECLARATION 1. In the opinion of the directors of Ainsworth Game Technology Limited ‘the Company’: (a) the financial statements and notes that are contained in paragraphs 1 to 34, and the Remuneration report in the Directors’ report, set out on pages 20 to 25, are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Company’s and the Group’s financial position as at 30 June 2010 and of their performance, for the financial year ended on that date; (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and (iii) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable . 2. 3. The directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the Chief Executive Officer and Chief Financial Officer for the financial year ended 30 June 2010. The directors draw attention to note 2(a) to the financial statements which includes a statement of compliance with International Financial Reporting Standards. Signed in accordance with a resolution of the directors: Dated at Sydney this 25th day of August 2010. LH Ainsworth Executive Chairman AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 79 Independent auditor’s report to the members of Ainsworth Game Technology Limited Report on the financial report We have audited the accompanying financial report of Ainsworth Game Technology Limited (the Company), which comprises the statements of financial position as at 30 June 2010, and statements of comprehensive income, statements of changes in equity and statements of cash flows for the year ended on that date, a summary of significant accounting policies and other explanatory notes 1 to 34 and the directors’ declaration of the Group comprising the company and the entities it controlled at the year’s end or from time to time during the financial year. Directors’ responsibility for the financial report The directors of the company are responsible for the preparation and fair presentation of the financial report in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal control relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. In note 2(a), the directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements, that the financial report of the Group, comprising the financial statements and notes, complies with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We performed the procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001 and Australian Accounting Standards (including the Australian Accounting Interpretations), a view which is consistent with our understanding of the Company’s and the Group’s financial position and of their performance. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. Auditor’s opinion In our opinion: (a) the financial report of Ainsworth Game Technology Limited is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Company’s and the Group’s financial position as at 30 June 2010 and of their performance for the year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001. (b) the financial report of the Group also complies with International Financial Reporting Standards as disclosed in note 2(a). Liability limited by a scheme approved under Professional Standards Legislation AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 80 Independent auditor’s report to the members of Ainsworth Game Technology Limited (continued) Report on the remuneration report We have audited the Remuneration Report included in pages 20 to 25 of the directors’ report for the year ended 30 June 2010. The directors of the company are responsible for the preparation and presentation of the remuneration report in accordance with Section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with auditing standards. Auditor’s opinion In our opinion, the remuneration report of Ainsworth Game Technology Limited for the year ended 30 June 2010, complies with Section 300A of the Corporations Act 2001. KPMG Carlo Pasqualini Partner Sydney 25 August 2010 Lead auditor’s independence declaration under Section 307C of the Corporations Act 2001 To: the directors of Ainsworth Game Technology Limited I declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 30 June 2010 there have been: (i) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and (ii) no contraventions of any applicable code of professional conduct in relation to the audit. KPMG Carlo Pasqualini Partner Sydney 25 August 2010 AINSWORTH GAME TECHNOLOGY ANNUAL REPORT 2010 Liability limited by a scheme approved under Professional Standards Legislation Auditor KPMG 10 Shelley Street Sydney NSW Australia 2000 Tel: +61 2 9335 7000 Fax: +61 2 9299 7001 Other Information Ainsworth Game Technology Limited, incorporated and domiciled in Australia, is a publicly listed company limited by shares. CORPORATE DIRECTORY Directors Executive Chairman Mr LH Ainsworth Stock Exchange Listing The Company is listed on the Australian Stock Exchange. The Home Exchange is Sydney. CODE: AGI Website www.ainsworth.com.au Share Registry Computershare Investor Services Pty Ltd Level 3, 60 Carrington Street, Sydney NSW Australia 2001 Tel: 1300 850 505 (within Aust) +61 3 9415 4000 (outside Aust) Fax: +61 3 9473 2500 THE AMERICAS 6600 N.W 12 Avenue, Suite 201 Ft. Lauderdale, FL 33309 USA (954) 317 5500 Tel: Fax: (954) 317 5555 Independent Non-Executive Directors Mr SL Wallis AO Mr GJ Campbell Mr MB Yates Chief Executive Officer & Executive Director Mr DE Gladstone Company Secretary and Chief Financial Officer Mr ML Ludski OFFICES AUSTRALIA Corporate and Head Office 10 Holker Street, Newington NSW Australia 2127 Tel: +61 2 9739 8000 Fax: +61 2 9737 9483 Queensland Unit 6, 3990 Pacific Highway Loganholme QLD Australia 4129 Tel: +61 7 3209 6210 Fax: +61 7 3209 6510 South Australia Ms Toni Odgers P.O. Box 379 Fullerton SA Australia 5063 Tel: +61 413 728 766 Fax: +61 8 8294 1094 10 Holker Street, Newington NSW Australia 2127 Phone +61 2 9739 8000 Fax +61 2 9737 9483 www.ainsworth.com.au QUALITYINNOVATION EXCELLENCE

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