ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED ACN 092 708 364 www.eos‑aus.com 12 ANNUAL REPORT 2012 CONTENTS CORPORATE DIRECTORY Review of Operations Directors’ Report Auditors’ Report Directors’ Declaration Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to and forming part of the Financial Statements ASX Additional Information Twenty Largest Shareholders Corporate Governance Statement 1 6 17 20 21 22 23 24 25 79 81 82 Directors Mr Fred Bart (Chairman) Dr Ben Greene (Chief Executive Offi cer) Mr Ian Dennis Mr Mark Ureda Lt Gen Peter Leahy AC Mr Kevin Scully Company Secretary Mr Ian Dennis Registered Offi ce Suite 2, Level 12 75 Elizabeth Street Sydney NSW 2000 Australia Telephone +61 2 9233 3915 Facsimile +61 2 9232 3411 Website www.eos-aus.com Share Registry Sydney NSW 2000 GPO Box 7045 Sydney NSW 1115 Australia Facsimile 1300 137 341 Auditors Deloitte Touche Tohmatsu Chartered Accountants Eclipse Tower Level 19, 60 Station Street Parramatta NSW 2150 Australia Computershare Investor Services Pty Limited Level 3, 60 Carrington Street Telephone 1300 855 080 or +61 3 9611 5711 outside Australia 4535 Designed and Produced by RDA Creative www.rda.com.au REVIEW OF OPERATIONS 1. RESULTS FOR FULL‑YEAR ENDING 31 DECEMBER 2012 The consolidated entity incurred a net loss during the year of $10,179,823 (2011: $180,188 profit) on revenues of $21,919,748 (2011: $32,775,391). Net cash used by provided by operating activities was $3,784,501 (2011 ‑ $3,778,311 used). As at 31 December 2012, the consolidated entity had cash of $6,686,194 (2011 ‑ $4,885,761) of which $400,393 (2011 ‑ $496,296) is restricted as it secures bank guarantees on existing contracts with local and overseas customers. The cash will become unrestricted when the contract is concluded or renegotiated. 2. BACKGROUND TO RESULT Overview: These stark and disappointing results arise from the company executing a strategy from 2011 to achieve sustainability in a new sustaining fiscal reality of reduced defence expenditure globally. The company assumes this new reality will extend with globally uneven intensity until 2016 and have broad consequences such as reduced sector revenue, rising protectionism, tighter competition, and industry consolidation both locally and globally. Notwithstanding the stresses there will also be opportunities for companies with genuine customer focus, advanced technology, lean processes, strong management and secure market access. EOS has addressed this situation by executing an aggressive strategy aimed at positioning EOS for future growth even as constrained circumstances apply. The key objectives of this strategy were: A. Production. Achieve significant product cost reduction and quality improvement, at the same time as achieving scalability of output to match unstable demand, by out‑sourcing production to major partners with existing plant capacity. B. Costs. Reposition the company for higher profits at any level of revenue by significantly and sustainably reducing fixed operating costs. sectors as they mature. This specialization will drive further process improvement and cost reduction. D. Diversification. Achieve diversification through targeting new geographic markets with emphasis on Asia and the Middle East where EOS networks are strong. E. Technology. Accelerate product improvement programs for space surveillance and remote weapon systems, and bring the new turret product to production after 5 years of development. This agenda is essentially about focusing on long‑term strengths of technology and market access while refining business process and reducing costs. These strategic goals are being achieved. These costs which formed part of the loss for 2012 were allocated to meet the following five items required for this strategic re‑positioning: ■ Production: $3.5 million for the relocation of most EOS production to partners. ■ Impairment: $1.3 million for impairments of all material for future contracts. ■ Depreciation: $2.6 million for accelerating depreciation, including licenses. ■ Marketing: $0.8 million for marketing. ■ Development: $1.9 million for product development costs. Production $3.5 million: EOS production capacity in Arizona was relocated during 2012 to Northrop Grumman facilities in Alabama and to Hyundai facilities in Korea. These new licensed facilities are now in production. This transfer has involved a reduction in staff in EOS USA from over 140 at the peak of EOS production to only 10 staff now deployed to support Northrop and Hyundai. The total cost of the relocation in 2012 was $3.5 million and it is now complete. Both Northrop Grumman and Hyundai have their own existing, highly‑qualified production facilities and resources, and can produce high quality products at low cost, and for scalable demand. The company’s production is now much more scalable at short notice from low demand to high demand, and product quality is improved. C. Segregation. Complete the separation of the company into two independent sectors, called Defence Systems [for remote weapon systems] and Space Systems [for space technology and surveillance], to reflect the different customer bases, security requirements, technology and skill sets required in these The overall outsourcing level for EOS across all programs and all Defence Systems products has increased from below 15% to above 50% in one calendar year, with no disruption to supply. The EOS production facility in Queanbeyan Australia remains in full production with current orders. 1 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 REVIEW OF OPERATIONS (CONT) Impairment $1.3 million: The transfer of production capacity to partners and the inventory held by EOS without binding sales contracts required the impairment of inventory held by EOS, at a cost of $1.5 million. It cannot be assumed that these parts will be used in the new production arrangements and accordingly impairment was appropriate. These impairment charges may be reversed in future if sales contracts for the existing inventory are received. Including this impairment, the total cost of relocating production from Arizona to Alabama and Korea was approximately $4.8 million. The annual saving in fixed costs attributable to the relocation of production and closing of the Tucson production facility is at least $5 million. The company has thus met its objective of improving remote weapon system production capacity, cost, quality, delivery risk, responsiveness and global market access, all through enhanced collaboration with strategic partners. From 2013 the company will benefit from the reduction in fixed cost of $5 million annually. This reduction in fixed costs will reduce the break‑even revenue for EOS going forward. Depreciation, amortisation and impairment $2.6 million: One impact of reduced revenue in 2012 with no early rebound in 2013 is an acceleration of depreciation and amortisation of company assets deployed to produce revenue. In 2012 depreciation was $2.6 million [2011 $0.4 million]. This included depreciation of $1.8 million of tangible assets and $0.8 million of amortisation and impairment of intangible assets. There is now no value ascribed to intangible assets in the financial statements. Marketing $0.8 million: EOS outlays towards special marketing projects were a net $0.8 million in 2012. Development $1.9 million: In addition to ongoing development effort to maintain leading‑edge military technology in EOS current weapon system products, in recent years EOS has undertaken development of a new product in the form of a remotely operated turret for a 30‑40 mm canon. EOS considers the market for this turret to be extremely large, and customers have reinforced this view by contributing over 70% of turret development costs over the past 4 years. Notwithstanding these contributions the cost to EOS in 2012 for turret development effort was $1.9 million. EOS expects to be in production with this new turret product in 2015. Summary EOS has completed its strategic adjustments in time to meet current circumstances and in advance of sequestration in the US and further expected cuts to government outlays both in Australia and internationally. The company has achieved lower costs and leaner operations while positioning new products in new markets, and bringing new production capacity on line. Beyond 2013 EOS still requires profitable new contract to meet future working capital and funding requirements to continue as a going concern as mentioned in Note 1(a). 3. EOS DEFENCE SYSTEMS The EOS Defence Systems business is concentrated on the development, marketing, production and support of remote weapon systems [RWS] and related products. Significant developments over 2012 included initial steps into new markets, first product shipping from new production facilities, successful testing of the new turret, and the US Army CROWS program award to a competitor. US Army CROWS In May 2010 EOS and Northrop Grumman Corporation [NGC] agreed to jointly develop, produce and support RWS for the USA and certain export markets. Those arrangements included EOS and NGC teaming to compete for the US Army CROWS program requirement for RWS. NGC and EOS jointly submitted tenders [proposals] for the CROWS requirement in March 2012. In August 2012 the US Army awarded this contract to Kongsberg, the incumbent competitor. This award was a major setback to EOS long term plans in the US. 2 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 REVIEW OF OPERATIONS (CONT) RWS Orders Product Development EOS received orders in 2012 from international customers, such that backlog of undelivered orders at 31 December 2012 was at the historical average of 16 months of production. This was a significant achievement during a year when the budgets of every customer were reduced. There were no Australian Defence orders delivered in 2012 and no future Australian orders in backlog which was disappointing. All orders in 2012 came from existing customers, with the exception of the Republic of Korea where Hyundai continued its success. Market Diversification During 2012 the EOS teaming relationship with Hyundai was formalised and the team achieved its first program success with defensive weapon systems for the Korean demilitarised zone [DMZ]. The scope of this program will change in 2013 because the production phase has been funded, and a separate competition for the production contract will take place in early 2013. In a separate development, in late 2012 Hyundai was successful, after several years of intense competition, in achieving an award as prime contractor for up to 2,000 armoured vehicles for the Korean armed forces. These vehicles will require remote weapon systems and EOS is supporting Hyundai’s efforts to offer an appropriate system for this program in 2014. EOS made significant efforts to expand its existing business footholds in the Middle East in 2012. Small quantity sales of weapon systems have established EOS’s reputation for technology and quality in this market over the past few years. This market is experiencing significant growth, and EOS is well positioned to meet customer requirements in specific programs. Production Diversification The transfer of US production of remote weapon systems from Arizona to a Northrop Grumman Corporation owned facility in Alabama was completed in Q3 2012 and the first products were completed in Alabama before 31 December 2012. This facility is now configured to meet demand from several EOS international customers. The licensed facility established with Hyundai in Korea was also completed during 2012. EOS continues to improve and diversify its product range. In 2012 incremental improvements were made to the EOS range of remote weapon systems, but the major effort was concentrated on the new remote turret for 30‑40 mm canon. In 2006 EOS joined with a strategic partner to develop a new unmanned turret for armoured vehicles. EOS and its partner have developed an unmanned turret to meet these requirements in consultation with and with funding support from potential customers. The ongoing impact of the global financial crisis has reduced global demand for this turret over the next 5 years from 4,000 units to around 1,500 [US$3 billion]. This is still a significant market and EOS expects to achieve strong market share notwithstanding rapidly emerging competition. The EOS turret underwent final operational testing to qualify for production, and these tests were successful. The turret is now expected to move to production from 2015. 4. SPACE BUSINESS 4.1 Commercial Space Operations EOS space tracking technology is applied in two commercial domains: precision tracking and space debris tracking. These two domains use different equipment and infrastructure. In each domain there have been important developments during 2012. Precision tracking delivers satellite orbit data which is accurate to better than 1 mm, and is used for a wide range of commercial and scientific applications, including navigation, banking transaction security, mapping, surveying, and climate change monitoring. Only precision laser tracking, combined with precision laser altimeters flown on special‑purpose satellites, can accurately measure ice mass and sea levels globally. Regardless of the cause of climate change, it is important to all societies to accurately determine whether sea levels are actually rising and how fast. There are now several dedicated satellites in orbit for this purpose, and seven more will launch in the next 4 years. EOS does not manufacture the satellite equipment, but the ground stations globally must be upgraded to the accuracies now provided by EOS from Australia. Despite funding pressures, 3 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 REVIEW OF OPERATIONS (CONT) this program has priority among all participating governments globally. An expansion of EOS activities in this segment is expected from late in 2013; however this is dependent on government funding being available. This is a development with long‑term implications for EOS. In addition, EOS space debris tracking capabilities have been recognised by EOS being designated as the coordinating agency for the first‑ever coordinated multi‑lateral international effort to systematically track space debris to avoid collisions in space. The Western Pacific Laser Tracking Network [WPLTN] is a multi‑national agency responsible for coordinating laser tracking for the hemisphere including Australia. It includes member states Russia, China, Japan, India, Korea, Australia and Saudi Arabia. All of these countries have substantial laser space tracking capabilities. In late 2012 EOS was designated by WPLTN as the planning and coordinating centre for WPLTN activities in space debris tracking for collision avoidance. This program will lead to multi‑site, multi‑country space debris tracking operations later in 2013. This will be the launch of laser tracking of space debris for collision avoidance, since the WPLTN mandate will create a commercial user portal for debris data. This is a significant development in the deployment and application of laser debris tracking technology and EOS believes that this will lead to commercial contracts in the future. The financial constraints on western governments have delayed all aspects of resolving the space debris issue, notwithstanding its urgency. EOS’ space debris de‑orbit effort remains unfunded, although background research continues. In practice there will likely not be demand for de‑orbit capability before the tracking of space debris has been substantially improved globally. 4.2 Space Surveillance and Space Situation Awareness [SSA] EOS is committed to meeting the requirements of Australia and its allies for SS and SSA optical data. On 14 November 2012 the US and Australian governments further publicly clarified their intention to deepen defence space cooperation, including optical space data operations. Those intentions are now moving towards funding in both governments. The outcome of those funding processes is uncertain due to circumstances such as sequestration in the US, and the reduction of the Australian defence budget in 2012 and 2013. 4.3 Partnerships EOS has long‑term alliances with the Australian National University and the Royal Melbourne Institute of Technology. These collaborations are allowing progress towards collective technical objectives with reduced costs to each individual partner. EOS will likely enter new strategic partnerships in space in 2013 as a means to further extend limited funding. EOS has agreements with European and US aerospace agencies and entities continue, with the express purpose of facilitating EOS market access for its data and systems products. 5. SUMMARY AND OUTLOOK Through 2012 the company implemented a radical transformation to meet unprecedented business conditions in its domestic and global markets. This company transformation has positioned EOS to ride out current market conditions which are already more severe than expected in 2011 when the process was planned and initiated. Customer budgets will remain tightly constrained through 2014 and possibly beyond. Although further consolidation of EOS reforms is required through 2013, the associated costs will be low compared to 2012 and are expected to fall within the company’s current funding capability. The key issues facing the company in 2012 were customer budgets and the urgent execution of a reform agenda. The key issues in 2013 will be: Defence Sector Revenue EOS has made significant cuts to its fixed costs, and has orders which are deliverable over the next 2 years. These backlogged orders form the bulk of EOS activity in any year, and are usually supplemented by orders which arise within each year. Cost reductions have substantially reduced the volume of short term orders required to achieve sector profitability in 2013, but EOS expects that new orders will be more difficult to achieve in 2013 than previously. 4 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 REVIEW OF OPERATIONS (CONT) The role of Australia in Defence Systems Business The high Australian dollar and the deferral of key Australian defence programs place the future of Australian operations in this sector under some uncertainty. Because the value of Australian defence orders in 2012 was zero and there are no Australian defence orders for 2013 and beyond in hand, the sustainability of these local operations will come under pressure without new sales contracts. Space Sector Revenue Space sector commercialisation has been supported by grants and co‑investment from customers towards achieving operational configurations which could integrate with existing customer infrastructure. However the operational deployment phases due from 2014 will be substantially more expensive than these upgrades and the ability of key customers to timely fund those deployments is presently in doubt. EOS is now working with those customers to develop more affordable business models for the customer needs to be achieved. Growth Opportunities The constrained fiscal reality in global defence and aerospace markets will create opportunities for companies like EOS which have taken early measures to adapt. EOS must ensure that it leverages its strengths through the industry consolidations expected through 2013 and 2014. Further marketing investments will be required as EOS pushes forward in north Asia and the Middle East, and moves forward with the product releases required to capture new business. However these costs are expected to be met from normal business operations going forward. The Company has scheduled orders to deliver under contract out to December 2014 utilising a leaner production and process model than in previous years. The Company is actively pursuing new orders in both sectors for 2013 and beyond which are required to ensure the ongoing financial viability of the Company and its continuation as a going concern. However the nascent global financial recovery is far from robust and although EOS selects its customers from the strongest economies, the company cannot be certain that future customer procurements will continue as usual or that business conditions will not further deteriorate. The Directors continue to consider alliances and arrangements with existing customers and development partners to better the position the company for the future in these difficult times. Ben Greene Chief Executive Officer 27 March 2013 5 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 DIRECTORS' REPORT The directors of Electro Optic Systems Holdings Limited submit herewith the annual financial report of the company for the year ended 31 December 2012. In order to comply with the provisions of the Corporations Act 2001, the directors report as follows: Directors The names and particulars of the directors of the company during or since the end of the financial year are: Name Particulars Fred Bart Dr Ben Greene Ian Dennis Mark Ureda Chairman (Age 58). A director since 8 May 2000. He has been Chairman and Director of numerous private companies since 1980, specialising in manufacturing, property and technology. He is a member of the Australian Institute of Company Directors and is a member of the Audit Committee and Remuneration Committee. BE (Hons), Phd in Applied Physics (Age 61) is the Chief Executive Officer of Electro Optic Systems. Dr Greene was involved in the formation of Electro Optic Systems. He is widely published in the subject areas of laser tracking, space geodesy, quantum physics, satellite design, laser remote sensing, and the metrology of time, and is currently regarded as a world leader in these fields. Dr Greene is a member of Australia’s Space Industry Innovation Council. Appointed to the Board on 11 April 2002. BA, C.A. (Age 55) is a Chartered Accountant with experience as director and secretary in various public listed companies and unlisted technology companies in Australia and overseas. He has been involved in the investment banking industry and stockbroking industry for the past twenty five years. Prior to that, he was with KPMG, Chartered Accountants in Sydney. Appointed to the Board on 8 May 2000. He is a member of the Australian Institute of Company Directors and is a member of the Audit Committee and Remuneration Committee. He is also company secretary of Electro Optic Systems Holdings Limited. Non‑executive director (Age 58). Appointed to the Board on 28 April 2005. Mark was vice president, Strategy and Technology for Northrop Grumman Corporation, a global defence company until August 2010. Mark is now Vice President and General Manager of the Harman Professional Loudspeaker Group. Mark received a bachelor’s degree in Engineering from the University of California at Los Angeles, a master’s degree in Acoustics from the Pennsylvania State University and a master’s degree in Finance from the UCLA Graduate School of Management. Lt Gen Peter Leahy AC Non‑executive director (Age 60). Appointed to the Board on 4 May 2009. Peter Leahy AC retired from the Australian Army in July 2008 as a Lieutenant General in the position of Chief of Army. As well as being Chairman of the Army’s Advisory Committee he was also a Member of the Defence Committee, the Chiefs of Service Committee, the Council of the Australian War Memorial and the Board of Defence Housing Australia. Kevin Scully Among his qualification he holds a BA (Military Studies), a Master of Military Arts and Science and is a member of the Australian Institute of Company Directors. In October 2008 he was appointed as a Professor and the foundation Director of the National Security Institute at the University of Canberra. He is a director of both Codan Limited and the Kokoda Foundation and a member of the Defence South Australia Advisory Board. Non‑executive director (Age 55). Appointed to the Board on 19 September 2011. Kevin Scully has more than 26 years of experience in equities research and analysis, corporate advisory and related matters, having worked for more than 12 years in various positions such as the head of research and director of Schroders and the Netresearch group (which he founded). Kevin is an advisor to two regulatory authorities of the Singaporean Government (Commercial Affairs Department and the Monetary Authority of Singapore) since 1999. The above named directors held office during and since the end of the financial year. 6 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 DIRECTORS' REPORT (CONT) Directorships of Other Listed Companies Directorships of other listed companies held by directors in the three years immediately before the end of the financial year were as follows: Name Fred Bart Ian Dennis Company Period of directorship Audio Pixels Holdings Limited 5 September 2000 to date Audio Pixels Holdings Limited 5 September 2000 to date Lt Gen Peter Leahy AC Codan Limited 19 September 2008 to date Kevin Scully PNE Micron Holding Limited 11 April 2011 to date Principal Activities The principal activities of the consolidated entity are in the space systems, space surveillance and defence products business. The company is listed on the Australian Securities Exchange. Review of Operations A detailed review of operations is included on pages 1 to 5 of this financial report. Changes to the State of Affairs There was no significant changes in the state of affairs of the consolidated entity that occurred during the financial period. Subsequent Events There has not been any matter or circumstance that has arisen since the end of the financial year, that has significantly affected or may significantly affect the operations of the consolidated entity, the results of those operations or the state of affairs of the consolidated entity in future financial years. Future Developments The company will continue to operate in the space systems, space surveillance and defence products business. Please see the review of operations for further details. Environmental Regulations In the opinion of the directors the consolidated entity is in compliance with all applicable environmental legislation and regulations. 7 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 DIRECTORS' REPORT (CONT) Dividends The directors recommend that no dividend be paid and no amount has been paid or declared by way of dividend since the end of the previous financial year and up to the date of this report. Share Options Share options granted to directors and executives During and since the end of the financial year no share options were granted to any directors of the company and consolidated entity as part of their remuneration. On 10 December 2009 the Company issued 1,800,000 options to staff including the executives listed in the Remuneration Report under the terms of the Employee Share Option Plan. Since these options were issued, 775,000 have been cancelled due to staff resignations leaving a balance currently outstanding of 1,025,000 options. These options have an exercise price of $1.30 and are exercisable on or before 8 December 2013. No options have been issued to executives since the end of the financial year. Share options on issue at year end or exercised during the year Details of unissued shares or interests under option are: Issuing entity Number of shares under option Class of shares Exercise price of option Expiry date of options Electro Optic Systems Holdings Limited 1,025,000 Ordinary $1.30 8 December 2013 Options issued to executives and staff during 2009 were issued at an exercise price of $1.30 determined by the directors. The holders of such options do not have the right, by virtue of the option, to participate in any share issue or interest issue of any other body corporate or registered scheme. 1,564,800 Options issued to directors at an exercise price of $1.95 lapsed on 31 May 2011. There were no shares or interests issued during the financial year as a result of exercise of an option. Indemnification and Insurance of Officers and Auditors During the financial year, the company paid a premium in respect of a contract insuring the Directors and Officers of the Company and any related body corporate against a liability incurred as such a Director or Officer to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the coverage provided and the amount of the premium. The Company has agreed to indemnify the current Directors, Company Secretary and Executive Officers against all liabilities to other persons that may arise from their position as Directors or Officers of the Company and its controlled entities, except where to do so would be prohibited by law. The agreement stipulates that the Company will meet the full amount of any such liabilities, including costs and expenses. The Company has not, during or since the financial year indemnified or agreed to indemnify an auditor of the company or of any related body corporate against any liability incurred as such an auditor. 8 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 DIRECTORS' REPORT (CONT) Directors’ Meetings The following table sets out the number of directors’ meetings (including meetings of committees of directors) held during the financial year and the number of meetings attended by each director (while they were a director or committee member). During the financial year, 12 Board meetings, 2 audit committee meetings and 2 Remuneration committee meetings were held. Directors Mr Fred Bart Dr Ben Greene Mr Ian Dennis Mr Mark Ureda Lt Gen Peter Leahy AC Mr Kevin Scully Board of directors Audit committee Remuneration committee Held Attended Held Attended Held Attended 12 12 12 12 12 12 12 12 12 11 11 10 1 ‑ 2 ‑ 2 1 1 ‑ 2 ‑ 2 1 2 ‑ 2 ‑ 2 ‑ 2 ‑ 2 ‑ 2 ‑ Directors’ Shareholdings The following table sets out each Director’s relevant interest in shares and options of the company or a related body corporate as at the date of this report. Directors Mr Fred Bart Dr Ben Greene Mr Ian Dennis Mr Mark Ureda Lt Gen Peter Leahy AC Mr Kevin Scully Fully paid ordinary shares Options 5,309,075 3,954,185 170,050 ‑ 15,000 ‑ ‑ ‑ ‑ ‑ ‑ ‑ Remuneration Report (Audited) The key management personnel of Electro Optic Systems Holdings Limited during the year were: Mr Fred Bart (Chairman, Non executive director) Dr Ben Greene (Chief Executive Officer and director) Mr Ian Dennis (Non‑executive director)* Mr Mark Ureda (Non‑executive director) Lt Gen Peter Leahy AC (Non‑executive director) Mr Kevin Scully (Non‑executive director) ‑ Commenced 19 September 2011 Mr Mark Bornholt (Chief Executive Officer of Defence Systems) ‑ Commenced 21 March 2011 Dr Craig Smith (Chief Executive Officer of EOS Space Systems Pty Limited) Mr John Palisi (Chief Financial Officer ‑ Electro Optic Systems Pty Limited) ‑ resigned 3 February 2012 Mr Scott Lamond (Chief Financial Officer ‑ Electro Optic Systems Pty Limited) ‑ appointed 10 August 2012 ‑ Mr Scott Lamond was Acting Chief Financial Officer from 3 February 2012 to 10 August 2012 Mr Hugo Keyner (Chief Executive Officer EOS Technologies Inc) ‑ Retired on 31 October 2012 *During the period from 3 February 2012 to 10 August 2012 whilst Mr Scott Lamond was Acting Chief Financial Officer, Mr Ian Dennis assumed an executive role to assist in the finance function. 9 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 DIRECTORS' REPORT (CONT) Remuneration Report (cont) Executive Director and Senior Management Remuneration This report outlines the remuneration arrangements in place for Directors and Executives of the Company. Objective The Directors are responsible for remuneration policies and packages applicable to the Board members and executives of the company. The Company has a separate Remuneration Committee. The broad remuneration policy is to ensure the remuneration package properly reflects the persons duties and responsibilities. Remuneration Structure In accordance with best practice corporate governance, the structure of Non‑Executive Director and senior manager remuneration is separate and distinct. The Company aims to award Executives with a level and mix of remuneration commensurate with their position and responsibilities within the Company and so as to: ■ reward Executives for Company and individual performance against targets set by reference to suitable benchmarks; ■ align the interests of Executives with those of shareholders; and ■ ensure that the total remuneration paid is competitive by market standards. Non‑Executive Director Remuneration Structure The remuneration paid to Executives is set with reference to prevailing market levels and typically comprises a fixed salary and option component. Options are granted to Executives in line with their respective levels of experience and responsibility. Details of the amounts paid and the number of options granted to Executives are disclosed elsewhere in the Directors’ Report. Employment contracts There are no employment contracts in place with any Non‑Executive Director of the Company. There are standard Contracts of Employment with Executive Directors and Senior Management which contain no unusual terms. The contracts provide for a termination period in respect of Ben Greene of 180 days and 90 days in respect of other senior executives. The current employment contract with Ben Greene expires on 30 June 2013. There are no other termination payments or golden parachutes for any directors or senior executives. Objective The Board seeks to set aggregate remuneration at a level which provides the Company with the ability to attract and retain directors of the highest calibre, whilst incurring a cost which is acceptable to shareholders. Structure The Company’s Constitution and the Australian Securities Exchange Listing Rules specify the aggregate remuneration of Non‑Executive Directors shall be determined from time to time by a General Meeting of shareholders. An amount not exceeding the amount determined is then divided between the Directors as agreed. The latest determination was at the Annual General Meeting held on 11 April 2002, when shareholders approved a maximum aggregate remuneration of $230,000 per year excluding options. The amount of aggregate remuneration sought to be approved by shareholders, the manner in which it is apportioned amongst Directors, and the policy of granting options to Directors, are reviewed annually. Each Non‑Executive Director receives a fee for serving as a Director of the Company. No additional fees are paid to any Director for serving on a committee of the Board. A company associated with Mr Ian Dennis receives a fee in recognition of additional services provided to the Group. 10 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 DIRECTORS' REPORT (CONT) Remuneration Report (cont) Director Remuneration The following tables disclose the remuneration of the directors of the Company: Short term Post Employment Equity Non‑monetary $ Superannuation $ Options $ 2012 Mr Fred Bart Dr Ben Greene* Mr Ian Dennis Mr Mark Ureda Lt Gen Peter Leahy AC Mr Kevin Scully Salary & Fees $ 61,000 439,994 197,500 40,875 37,500 40,875 817,744 28,726 * Executive Director during the financial year 2011 Mr Fred Bart Dr Ben Greene* Mr Ian Dennis Mr Mark Ureda Lt Gen Peter Leahy AC Mr Kevin Scully Salary & Fees $ 61,000 300,000 157,500 40,875 37,500 11,535 608,410 39,182 * Executive Director during the financial year ‑ 28,726 ‑ ‑ ‑ ‑ ‑ 39,182 ‑ ‑ ‑ ‑ Short term Post Employment Equity Non‑monetary $ Superannuation $ Options $ 5,490 37,177 3,375 ‑ 3,375 ‑ 49,417 ‑ ‑ ‑ ‑ ‑ ‑ ‑ 5,490 27,000 3,375 ‑ 3,375 ‑ 39,240 ‑ ‑ ‑ ‑ ‑ ‑ ‑ Other Long Term Benefits $ ‑ ‑ ‑ ‑ ‑ ‑ ‑ Other Long Term Benefits $ ‑ ‑ ‑ ‑ ‑ ‑ ‑ Total $ 66,490 505,897 200,875 40,875 40,875 40,875 895,887 Total $ 66,490 366,182 160,875 40,875 40,875 11,535 686,832 11 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 DIRECTORS' REPORT (CONT) Remuneration Report (cont) Executive Remuneration No executives are employed by the holding company. The following table discloses the remuneration of the executives of the consolidated entity: 2012 Dr Craig Smith Mr Mark Bornholt Mr John Palisi ** Mr Scott Lamond ** Mr Hugo Keyner ** Short term Post Employment Equity Salary & Fees $ 210,000 210,000 80,324 167,556 85,976 753,856 Non‑monetary $ Superannuation $ Options $ ‑ ‑ ‑ ‑ 749 749 18,900 18,152 18,900 2,326 ‑ ‑ 15,080 3,630 ‑ 18,152 55,206 39,934 ** John Palisi, Scott Lamond and Hugo Keyner were executives for part of the financial year (See Note 21) Short term Post Employment Equity Other Long Term Benefits $ ‑ ‑ ‑ ‑ ‑ ‑ Total $ 247,052 228,900 82,650 186,266 104,877 849,745 Other Long Term Benefits $ Total $ 2011 Mr Ron Thompson Dr Craig Smith Mr Mark Bornholt Mr John Palisi Mr Hugo Keyner Salary & Fees $ 172,083 197,532 128,423 196,946 154,889 849,873 Non‑monetary $ Superannuation $ Options $ ‑ ‑ ‑ ‑ 854 854 13,288 35,597 42,760 263,728 17,750 35,597 11,340 ‑ 17,724 35,597 ‑ 35,597 ‑ ‑ ‑ ‑ 250,879 139,763 250,267 191,340 60,102 142,388 42,760 1,095,977 Non‑monetary includes the provision for motor vehicles and health benefits. 12 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 DIRECTORS' REPORT (CONT) Remuneration Report (cont) Value of Options Issued to Directors and Executives The following table discloses the value of options granted and exercised during the 2012 year: Options Granted Value at grant date (i) $ Options Exercised Value at exercise date $ Total value of options granted and exercised $ Value of options included in remuneration for the year (i) $ Percentage of total remuneration for the year that consists of options % Dr Craig Smith Mr Hugo Keyner Mr Scott Lamond ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 18,152 18,152 3,630 7.35 17.31 1.95 (i) The value of options granted during the period is recognised in compensation over the vesting period of the grant. Value of Options ‑ Basis of Calculation The total value of options included in remuneration for the year is calculated as follows: ■ The value of the options is determined at grant date, and are included in remuneration on a proportionate basis from grant date to vesting date. Where the options immediately vest the full value of the option is recognised in remuneration in the current year. Elements of Remuneration Related to Performance There are no performance conditions other than service attached to the above remuneration to directors and executives. Directors and senior executives receive options as disclosed in the above tables which are not subject to specific performance conditions other than service. The overall performance of the company as measured by the share price will determine whether the options are exercised and whether the director or executive receives any benefit from these options. The time service condition has been chosen by the Board as an appropriate condition as it helps in the retention and motivation of staff. Options issued to certain directors and executives are also subject to vesting provisions as disclosed below. 13 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 DIRECTORS' REPORT (CONT) Remuneration Report (cont) Key Management Personnel Option Holdings Balance at 1/1/12 No. Granted as remuneration No (Lapsed) No. Balance at 31/12/12 No. Balance vested at 31/12/12 No Options vested during year ‑ ‑ ‑ ‑ ‑ ‑ ‑ 160,000 160,000 32,000 160,000 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 160,000 160,000 80,000 (160,000) ‑ ‑ ‑ ‑ 32,000 32,000 160,000 160,000 ‑ 16,000 80,000 2012 Mr Fred Bart Dr Ben Greene Mr Ian Dennis Mr Mark Ureda Lt Gen Peter Leahy AC Mr Kevin Scully Mr Mark Bornholt Dr Craig Smith Mr John Palisi Mr Scott Lamond Mr Hugo Keyner On 10 December 2009, The Directors’ issued 1,800,000 unlisted options to executives and staff. The options issued to executives and staff have an exercise price of $1.30 and expire on 8 December 2013. These options vested 20% after 12 months, 30% after 2 years and the balance after 3 years. Balance at 1/1/11 No Granted as remuneration No 2011 Mr Fred Bart Dr Ben Greene Mr Ian Dennis Mr Mark Ureda Lt Gen Peter Leahy AC Mr Kevin Scully 200,000 964,800 200,000 200,000 ‑ ‑ Mr Ron Thompson 160,000 Mr Mark Bornholt Dr Craig Smith Mr John Palisi Mr Hugo Keyner ‑ 280,000 160,000 160,000 14 Balance at 31/12/11 No. Balance vested at 31/12/11 No. Options vested during year ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 100,000 482,400 100,000 100,000 ‑ ‑ 160,000 80,000 48,000 ‑ 160,000 160,000 160,000 ‑ 80,000 80,000 80,000 ‑ 108,000 48,000 48,000 (Lapsed) No. (200,000) (964,800) (200,000) (200,000) ‑ ‑ ‑ ‑ (120,000) ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 DIRECTORS' REPORT (CONT) Remuneration Report (cont) All options issued during the year ended 31 December 2007 were issued on 31 May 2007. The options issued to directors have an exercise price of $1.95 and expired on 31 May 2011. These options vested 20% after 12 months, 30% after 2 years and the balance after 3 years. The 120,000 options issued to Dr Craig Smith during the year ended 31 December 2007 at an exercise price of $1.95 vested 20% after 12 months, 30% after 2 years and the balance after 3 years. These options lapsed during the year. Other Key Management Personnel options vest 20% after 12 months, 30% after 2 years and the balance after 3 years. The percentage of the options granted on 10 December 2009 which vested in the current year to Mr Hugo Keyner and Dr Craig Smith was 50%. All options outstanding were fully vested at 31 December 2012 and there are no further options to vest in the year ended 31 December 2013. The Board policy is not to allow any person to hedge their exposure to risk in relation to the options granted. This policy may be reviewed should the options become in the money. The table below sets out summary information about the company’s earnings and movements in shareholder wealth for the last 5 financial years. 31 December 2012 $ 31 December 2011 $ 31 December 2010 $ 31 December 2009 $ 31 December 2008 $ Revenue 21,919,748 32,775,391 33,828,658 37,005,723 38,958,206 Net profit/(loss) before tax (10,179,823) Net profit/(loss) after tax (10,179,823) 180,188 180,188 3,175,142 2,436,249 2,213,006 3,175,142 2,436,249 2,213,006 31 December 2012 $ 31 December 2011 $ 31 December 2010 $ 31 December 2009 $ 31 December 2008 $ Share price at start of year Share price at end of year Dividends paid 0.55 0.30 ‑ 1.35 0.55 ‑ 1.05 1.35 ‑ 0.41 1.05 ‑ 0.50 0.41 ‑ Audit Committee The Board appointed three non‑executive directors to form the committee, with a majority of independent directors and the Chairman being an independent person. The current members of the committee are Lt Gen Peter Leahy AC (Chairman), Mr Ian Dennis and Mr Kevin Scully. Mr Fred Bart retired from the Audit Committee on 6 June 2012 and was replaced by Mr Kevin Scully. 15 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 DIRECTORS' REPORT (CONT) Non‑audit services The Directors are satisfied that the provision of non‑audit services, during the year, by the auditor (or by another person or firm on the auditor’s behalf) is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors have formed this view based on the fact that the nature and scope of each type of non‑audit service provided means that the audit independence was not compromised. Details of amounts paid or payable to the auditor for non‑audit services provided during the year by the auditor are contained in Note 10 to the financial statements. Auditor’s Independence Declaration The auditor’s independence declaration is included on page 17 of the annual report. Signed in accordance with a resolution of directors made pursuant to s.298(2) of the Corporations Act 2001. On behalf of the Directors I A Dennis Director Dated at Sydney this 27 day of March 2013 16 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 17 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 21 to 78. 18 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 9 to 15 19 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 DIRECTORS’ DECLARATION The directors declare that: (a) in the directors’ opinion, there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable; (b) in the directors’ opinion, the attached financial statements and notes thereto are in accordance with the Corporations Act 2001, including compliance with accounting standards and giving a true and fair view of the financial position and performance of the company and the consolidated entity; (c) the directors have been given the declarations required by s.295A of the Corporations Act 2001; and (d) the attached financial statements are in compliance with International Financial Reporting Standards, as stated in Note 1 to the financial statements. Signed in accordance with a resolution of the directors made pursuant to s.295(5) of the Corporations Act 2001. On behalf of the Directors I A Dennis Director Dated at Sydney this 27 day of March 2013 20 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2012 Consolidated Company 31 December 2012 $ 31 December 2011 $ 31 December 2012 $ 31 December 2011 $ Note Revenue 2 21,919,748 32,775,391 166,211 333,807 Changes in inventories of finished goods and work in progress Raw materials and consumables used 4,744,819 (164,152) (17,883,251) (14,214,487) ‑ ‑ ‑ ‑ Employee benefits expense Administration expenses Amortisation of intangibles Finance costs Depreciation and amortisation of property, plant and equipment Impairment Impairment of intangibles Gain on disposal of fixed assets Foreign exchange (losses)/gains Occupancy costs Reversal of/(provision for) non‑recovery of loan Provision for non‑recovery of investment Other expenses (Loss)/Profit before income tax benefit Income tax benefit 2(b) 2(b) 2(b) 2(b) 2(b) 2(b) 2(b) 2(b) 2(b) 2 4 2(b) (11,996,783) (13,338,261) (2,723,142) (3,210,571) (131,519) (112,741) (131,533) (302,881) (389,990) (394,804) (320,650) (436,729) ‑ ‑ ‑ ‑ (1,886,926) (426,512) (657) (1,095) ‑ 333,561 (565,119) 4,603 (196,299) ‑ 2,287 573,317 (1,136,400) (1,356,956) ‑ ‑ ‑ 772 ‑ ‑ ‑ ‑ 669 ‑ ‑ ‑ ‑ ‑ 2,824,983 (3,573,685) (204,209) (400,464) (216,814) (359,015) ‑ ‑ (10,179,823) 180,188 2,002,306 (4,398,147) ‑ ‑ ‑ ‑ (Loss)/Profit for the period 20 (10,179,823) 180,188 2,002,306 (4,398,147) Other comprehensive income Exchange differences arising on translation of foreign operations Income tax relating to components of other comprehensive income 4,173 (527,622) ‑ ‑ 4,173 (527,622) ‑ ‑ ‑ ‑ ‑ ‑ Total comprehensive (Loss)/income for the period (10,175,650) (347,434) 2,002,306 (4,398,147) (Loss)/Earnings per share Basic (cents per share) Diluted (cents per share) 3 3 (17.9) (17.9) 0.3 0.3 Notes to the financial statements are included on pages 25 to 78. 21 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2012 CURRENT ASSETS Cash and cash equivalents Trade and other receivables Inventories Other TOTAL CURRENT ASSETS NON‑CURRENT ASSETS Property, plant and equipment Intangibles Other financial assets Other TOTAL NON‑CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Trade and other payables Borrowings Provisions TOTAL CURRENT LIABILITIES NON‑CURRENT LIABILITIES Borrowings Provisions TOTAL NON‑CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Issued capital Reserves Accumulated losses TOTAL EQUITY Consolidated Company December 2012 $ December 2011 $ December 2012 $ December 2011 $ Note 22 6 7 8 11 9 5 8 12 13 14 13 14 17 19 20 6,686,194 4,885,761 3,502,600 1,324,726 1,874,896 9,835,027 26,983 21,156 3,855,850 10,704,724 588,939 101,316 ‑ ‑ ‑ ‑ 13,005,879 25,526,828 3,529,583 1,345,882 538,106 2,431,083 985 1,642 ‑ ‑ ‑ 714,830 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 538,106 3,145,913 985 1,642 13,543,985 28,672,741 3,530,568 1,347,524 5,774,085 8,890,029 97,490 120,961 102,191 1,991 867 4,670,600 4,763,852 ‑ ‑ ‑ ‑ 10,546,876 15,645,748 97,490 120,961 15,032 293,271 308,303 117,223 249,523 366,746 ‑ ‑ ‑ ‑ ‑ ‑ 10,855,179 16,012,494 97,490 120,961 2,688,806 12,660,247 3,433,078 1,226,563 75,383,567 75,383,567 75,383,567 75,383,567 7,777,756 7,569,374 7,727,803 7,523,594 (80,472,517) (70,292,694) (79,678,292) (81,680,598) 2,688,806 12,660,247 3,433,078 1,226,563 Notes to the financial statements are included on pages 25 to 78. 22 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2012 Accumulated losses $ Total $ Issued capital $ Foreign currency translation reserve $ Employee equity settled benefits reserve $ Consolidated 2012 Balance at 1 January 2012 12,660,247 (70,292,694) 75,383,567 45,780 7,523,594 Loss for the year (10,179,823) (10,179,823) Exchange differences arising on translation of foreign operations 4,173 ‑ Total comprehensive (loss)/income for the year (10,175,650) (10,179,823) Recognition of share based payments 204,209 ‑ ‑ ‑ ‑ ‑ ‑ 4,173 4,173 ‑ ‑ ‑ ‑ 204,209 Balance at 31 December 2012 2,688,806 (80,472,517) 75,383,567 49,953 7,727,803 2011 Balance at 1 January 2011 12,607,217 (70,472,882) 75,383,567 573,402 7,123,130 Profit for the year 180,188 180,188 Exchange differences arising on translation of foreign operations (527,622) ‑ Total comprehensive (loss)/income for the year (347,434) 180,188 Recognition of share based payments 400,464 ‑ ‑ ‑ ‑ ‑ ‑ (527,622) (527,622) ‑ ‑ ‑ ‑ 400,464 Balance at 31 December 2011 12,660,247 (70,292,694) 75,383,567 45,780 7,523,594 Company 2012 Balance at 1 January 2012 1,226,563 (81,680,598) 75,383,567 Profit for the year 2,002,306 2,002,306 Total comprehensive income for the year 2,002,306 2,002,306 Recognition of share based payments 204,209 ‑ ‑ ‑ ‑ Balance at 31 December 2012 3,433,078 (79,678,292) 75,383,567 2011 Balance at 1 January 2011 5,224,246 (77,282,451) 75,383,567 Loss for the year (4,398,147) (4,398,147) Total comprehensive income for the year (4,398,147) (4,398,147) Recognition of share based payments 400,464 ‑ ‑ ‑ ‑ Balance at 31 December 2011 1,226,563 (81,680,598) 75,383,567 Notes to the financial statements are included on pages 25 to 78. ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 7,523,594 ‑ ‑ 204,209 7,727,803 7,123,130 ‑ ‑ 400,464 7,523,594 23 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2012 Consolidated Company 31 December 2012 $ 31 December 2011 $ 31 December 2012 $ 31 December 2011 $ Note Cash flows from operating activities Receipts from customers 28,382,072 36,594,370 13,868 4,361 Payments to suppliers and employees (24,656,527) (40,418,655) (813,318) (792,057) Interest received 171,697 348,855 152,342 329,446 Interest and other costs of finance paid (112,741) (302,881) ‑ ‑ Net cash inflows/(outflows) from operating activities Cash flows from investing activities Advances (to) from wholly‑owned controlled entities Proceeds from sale of property, plant and equipment 22(b) 3,784,501 (3,778,311) (647,108) (458,250) ‑ ‑ 2,824,982 (3,573,685) Payment for property, plant and equipment (45,234) (175,690) 59,543 14,418 ‑ ‑ ‑ ‑ Net cash inflows/(outflows) from investing activities Cash flows from financing activities Proceeds of borrowings Repayment of borrowings Net cash (outflows)/inflows from financing activities Net increase/(decrease) in cash and cash equivalents 14,309 (161,272) 2,824,982 (3,573,685) ‑ 739,020 (1,991,867) ‑ (1,991,867) 739,020 ‑ ‑ ‑ ‑ ‑ ‑ 1,806,943 (3,200,563) 2,177,874 (4,031,935) Cash and cash equivalents at the beginning of the financial year 4,885,761 8,088,355 1,324,726 5,356,661 Effects of exchange rate fluctuations on the balances of cash held in foreign currencies (6,510) (2,031) ‑ ‑ Cash and cash equivalents at the end of the financial year 22(a) 6,686,194 4,885,761 3,502,600 1,324,726 Notes to the financial statements are included on pages 25 to 78. 24 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 1. Summary of Accounting Policies Statement of compliance The financial report is a general purpose financial report which has been prepared in accordance with the Corporations Act 2001 and Accounting Standards and complies with other requirements of the law: The financial statements comprise the consolidated financial statements of the Group. For the purposes of preparing the consolidated financial statements, the Company is a for‑profit entity. Accounting Standards include Australian equivalents to International Financial Reporting Standards (“A‑IFRS”). The financial report includes the separate financial statements of the company and the consolidated financial statements of the group. Compliance with A‑IFRS ensures that the financial statements and notes of the company and the consolidated entity comply with International Financial Reporting Standards (“IFRS”). The financial statements were authorised for issue by the Directors on 27 March 2013. Basis of preparation The financial report has been prepared on the basis of historical cost. Cost is based on the fair values of the consideration given in exchange for assets. All amounts are presented in Australian dollars, unless otherwise stated. In the application of A‑IFRS management is required to make judgments, estimates and assumptions about carrying values of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstance, the results of which form the basis of making the judgments. Actual results may differ from these estimates. The 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 if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Judgments made by management in the application of A‑IFRS that have significant effects on the financial statements and estimates with a significant risk of material adjustments in the next year are disclosed, where applicable, in the relevant notes to the financial statements. The areas of judgement made by management are in the areas of asset impairment of property, plant and equipment, inventory obsolescence and percentage completion of construction contracts. Accounting policies are selected and applied in a manner which ensures that the resulting financial information satisfies the concepts of relevance and reliability, thereby ensuring that the substance of the underlying transactions or other events is reported. The following significant accounting policies have been adopted in the preparation and presentation of the financial report: (a) Going Concern The financial report has been prepared on the basis that the company and the consolidated entity are going concerns, which assumes continuity of normal business activities and the realisation of assets and the settlement of liabilities in the ordinary course of business. The consolidated entity incurred a net loss during the year of $10,179,823 (2011: $180,188 profit). Net cash provided by operating activities was $3,784,501 (2011 ‑ $3,778,311 used). As at 31 December 2012, the consolidated entity had cash of $6,686,194 (2011 ‑ $4,885,761) of which $400,393 (2011 ‑ $496,692) is restricted as it secures bank guarantees on existing contracts with local and overseas customers. The cash will become unrestricted if the contracts are concluded or renegotiated. In the opinion of the directors, the ability of the company and the consolidated entity to continue as going concerns and pay their debts as and when they fall due is dependent upon: ■ The ability to achieve target production levels and the required technical/quality levels for the military business. The directors believe that this is achievable based on current production plans. ■ The ability to obtain further new profitable contracts. The directors are in the process of bidding for new military and space contracts. The results of these bids are not known as at the date of this financial report. The Directors are confident that new contracts will be received during the next 12 months from the current bids outstanding and from new contracts which have not been bid at the date of the directors’ report. 25 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 1. Summary of Accounting Policies (cont) (a) Going Concern (cont) ■ The successful completion of the telescope and enclosure contracts on hand. The space systems division has progressed the completion of the contracts on hand and the consolidated entity has already provided for expected losses on contracts in accordance with Australian Accounting Standard AASB111 “Construction Contracts”. ■ The willingness and ability of key military customers to make timely payments for goods supplied in accordance with agreed terms. (b) Borrowings Borrowings are recorded initially at fair value, net of transaction costs. Subsequent to initial recognition, borrowings are measured at amortised cost with any difference between the initial recognised amount and the redemption value being recognised in profit and loss over the period of the borrowing using the effective interest rate method. (c) Cash and cash equivalents Cash and cash equivalents comprise cash on hand, cash in banks and investments in money market instruments, net of outstanding bank overdrafts. Cash and cash equivalents includes restricted cash to the extent it relates to operating activities. (d) Construction contracts and work in progress Where the outcome of a construction contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion of the contract activity at the reporting date, as measured by the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs, except where this would not be representative of the stage of completion. Variations in contract work, claims and incentive payments are included to the extent that they have been agreed with the customer. Where the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised to the extent of contract costs incurred that it is probable will be recoverable. Contract costs are recognised as expenses in the period in which they are incurred. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. Deferred revenue is represented by advance billings on contracts and the basis of recognition is the percentage of completion basis. (e) Embedded derivatives Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of host contracts and the host contracts are not measured at fair value with changes in fair value recognised in profit and loss. (f) Employee benefits Provision is made for benefits accruing to employees in respect of wages and salaries, annual leave, and long service leave when it is probable that settlement will be required and they are capable of being measured reliably. Provisions made in respect of short term employee benefits are measured at their nominal values using the remuneration rate expected to apply at the time of settlement. Provisions made in respect of long term employee benefits are measured as the present value of the estimated future cash outflows to be made by the consolidated entity in respect of services provided by employees up to the reporting date. Defined contribution plans ‑ Contributions to defined benefit contribution superannuation plans are expensed when incurred. (g) Financial assets Subsequent to initial recognition, investments in subsidiaries are measured at cost less any impairment. Other financial assets are classified into the following specified categories: held to maturity investments and loans and receivables. The classification depends on the nature and purpose of the financial assets and is determined at the time of the initial recognition. 26 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 1. Summary of Accounting Policies (cont) (i) Foreign currency (g) Financial assets (cont) Held to maturity investments Bills of exchange are recorded at amortised cost using the effective interest method less impairment, with revenue recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset, or, where appropriate, a shorter period. Loans and receivables Trade receivables, loans and other receivables are recorded at amortised cost less impairment. (h) Financial instruments issued by the company Debt and equity instruments Debt and equity instruments are classified as either liabilities or as equity in accordance with the substance of the contractual arrangement. Foreign currency transactions All foreign currency transactions during the financial year are bought to account using the exchange rate in effect at the date of the transaction. Foreign currency monetary items at reporting date are translated at the exchange rate existing at reporting date. Non‑monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Exchange differences are recognised in profit and loss in the period they arise. Foreign operations On consolidation, the assets and liabilities of the consolidated entity’s overseas operations are translated at exchange rates prevailing at the reporting date. Income and expense items are translated at the average exchange rates for the period unless exchange rates fluctuate significantly. Exchange differences arising, if any, are recognised in the foreign currency translation reserve, and recognised in profit and loss on disposal of the foreign operation. (j) Goods and services tax Transaction costs on the issue of equity instruments Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except: Transaction costs arising on the issue of equity instruments are recognised directly in equity as a reduction of the proceeds of the equity instruments to which the costs relate. Transaction costs are the costs that are incurred directly in connection with the issue of those equity instruments and which would not have been incurred had those instruments not been issued. Interest Interest is classified as an expense consistent with the statement of financial position classification of the related debt. i. where the amount of GST incurred is not recoverable from the taxation authority, it is recognised as part of the cost of acquisition of an asset or as part of an item of expense; or ii. for receivables and payables which are recognised inclusive of GST. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables. Cash flows are included in the statement of cash flows on a gross basis. The GST component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authority is classified as operating cash flows. 27 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 1. Summary of Accounting Policies (cont) (k) Government grants Government grants are assistance by the government in the form of transfers of resources to the consolidated entity in return for past or future compliance with certain conditions relating to the operating activities of the entity. Government grants include government assistance where there are no conditions specifically relating to the operating activities of the consolidated entity other than the requirement to operate in certain regions or industry sectors. Government grants relating to income are recognised as income over the periods necessary to match them with the related costs. Government grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the consolidated entity with no future related costs are recognised as income in the period in which it becomes receivable. (l) Impairment of assets At each reporting date, the consolidated entity reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the consolidated entity estimates the recoverable amount of the cash‑generating unit to which the asset belongs. Goodwill, intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment annually and whenever there is an indication that the asset may be impaired. An impairment of goodwill is not subsequently reversed. Recoverable amount is the higher of fair value less costs to sell and value in use. 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 which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash‑generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash‑generating unit) is reduced to its recoverable amount. An impairment loss is recognised in profit or loss immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash‑generating unit) is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash‑generating unit) in prior years. A reversal of an impairment loss is recognised in profit and loss immediately. (m) Income tax Current tax Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profit or tax loss for the period. It is calculated using tax rates and tax laws that have been enacted or substantively enacted by reporting date. Current tax for current and prior periods is recognised as a liability (or asset) to the extent that it is unpaid (or refundable). Deferred tax Deferred tax is accounted for using the comprehensive balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax base of those items. In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that sufficient taxable amounts will be available against which deductible temporary differences or unused tax losses and tax offsets can be utilised. However, deferred tax assets and liabilities are not recognised if the temporary differences giving rise to them arise from the initial recognition of assets and liabilities (other than as a result of business combination) which affects neither taxable income nor accounting profit. Furthermore, a deferred tax liability is not recognised in relation to taxable temporary differences arising from goodwill. 28 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 1. Summary of Accounting Policies (cont) (m) Income tax (cont) Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries except where the consolidated entity is able to control the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with these investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period(s) when the assets and liabilities giving rise to them are realised or settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by reporting date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the consolidated entity expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the company/consolidated entity intends to settles its current tax assets and liabilities on a net basis. Current and deferred tax for the period Current and deferred tax is recognised as an expense or income in the statement of comprehensive income, except when it relates to items credited or debited directly to equity, in which case the deferred tax is also recognised directly in equity, or where it arises from the initial accounting for a business combination, in which case it is taken into account in the determination of goodwill or excess. Tax consolidation The company and all its wholly‑owned Australian resident entities are part of a tax consolidated group under Australian taxation law. Electro Optic Systems Holdings Limited is the head entity in the tax‑consolidated group. Tax expense/income, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax‑consolidated group are recognised in the separate financial statements of the members of the tax‑consolidated group using the ‘separate taxpayer within the group’ approach. Current tax liabilities and assets and deferred tax assets arising from unused tax losses and tax credits of the members of the tax‑consolidated group are recognised by the company (as head entity in the tax‑consolidated group). There are no formal tax funding arrangements within companies within the tax‑consolidated entity. (n) Intangible assets Research and development costs Expenditure on research activities is recognised as an expense in the period in which it is incurred. Where no internally‑generated intangible assets can be recognised, development expenditure is recognised as an expense in the period as incurred. Intangible assets acquired in a business combination Intangible assets acquired in a business combination are identified and recognised separately from goodwill where they satisfy the definition of an intangible asset and their fair value can be measured reliably. Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets acquired separately. (o) Inventories Inventories are measured at the lower of cost and net realisable value. Costs are assigned on a first‑in first‑out basis. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. 29 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 1. Summary of Accounting Policies (cont) (r) Principles of consolidation (p) Leased assets Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Consolidated entity as lessee Assets held under finance leases are initially recognised at their fair value or, if lower, at amounts equal to the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. Finance leased assets are amortised on a straight line basis over the estimated useful life of the asset. Operating lease payments are recognised as an expense on a straight‑line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed. Lease incentives In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefits of incentives are recognised as a reduction of rental expenses on a straight‑line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed. (q) Payables Trade payable and other accounts payable are recognised when the consolidated entity becomes obliged to make future payments resulting from the purchase of goods and services. The consolidated financial statements are prepared by combining the financial statements of all the entities that comprise the consolidated entity, being the company (the parent entity) and its subsidiaries as defined in Accounting Standard AASB 127 Consolidated and Separate Financial Statements. Consistent accounting policies are employed in the preparation and presentation of the consolidated financial statements. On acquisition, the assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. If, after reassessment, the fair values of the identifiable net assets acquired exceeds the cost of acquisition, the deficiency is credited to profit and loss in the period of acquisition. The consolidated financial statements include the information and results of each subsidiary from the date on which the company obtains control and until such time as the company ceases to control such entity. In preparing the consolidated financial statements, all inter‑company balances and transactions and unrealised profits within the consolidated entity are eliminated in full. (s) Property, plant and equipment Plant and equipment, leasehold improvements and equipment under finance lease are stated at cost less accumulated depreciation and impairment. Cost includes expenditure that is directly attributable to the acquisition of an item. In the event that settlement of all or part of the purchase consideration is deferred, cost is determined by discounting the amounts payable in the future to their present value as at the date of acquisition. Depreciation is provided on property, plant and equipment. Depreciation is calculated so as to write off the net cost or other revalued amount of each asset over its expected useful life to its estimated residual value. Leasehold improvements are depreciated over the period of the lease or estimated useful life, whichever is the shorter, using the straight line method. The estimated useful lives, residual values and depreciation method is reviewed at the end of each annual accounting period. 30 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 1. Summary of Accounting Policies (cont) (s) Property, plant and equipment (cont) The following estimated useful lives are used in the calculation of depreciation: Plant and equipment 5 to 15 years Leasehold improvements 3 to 5 years Equipment under finance lease 3 to 5 years Office equipment 5 to 15 years Furniture, fixture and fittings 5 to 15 years Motor vehicles 3 to 5 years (t) Provisions Provisions are recognised when the consolidated entity has a present obligation, the future sacrifice of economic benefits is probable, and the amount of the provision can be measured reliably. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognised as an asset if it is probable that recovery will be received and the amount of the receivable can be measured reliably. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. Warranties ‑ Provisions for warranty costs are recognised as agreed in individual sales contracts, at the directors best estimate of the expenditure required to settle the consolidated entity’s liability. Surplus lease space ‑ The consolidated entity entered into contracts for the lease of premises in Tucson, USA which were surplus to the requirements of the company. Present obligations under the onerous lease contract were recognised as a provision in 2011. Redundancy costs ‑ The consolidated entity recognised costs for redundancy costs in its Tucson, USA plant which was relocated to Huntsville, Alabama. Onerous contracts ‑ Present obligations arising under onerous contracts are recognised and measured as a provision. An onerous contract is considered to exist where the Group has a contract under which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. Decommissioning cost and make good of leased premises ‑ a provision for decommissioning cost and make good of leased premises is recognised when there is a present obligation, it is probable that an outflow of economic benefits will be required to settle the obligation, and the amount of the provision can be measured reliably. The estimated future obligations include the costs of removing the facilities and restoring the premises. (u) Revenue recognition Construction revenue is recognised on the basis of the terms of the contract adjusted for any variations or claims allowable under the contract. Revenue from contracts to provide services is recognised on a monthly basis in accordance with the services contracts. Interest income is recognised as it accrues. Revenue from the sale of goods is recognised when the consolidated entity has transferred to the buyer the significant risks and rewards of ownership of the goods. (v) Share based payments to employees Equity‑settled share‑based payments are measured at fair value at the date of the grant. Fair value is measured by use of a modified Cox‑Rubenstein binomial model. The expected life used in the model has been adjusted, based on management best estimates, for the effects of non‑transferability, exercise restrictions and behavioural considerations. The fair value determined at the grant date of the equity‑settled share based payments is expensed on a straight‑line basis over the vesting period, based on the consolidated entity’s estimate of shares that will eventually vest. 31 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 1. Summary of Accounting Policies (cont) (w) AASB Accounting Standards not yet effective The entity has not elected to early adopt the following Standards and Interpretations which have been issued or revised by the AASB but are not yet effective: All other new and revised Standards and Interpretations effective for the period ended 31 December 2012 have been adopted with no material impact on the amounts or disclosures in the financial statements. Standards and Interpretations in issue not yet adopted At the date of authorisation of the financial statements, the Standards and Interpretations listed below were in issue but not yet effective. Standard/Interpretation AASB 9 Financial Instruments AASB 10 Consolidated Financial Statements AASB 12 Disclosure of Interests in Other Entities AASB 13 Fair Value Measurement AASB 127 Separate Financial Statements AASB 2010‑2 Amendments to Australian Accounting Standards arising from Reduced Disclosure Requirements [AASB 1, 2, 3, 5, 7, 8,101, 102, 107,108, 110, 111, 112, 116, 117,119, 121, 123, 124,127, 128, 131, 133, 134,136, 137,138, 140, 141, 1050 & 1052 and Interpretations 2, 4, 5, 15, 17, 127, 129 & 1052] AASB 2010‑7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) [AASB 1, 3, 4, 5, 7, 101, 102, 108, 112, 118, 120, 121, 127, 128, 131, 132, 136, 137, 139, 1023 & 1038 and Interpretations 2, 5, 10, 12, 19 & 127] AASB 2011‑4 Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements [AASB 124] AASB 2011‑7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards [AASB 1, 2, 3, 5, 7, 101, 107, 112, 118, 121, 124, 132, 133, 136, 138, 139, 1023 & 1038 and Interpretations 5, 9, 16 & 17] AASB 2011‑8 Amendments to Australian Accounting Standards arising from AASB 13 [AASB 1, 2, 3, 4, 5, 7, 101, 102, 108, 110, 116, 117, 118, 119, 120, 121, 128, 131, 132, 133, 134, 136, 138, 139, 140, 141, 1004, 1023 & 1038 and Interpretations 2, 4, 12, 13, 14, 17, 19, 131 & 132] AASB 2011‑10 Amendments to Australian Accounting Standards arising from AASB 119 (September 2011) [AASB 1, AASB 8, AASB 101, AASB 124, AASB 134, AASB 1049 & AASB 2011‑8 and Interpretation 14] AASB 2011‑11 Amendments to AASB 119 (September 2011) arising from Reduced Disclosure Requirements Effective for annual reporting periods beginning on or after Expected to be initially applied in the financial year ending 1‑Jan‑15 1‑Jan‑13 1‑Jan‑13 1‑Jan‑13 1‑Jan‑13 31‑Dec‑15 31‑Dec‑13 31‑Dec‑13 31‑Dec‑13 31‑Dec‑13 1‑Jul‑13 31‑Dec‑14 1‑Jan‑15 31‑Dec‑15 1‑Jul‑13 31‑Dec‑14 1‑Jan‑13 31‑Dec‑13 1‑Jan‑13 31‑Dec‑13 1‑Jan‑13 31‑Dec‑13 1‑Jul‑13 30‑Jun‑14 32 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 1. Summary of Accounting Policies (cont) (w) AASB Accounting Standards not yet effective (cont) Standard/Interpretation Effective for annual reporting periods beginning on or after Expected to be initially applied in the financial year ending AASB 2011‑12 Amendments to Australian Accounting Standards arising from Interpretation 20 [AASB 1] AASB 2012‑1 Amendments to Australian Accounting Standards ‑ Fair Value Measurement ‑ Reduced Disclosure Requirements [AASB 3, AASB 7, AASB 13, AASB 140 & AASB 141] AASB 2012‑5 Amendments to Australian Accounting Standards arising from Annual Improvements 2009‑2011 Cycle [AASB 1, AASB 101, AASB 116, AASB 132 & AASB 134 and Interpretation 2] AASB 2012‑7 Amendments to Australian Accounting Standards arising from Reduced Disclosure Requirements [AASB 7, AASB 12, AASB 101 & AASB 127] AASB 2012‑10 Amendments to Australian Accounting Standards ‑ Transition Guidance and Other Amendments [AASB 1, 5, 7, 8, 10, 11, 12, 13, 101, 102, 108, 112, 118, 119, 127, 128, 132, 133, 134, 137, 1023, 1038, 1039, 1049 & 2011‑7 and Interpretation 12] AASB 2012‑11 Amendments to Australian Accounting Standards ‑ Reduced Disclosure Requirements and Other Amendments [AASB 1, AASB 2, AASB 8, AASB 10, AASB 107, AASB 128, AASB 133, AASB 134 & AASB 2011‑4] 1‑Jan‑13 31‑Dec‑13 1‑Jul‑13 31‑Dec‑14 1‑Jan‑13 31‑Dec‑13 1‑Jul‑13 31‑Dec‑14 1‑Jan‑13 31‑Dec‑13 1‑Jul‑13 31‑Dec‑14 The directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material financial impact on the financial statements of the company or the consolidated entity but may change disclosures made. (x) Comparative amounts Where the Group changes the presentation or classification of items in its financial statements, it reclassifies the comparative amounts for consistency and comparability between financial years. 33 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 2. (Loss)/Profit from Operations Consolidated Company 31 December 2012 $ 31 December 2011 $ 31 December 2012 $ 31 December 2011 $ (a) Revenue Revenue from operations consisted of the following items: Revenue from the sale of goods 16,432,289 24,363,281 Revenue from the rendering of services 2,720,460 5,787,406 Construction contract revenue 2,575,955 2,227,355 21,728,704 32,378,042 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ Interest revenue: Bank deposits Other Other 171,697 348,855 152,342 329,446 19,347 48,494 13,869 4,361 21,919,748 32,775,391 166,211 333,807 34 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 2. (Loss)/Profit from Operations (cont) Consolidated Company 31 December 2012 $ 31 December 2011 $ 31 December 2012 $ 31 December 2011 $ (b) (Loss)/profit before income tax has been arrived at after charging the following expenses: Borrowing costs Finance lease finance charges Interest paid ‑ Other entities 104,363 8,378 112,741 Depreciation ‑ property, plant and equipment 1,886,926 111,371 191,510 302,881 426,512 Impairment of property, plant and equipment ‑ (333,561) Amortisation ‑ intangibles Impairment of intangibles (Reversal of)/provision for non‑recovery of loan ‑ wholly‑owned controlled entity Provision for non‑recovery of investment in subsidiary 131,519 565,119 ‑ ‑ 131,533 ‑ ‑ ‑ Writedown of inventory to net realisable value 1,342,530 1,650,540 Profit on sale of property, plant and equipment (4,603) (2,287) ‑ ‑ ‑ ‑ ‑ ‑ 657 1,095 ‑ ‑ ‑ ‑ ‑ ‑ (2,824,982) 3,573,685 204,209 400,464 ‑ ‑ ‑ ‑ Foreign exchange gain/(loss) (196,299) 573,317 (772) (669) Operating lease rental expenses: Minimum lease payments Employee benefit expense: Share based payments: Equity settled Contributions to defined contribution superannuation plans 500,552 542,209 204,209 400,464 917,051 1,222,520 Other employee benefits 10,875,523 11,715,277 11,996,783 13,338,261 ‑ ‑ ‑ ‑ 12,240 377,750 389,990 12,240 308,410 320,650 35 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 3. (Loss)/Earnings per Share Consolidated 31 December 2012 $ 31 December 2011 $ Basic (loss)/earnings per share (17.9 cents) 0.3 cents Diluted (loss)/earnings per share (17.9 cents) 0.3 cents Basic (Loss)/Earnings per Share (Loss)/Earnings (a) (10,179,823) 180,188 Weighted average number of ordinary shares (b) 56,845,926 56,845,926 (a) (Loss)/Earnings used in the calculation of basic earnings per share are the same as the net (loss)/profit in the statement of comprehensive income. (b) Options are considered to be potential ordinary shares and are therefore excluded from the weighted average number of shares used in the calculation of basic earnings per share. Where dilutive, potential ordinary shares are included in the calculation of diluted earnings per share (see below). Diluted (Loss)/Earnings per Share (Loss)/Earnings (a) (10,179,823) 180,188 Weighted average number of ordinary shares (b) 56,845,926 56,845,926 (a) (Loss)/Earnings used in the calculation of diluted earnings per share are the same as the net (loss)/profit in the statement of comprehensive income. (b) The weighted average number of ordinary shares and potential ordinary shares used in the calculation of diluted earnings per share are as follows: Weighted average number of shares used in the calculation of basic earnings per share Staff Share plan Weighted average number of shares used in the calculation of diluted earnings per share 56,845,926 56,845,926 ‑ ‑ 56,845,926 56,845,926 (c) The following potential ordinary shares are not dilutive and therefore excluded from the weighted average number of ordinary shares and potential ordinary shares used in the calculation of diluted earnings per share: Staff Share plan 1,025,000 1,538,000 (d) Weighted average number of converted, lapsed, or cancelled potential ordinary shares used in the calculation of diluted earning per share: None used as they are not considered dilutive. 36 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 4 Income Tax (a) The prima facie income tax benefit on pre‑tax accounting profit/(loss) from operations reconciles to the income tax benefit in the financial statements as follows: Consolidated Company 31 December 2012 $ 31 December 2011 $ 31 December 2012 $ 31 December 2011 $ (Loss)/Profit from operations (10,179,823) 180,188 2,002,306 (4,398,147) Income tax (benefit)/expense calculated at 30% (3,053,947) 54,056 600,692 (1,319,444) Non‑deductible provision for non‑recovery of loan ‑ ‑ (847,495) 1,072,106 Share based payments 61,263 120,139 61,263 120,139 Previously unrecognised and unused tax losses now recognised ‑ Other non‑deductible/non assessable items (22,231) (367,922) (6,058) ‑ 5,626 (3,014,915) (193,727) (191,598) (121,573) Unused tax losses and tax offsets not recognised as deferred tax assets 3,014,915 193,727 191,598 121,573 Income tax attributable to operating (Loss)/profit ‑ ‑ ‑ ‑ The tax rate used in the above reconciliation is the corporate tax rate of 30% payable by Australian corporate entities on taxable profits under Australian tax law, 25% in Germany, 17% in Singapore and the federal tax rate applicable in the USA and the State of Arizona has been assumed to approximate a combined rate 40% as their tax rates apply on a sliding scale. There has been no change in the corporate tax rate when compared with the previous reporting period. (b) Unrecognised deferred tax balances The following deferred tax assets have not been bought to account as assets Tax losses ‑ revenue Temporary differences Consolidated Company 31 December 2012 $ 31 December 2011 $ 31 December 2012 $ 31 December 2011 $ 21,309,046 18,294,131 6,576,523 6,384,925 1,489,161 1,504,013 ‑ ‑ 22,798,207 19,798,144 6,576,523 6,384,925 37 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 4 Income Tax (cont) (b) Unrecognised deferred tax balances (cont) Tax consolidation Relevance of tax consolidation to the consolidated entity The company and its wholly‑owned Australian resident entities have formed a tax‑consolidated group with effect from 1 January 2003 and are therefore taxed as a single entity from that date. The head entity within the tax‑consolidated group is Electro Optic Systems Holdings Limited. The members of the tax‑consolidated entity group are identified in Note 24. Nature of tax funding arrangements and tax sharing agreements There are no formal tax funding or tax sharing arrangements within the tax‑consolidated group. 5. Other Financial Assets Non‑Current ‑ at cost Unlisted shares in controlled entities at cost provision for non recovery Carrying value at start of financial year share options provided at no cost provision for non recovery Consolidated Company 31 December 2012 $ 31 December 2011 $ 31 December 2012 $ 31 December 2011 $ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 4,016,132 3,811,923 (4,016,132) (3,811,923) ‑ ‑ ‑ ‑ 204,209 400,464 (204,209) (400,464) ‑ ‑ The directors have assessed the carrying value of the unlisted shares held in controlled entities and have determined that, as at 31 December 2012, based upon the net asset position of the controlled entities, the current and historic trading results and the foreseeable future results from signed contracts on hand the investments are fully impaired. 38 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 6. Trade and Other Receivables Current Trade receivables GST receivable Rental deposit related party Amounts due from customers under construction contracts (Note 30) Other debtors Consolidated Company 31 December 2012 $ 31 December 2011 $ 31 December 2012 $ 31 December 2011 $ 1,507,256 9,126,990 81,785 5,843 108,417 ‑ 274,847 599,620 5,165 ‑ ‑ 21,140 5,843 ‑ ‑ ‑ 21,156 ‑ ‑ ‑ 1,874,896 9,835,027 26,983 21,156 The average credit period on sales of goods is 30 days. No interest is charged on late payments and no general allowance for doubtful debts has been made as most contracts are with governments and government agencies. Ageing of past due not impaired 31‑60 days 61‑90 days 120 days + Ageing of past due and impaired 120 days + Total Movement in allowance for doubtful debts Balance at the beginning of the financial year Amount released Balance at the end of the financial year 344,008 772,031 1,217 9,114 5,148 58,015 354,339 835,194 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 39 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 7. Current Inventories Consolidated Company 31 December 2012 $ 31 December 2011 $ 31 December 2012 $ 31 December 2011 $ Finished goods ‑ at cost ‑ 2,354,511 Raw materials ‑ at net realisable value 2,541,172 4,644,227 Work in progress ‑ at cost 1,314,678 3,705,986 3,855,850 10,704,724 8. Other Assets Current Prepayments Non‑current 588,939 101,316 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ Amounts due from wholly‑owned controlled entity Less Allowance for uncollectible amounts Movement in allowance for uncollectible amounts Balance at the beginning of the financial year Reversal of provision recognised in profit and loss Balance at the end of the financial year ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 65,258,001 68,082,984 (65,258,001) (68,082,984) ‑ ‑ 68,082,984 64,509,299 (2,824,983) 3,573,685 65,258,001 68,082,984 40 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 9. Intangibles Consolidated Company 31 December 2012 $ 31 December 2011 $ 31 December 2012 $ 31 December 2011 $ License agreement ‑ 714,830 ‑ ‑ On 3 December 2009 as part of the acquisition of the assets of Recon Optical Inc of the USA, the consolidated entity acquired a licence for the Kollmorgen Licensed patents. The license expires on the expiry of the patents which expire on 16 July 2017 and relates to the manufacturing of gimbals. The full value of the licence agreement was impaired during the period based on the forecasted future cash flows from signed contracts on hand. Movement in intangible assets Gross carrying amount Balance at the beginning of the financial year 714,830 849,852 Amortisation Impairment Net foreign currency exchange differences Balance at the end of the financial year Net book value (131,519) (131,533) (565,119) (18,192) ‑ ‑ ‑ (3,489) 714,830 714,830 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 10. Auditors Remuneration (a) Auditor of the Parent Entity Audit or review of the financial report 186,031 242,860 186,031 242,860 Taxation services 13,500 12,000 13,500 12,000 199,531 254,860 199,531 254,860 (b) Network firm of the Parent Entity Auditor Audit or review of the financial report Taxation services 189 110 299 9,076 1,512 10,588 ‑ ‑ ‑ ‑ ‑ ‑ The auditor of Electro Optic Systems Holdings Limited is Deloitte Touche Tohmatsu. 41 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 11. Property, Plant and Equipment Consolidated Company 31 December 2012 $ 31 December 2011 $ 31 December 2012 $ 31 December 2011 $ (a) Plant and equipment ‑ at cost 5,905,447 6,013,397 Less accumulated depreciation and impairment (5,755,546) (4,944,358) 149,901 1,069,039 (b) Leased assets ‑ at cost 361,997 362,181 Less accumulated amortisation and impairment (144,845) (77,607) 217,152 284,574 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ (c) Office equipment ‑ at cost 2,755,422 2,752,175 15,048 15,048 Less accumulated depreciation and impairment (2,589,636) (1,996,675) (14,063) (13,406) 165,786 755,500 985 1,642 (d) Furniture, fixtures and fittings ‑ at cost 280,703 300,212 Less accumulated depreciation and impairment (275,436) (274,814) 5,267 25,398 (e) Leasehold improvements ‑ at cost 1,128,493 1,140,721 Less accumulated depreciation and impairment (1,128,493) (844,149) ‑ 296,572 (f) Motor vehicle ‑ at cost 17,736 18,081 Less accumulated depreciation and impairment (17,736) (18,081) ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 7,000,000 7,000,000 (7,000,000) (7,000,000) ‑ ‑ 538,106 2,431,083 985 1,642 (g) Satellite ‑ at cost Less impairment Total net book value of Property, Plant and Equipment 42 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 11. Property, Plant and Equipment (cont) Consolidated Company 31 December 2012 $ 31 December 2011 $ 31 December 2012 $ 31 December 2011 $ Cost Plant and equipment Balance at beginning of year 6,013,397 6,047,822 Additions Asset transfers Disposals Net foreign currency exchange differences 18,640 9,730 (65,066) (71,254) 33,060 ‑ (62,168) (5,317) Balance at end of year 5,905,447 6,013,397 Leased assets Balance at beginning of year 362,181 Asset transfer Transfer to office equipment ‑ ‑ Net foreign currency exchange differences (184) 414,285 19,315 (71,431) 12 Balance at end of year 361,997 362,181 Office equipment ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ Balance at beginning of year 2,752,175 2,601,098 15,048 15,048 Additions Asset transfers Transfer from leased assets Disposals Net foreign currency exchange differences 26,594 4,979 ‑ (3,862) (24,464) 115,149 ‑ 71,431 (30,322) (5,181) ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ Balance at end of year 2,755,422 2,752,175 15,048 15,048 43 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 11. Property, Plant and Equipment (cont) Consolidated Company 31 December 2012 $ 31 December 2011 $ 31 December 2012 $ 31 December 2011 $ Furniture, fixtures and fittings Balance at beginning of year 300,212 299,546 Additions Disposals Asset transfers Net foreign currency exchange differences ‑ ‑ (14,709) (4,800) 7,586 (6,590) ‑ (330) Balance at end of year 280,703 300,212 Leasehold improvements Balance at beginning of year 1,140,721 1,142,806 Additions Disposals ‑ ‑ 19,895 (21,159) Net foreign currency exchange differences (12,228) (821) Balance at end of year 1,128,493 1,140,721 Motor vehicle Balance at beginning of year Net foreign currency exchange differences Balance at end of year 18,081 (345) 17,736 18,104 (23) 18,081 Satellite Balance at beginning of year Balance at end of year 7,000,000 7,000,000 7,000,000 7,000,000 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 44 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 11. Property, Plant and Equipment (cont) Consolidated Company 31 December 2012 $ 31 December 2011 $ 31 December 2012 $ 31 December 2011 $ Accumulated Depreciation/ Amortisation/Impairment Plant and equipment Balance at beginning of year (4,944,358) (4,299,133) Depreciation Impairment Disposals Net foreign currency exchange differences (898,344) (318,269) ‑ (371,085) 12,305 74,851 50,711 (6,582) Balance at end of year (5,755,546) (4,944,358) Leased plant and equipment Balance at beginning of year Amortisation expense Impairment Asset transfer Transfer to office equipment Net foreign currency exchange differences (77,607) (67,422) ‑ ‑ ‑ 184 (62,539) (67,089) (83) (19,315) 71,431 (12) Balance at end of year (144,845) (77,607) Office equipment ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ Balance at beginning of year (1,996,675) (2,578,921) (13,406) (12,311) Depreciation Impairment Transfer from leased assets Disposals Net foreign currency exchange differences (619,166) ‑ ‑ 1,683 24,522 (15,458) 633,698 (71,431) 30,322 5,115 (657) (1,095) ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ Balance at end of year (2,589,636) (1,996,675) (14,063) (13,406) 45 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 11. Property, Plant and Equipment (cont) Consolidated Company 31 December 2012 $ 31 December 2011 $ 31 December 2012 $ 31 December 2011 $ Net foreign currency exchange differences 4,800 Balance at end of year (275,436) (274,814) Furniture, fixtures and fittings Balance at beginning of year Depreciation Impairment Disposals Leasehold improvements Balance at beginning of year Amortisation Impairment Disposals (274,814) (290,212) (5,422) (1,220) ‑ ‑ ‑ ‑ 9,697 6,591 330 60,534 21,159 11,550 (844,149) (912,916) (296,572) (24,476) Net foreign currency exchange differences 12,228 Balance at end of year (1,128,493) (844,149) Motor vehicle Balance at beginning of year (18,081) (18,104) Net foreign currency exchange differences 345 23 Balance at end of year (17,736) (18,081) Satellite Balance at beginning of year (7,000,000) (7,000,000) Balance at end of year (7,000,000) (7,000,000) The Group reassessed the remaining useful lives of assets during the current period. 46 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 11. Property, Plant and Equipment (cont) Aggregate depreciation, impairment and amortisation allocated during the period is recognised as an expense and disclosed in Note 2 to the financial statements. Impairment of property, plant and equipment The consolidated entity has assessed the carrying amount of plant and equipment in the Queanbeyan and Tucson facilities and determined an impairment (reversal) charge for the year of Nil (2011: reversal $333,561). The basis to assess for any potential impairment was fair value less costs to sell and fair value determined by reference to an active market for second hand manufacturing equipment. 12. Current Trade and Other Payables Trade payables Accruals Amounts due to customers under construction contracts (Note 30) Consolidated Company 31 December 2012 $ 31 December 2011 $ 31 December 2012 $ 31 December 2011 $ 1,473,693 3,223,921 511,974 295,309 10,831 86,659 6,802 114,159 3,788,418 5,370,799 ‑ ‑ 5,774,085 8,890,029 97,490 120,961 The average credit period on purchases of goods is 30 days and no interest is payable on goods purchased within agreed credit terms. The consolidated entity has financial risk management policies in place to ensure that all payables are paid within the credit timeframe. 13. Borrowings Secured ‑ At amortised cost Current Finance lease liabilities (Note 26) 102,191 113,524 Secured promissory Note 2 Secured promissory Note 3 Non‑current ‑ ‑ 1,139,323 739,020 102,191 1,991,867 Finance lease liabilities (Note 26) 15,032 117,223 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 47 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 13. Borrowings (cont) The finance lease liabilities are secured by the leased assets. The average weighted interest rate charged on the finance leases was 10.03% (2011 ‑ 9.95%). The secured promissory Note 2 of $1,139,323 (US$1,159,375) was denominated in US dollars and attracted an interest rate of 5%. The secured promissory Note 3 of $739,020 (US$752,027) was denominated in US dollars and attracted an interest rate of 5%. The promissory notes were secured by the inventory purchased and a guarantee from the parent company. The promissory notes have been repaid in full during the year. 14. Provisions Consolidated Company 31 December 2012 $ 31 December 2011 $ 31 December 2012 $ 31 December 2011 $ Current Employee benefits (Note 16) 2,382,606 2,126,061 Surplus lease space Contract losses Contract credit Redundancy costs Decommissioning costs Make good of leased premises Warranty (Note 15) Non‑current ‑ 222,191 308,776 ‑ 250,000 ‑ 87,642 22,422 ‑ 201,185 250,000 29,481 1,507,027 2,047,061 4,670,600 4,763,852 Employee Benefits (Note 16) 293,271 249,523 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 48 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 14. Provisions (cont) Consolidated Company 31 December 2012 $ 31 December 2011 $ 31 December 2012 $ 31 December 2011 $ Movement in surplus lease space provision ‑ current Balance at 1 January Payments made Balance as at 31 December 87,642 110,141 (87,642) (22,499) ‑ 87,642 ‑ ‑ ‑ The surplus lease space provisions related to the leased premises at 3160 East Transcon Way, Tucson, Arizona, USA. Movement in contract loss provision Balance at 1 January Additional provision recognised 22,422 166,496 222,191 ‑ Reductions resulting from re‑measurement (22,422) (144,074) Balance as at 31 December 222,191 22,422 ‑ ‑ ‑ ‑ The provision for contract losses is based on assessment by management of the additional costs to complete existing contracts not recoverable from the customer. Movement in contract credit provision Balance at 1 January Additional provision recognised Balance as at 31 December ‑ 308,776 308,776 ‑ ‑ ‑ ‑ ‑ The provision is for an agreed credit to be provided to a customer. ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 49 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 14. Provisions (cont) Consolidated Company 31 December 2012 $ 31 December 2011 $ 31 December 2012 $ 31 December 2011 $ Movement on redundancy provision Balance at 1 January Payments made Additional provision recognised for Tucson relocation Balance as at 31 December 201,185 (201,185) ‑ ‑ ‑ ‑ 201,185 201,185 Movement on decommissioning costs Balance at 1 January Balance as at 31 December 250,000 250,000 250,000 250,000 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ The provision for decommissioning costs relate to an obligation to dismantle and refurbish a telescope at a future date. Movement on make good of leased premises Balance at 1 January 29,481 29,519 Reductions resulting from re‑measurement (29,481) (38) Balance as at 31 December ‑ 29,481 ‑ ‑ ‑ ‑ ‑ ‑ The provision for make good of leased premises costs related to an obligation to make good the premises in at 3160 East Transcon Way, Tucson, Arizona, USA on expiry of the lease. 50 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 15. Warranty Provisions Consolidated Company 31 December 2012 $ 31 December 2011 $ 31 December 2012 $ 31 December 2011 $ Movement in warranty provision Balance at 1 January 2,047,061 2,912,985 Reductions resulting from re‑measurement (1,212,164) (1,835,221) Additional provisions recognised 672,130 969,297 Balance as at 31 December 1,507,027 2,047,061 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ The provision for warranty claims represents the present value of the directors’ best estimate of the future sacrifice of economic benefits that will be required under the consolidated entity’s 12‑month warranty program for military products and telescopes. The estimate has been made on the basis of historical industry accepted warranty trends and may vary as a result of new materials, altered manufacturing processes or other events affecting product quality. 16. Employee Benefits The aggregate employee benefits liability recognised in the financial statements is as follows: Provision for employee entitlements Current (Note 14) Non‑Current (Note 14) 2,382,606 2,126,061 293,271 249,523 ‑ ‑ ‑ ‑ 51 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 17. Issued Capital Consolidated Company 31 December 2012 $ 31 December 2011 $ 31 December 2012 $ 31 December 2011 $ Balance at the beginning of the financial year ‑ Ordinary shares 75,383,567 75,383,567 75,383,567 75,383,567 Balance at the end of the financial year 75,383,567 75,383,567 75,383,567 75,383,567 Changes to the then Corporations Law abolished the authorised capital and par value concept in relation to share capital from 1 July 1998. Therefore, the company does not have a limited amount of authorised capital and issued shares do not have a par value. Fully Paid Ordinary Shares Number Number Number Number Balance at the beginning of financial year 56,845,926 56,845,926 56,845,926 56,845,926 Balance at end of financial year 56,845,926 56,845,926 56,845,926 56,845,926 Fully paid ordinary shares carry one vote per share and carry the right to dividends. 18. Directors and Employee Share Option Plan (a) Unlisted Options issued under the Employee Share Option Plan On 28 June 2002, shareholders approved the adoption of an Employee Share Option Plan. On 10 December 2009 Directors approved the issue of 1,800,000 unlisted options to staff at an exercise price of $1.30 exercisable on or before 8 December 2013. The consolidated entity has an ownership‑based compensation scheme for employees (including directors) of the company. In accordance with the provisions of the scheme, as approved by shareholders at a previous annual general meeting, employees with more than three months service with the company may be granted options to purchase ordinary shares at exercise prices determined by the directors based on market prices at the time the issue of options were made. Each share option converts to one ordinary share in Electro Optic Systems Holdings Limited. No amounts are paid or payable by the recipient on receipt of the options. The options carry neither rights to dividends nor voting rights. Options may be exercised at any time from the date of vesting to the date of expiry. The number of options granted is determined by the directors and takes into account the company’s and individual achievements against both qualitative and quantitive criteria. 52 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 18. Directors and Employee Share Option Plan (cont) (b) Unlisted Options issued under the Employee Share Option Plan 2012 2011 Weighted average exercise price $ Weighted average exercise price $ Number Number Balance at the beginning of the financial year (i) 1,538,000 1.30 3,393,800 1.62 Granted during the year (ii) Exercised during the year (iii) Lapsed during the year (iv) Balance at the end of the financial year (v) Exercisable at end of the year (i) Balance at the beginning of the year ‑ ‑ (513,000) 1,025,000 1,025,000 ‑ ‑ 1.30 1.30 (1,855,800) 1,538,000 769,000 ‑ ‑ 1.89 1.30 2012 Staff options 2011 Staff options Director options Staff options Staff options Number Grant date Expiry date Exercise Price Fair value at grant date 1,538,000 10/12/09 8/12/13 $1.30 $1,481,094 Number Grant date Expiry date 60,000 1,564,800 31/5/07 31/5/07 60,000 23/11/07 1,709,000 10/12/09 3,393,800 31/5/11 31/5/11 31/5/11 8/12/13 Exercise Price Fair value at grant date $1.95 $44,100 $1.95 $1,150,128 $1.95 $7,764 $1.30 $1,645,767 $2,847,759 Staff and Director options carry no rights to dividends and no voting rights. 53 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 18. Directors and Employee Share Option Plan (cont) (b) Unlisted Options issued under the Employee Share Option Plan (cont) (ii) Granted during the year 2012 2011 Number Grant Date Expiry Date Exercise Price Fair Value Received $ Fair value at grant date $ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ There were no options issued during 2012 or 2011. All the options granted to staff during 2009 vested over a three year period with 20% vesting after 12 months, a further 30% after 2 years and the balance after 3 years. Options were priced using a modified Cox‑Rubenstein binomial pricing model. Where relevant, the expected life used in the model has been adjusted based on management’s best estimate for the effects of non‑transferability, exercise restrictions and behavioural conditions. Expected volatility is based on the historical share price volatility over a two year period. The following inputs were used in the model for grants during the year ended 31 December 2009: Dividend yield Expected volatility (linearly interpolated) Risk free interest rate Expected life of options Grant date share price Exercise price (iii) Exercised during the year ‑ 133.9% 3.75% 4 years $1.20 $1.30 Number of Options Exercised Grant Date Exercise Date Expiry Date Exercise Price No. of Shares Issued Fair Value Received Fair Value of Shares at Date of Issue Nil Nil ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ Nil Nil Nil Nil Nil Nil 2012 2011 54 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 18. Directors and Employee Share Option Plan (cont) (b) Unlisted Options issued under the Employee Share Option Plan (cont) (iv) Lapsed during the year Number of Options Lapsed Grant Date Exercise Date Expiry Date Exercise Price No. of Shares Issued Fair Value Received Fair Value of Shares at Date of Issue 2012 Staff 2011 Staff Staff 513,000 10/12/09 ‑ 8/12/13 $1.30 60,000 31/5/07 60,000 23/11/07 Directors 1,564,800 31/5/07 Staff 171,000 10/12/09 1,855,800 (v) Balance at the end of the financial year ‑ ‑ ‑ ‑ 31/5/11 31/5/11 31/5/11 8/12/13 $1.95 $1.95 $1.95 $1.30 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 2012 Staff options 2011 Staff options Number Grant date Expiry date Exercise Price Fair value at grant date 1,025,000 10/12/09 8/12/13 $1.30 $987,075 Number Grant date Expiry date Exercise Price Fair value at grant date 1,538,000 10/12/09 8/12/13 $1.30 $1,481,094 Staff and Director options carry no rights to dividends and no voting rights. All the options granted to staff during 2009 vested over a three year period with 20% vesting after 12 months, a further 30% after 2 years and the balance after 3 years. No options were issued during 2010, 2011 and 2012. The difference between the total market value of the options issued during the financial year, at the date of issue, and the total amount received from employees (nil) is recognised in the financial statements over the vesting period as disclosed in Note 18 to the financial statements. 55 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 19. Reserves Consolidated Company 31 December 2012 $ 31 December 2011 $ 31 December 2012 $ 31 December 2011 $ Foreign currency translation 49,953 45,780 ‑ ‑ Employee equity‑settled benefits 7,727,803 7,523,594 7,727,803 7,523,594 7,777,756 7,569,374 7,727,803 7,523,594 Foreign currency translation Balance at beginning of financial year 45,780 573,402 Translation of foreign operations Balance at end of financial year 4,173 (527,622) 49,953 45,780 ‑ ‑ ‑ ‑ ‑ ‑ Exchange differences relating to the translation from US dollars, being the functional currency of the consolidated entity’s foreign controlled entities in the USA, Euros, being the functional currency of the consolidated entity’s foreign controlled entity in Germany and Singaporean dollars, being the functional currency of the consolidated entity’s foreign controlled entity in Singapore, into Australian dollars are brought to account by entries made directly to the foreign currency translation reserve. Employee equity‑settled benefits Balance at beginning of financial year 7,523,594 7,123,130 7,523,594 7,123,130 Share based payment 204,209 400,464 204,209 400,464 Balance at end of financial year 7,727,803 7,523,594 7,727,803 7,523,594 The employee equity‑settled benefits reserve arises on the grant of share options to directors and executives under the Employee Share Option plan. Further information about share‑based payments to employees is made in Note 18 to the financial statements. 20. Accumulated Losses Balance at beginning of financial year (70,292,694) (70,472,882) (81,680,598) (77,282,451) Net (Loss)/profit attributable to members of the parent entity (10,179,823) 180,188 2,002,306 (4,398,147) Balance at end of financial year (80,472,517) (70,292,694) (79,678,292) (81,680,598) 56 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 21. Key Management Personnel Compensation The key management personnel of Electro Optic Systems Holdings Limited during the year were: Mr Fred Bart (Chairman, Non‑executive director) Dr Ben Greene (Chief Executive Officer and director) Mr Ian Dennis (Non‑executive director)* Mr Mark Ureda (Non‑executive director) Lt Gen Peter Leahy AC (Non‑executive director) Mr Kevin Scully (Non‑executive director) commenced 19 September 2011 Dr Craig Smith (Chief Executive Officer of EOS Space Systems Pty Limited) Mr Mark Bornholt (Chief Executive Officer Defence Systems) ‑ commenced 21 March 2011 Mr John Palisi (Chief Financial Officer ‑ Electro Optic Systems Pty Limited) resigned 3 February 2012 Mr Scott Lamond (Chief Financial Officer ‑ Electro Optic Systems Pty Limited) appointed 10 August 2012 ‑ Mr Scott Lamond was Acting Chief Financial Officer from 3 February 2012 to 10 August 2012 Mr Hugo Keyner (Chief Executive Officer EOS Technologies Inc) retired 31 October 2012 *During the period 3 February 2012 to 10 August 2012 whilst Scott Lamond was Acting Chief Financial Officer, Mr Ian Dennis assumed an executive role to assist in the finance function. Key management personnel compensation policy The board reviews the remuneration packages of all key management personnel on an annual basis. Remuneration packages are reviewed and determined with regard to current market rates and are benchmarked against comparable industry salaries, adjusted by a performance factor to reflect changes in the performance of the company. The aggregate compensation of the key management personnel of the consolidated entity and company is set out below: Consolidated Company 2012 $ 2011 $ Short‑term employee benefits 1,601,075 1,498,319 Post‑employment benefits Share‑based payment Other long term benefits 104,623 39,934 ‑ 99,342 142,388 42,760 2012 $ 377,750 12,240 ‑ ‑ 2011 $ 308,410 12,240 ‑ ‑ 1,745,632 1,782,809 389,990 320,650 57 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 21. Key Management Personnel Compensation (cont) The compensation of the non executive directors is paid by the holding company and is the same for both the holding company and the consolidated entity. The compensation for Dr Ben Greene and the senior executives are paid by subsidiary companies. ‑ ‑ ‑ ‑ ‑ ‑ ‑ Other Long Term Benefits $ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ Total $ 66,490 505,897 200,875 40,875 40,875 40,875 895,887 247,052 228,900 82,650 186,266 104,877 849,745 1,745,632 Short term Equity settled Share based payments Post Employment Non‑monetary $ Superannuation $ Options $ 2012 Directors Mr Fred Bart Dr Ben Greene* Mr Ian Dennis Mr Mark Ureda Lt Gen Peter Leahy AC Mr Kevin Scully Salary & Fees $ 61,000 439,994 197,500 40,875 37,500 40,875 ‑ 28,726 ‑ ‑ ‑ ‑ 5,490 37,177 3,375 ‑ 3,375 ‑ 817,744 28,726 49,417 Executives Dr Craig Smith Mr Mark Bornholt Mr John Palisi Mr Scott Lamond Mr Hugo Keyner 210,000 210,000 80,324 167,556 85,976 753,856 ‑ ‑ ‑ ‑ 749 749 1,571,600 29,475 18,900 18,900 2,326 15,080 ‑ 55,206 104,623 18,152 ‑ ‑ 3,630 18,152 39,934 39,934 58 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 21. Key Management Personnel Compensation (cont) Short term Equity settled Share based payments Post Employment Non‑monetary $ Superannuation $ Options $ 2011 Directors Mr Fred Bart Dr Ben Greene* Mr Ian Dennis Mr Mark Ureda Lt Gen Peter Leahy AC Mr Kevin Scully Salary & Fees $ 61,000 300,000 157,500 40,875 37,500 11,535 ‑ 39,182 ‑ ‑ ‑ ‑ 5,490 27,000 3,375 ‑ 3,375 ‑ 608,410 39,182 39,240 Other Long Term Benefits $ ‑ ‑ ‑ ‑ ‑ ‑ ‑ Total $ 66,490 366,182 160,875 40,875 40,875 11,535 686,832 ‑ ‑ ‑ ‑ ‑ ‑ ‑ Executives Mr Ron Thompson Dr Craig Smith Mr Mark Bornholt Mr John Palisi Mr Hugo Keyner * Executive director 172,083 197,532 128,423 196,946 154,889 849,873 ‑ ‑ ‑ ‑ 854 854 13,288 17,750 11,340 17,724 ‑ 35,597 42,760 263,728 35,597 ‑ 35,597 35,597 ‑ ‑ ‑ ‑ 250,879 139,763 250,267 191,340 60,102 142,388 42,760 1,095,977 1,458,283 40,036 99,342 142,388 42,760 1,782,809 Non‑monetary includes the provision for motor vehicles and health benefits. Further details on options can be found in Note 18. 59 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 22. Notes to the Cash Flow Statement (a) Reconciliation of Cash and cash equivalents For the purposes of the cash flow statement, cash includes cash on hand and at call deposits with banks or financial institutions, investments in money market instruments maturing within less than two months and net of bank overdrafts. Cash at the end of the financial year as shown in the statements of cash flows is reconciled to the related items in the statement of financial position as follows: Consolidated Company 2012 $ 2011 $ 2012 $ 2011 $ Cash and cash equivalents 6,686,194 4,885,761 3,502,600 1,324,726 (b) Reconciliation of (Loss)/profit for the year to net cash flows from operating activities (Loss)/profit for the period (10,179,823) 180,188 2,002,306 (4,398,147) (Profit) on disposal of fixed assets Equity settled share‑based payments Amortisation of intangibles Impairment of intangibles Depreciation of fixed assets Impairment Foreign exchange movements Provision for non‑recovery of loan Provision for non‑recovery of investment (4,603) 204,209 131,519 565,119 1,886,926 ‑ 25,220 ‑ ‑ (2,287) 400,464 131,533 ‑ 426,512 (333,561) (520,741) ‑ ‑ ‑ ‑ 657 ‑ ‑ ‑ ‑ ‑ ‑ 1,095 ‑ ‑ ‑ ‑ (2,824,982) 3,573,685 204,209 400,464 Writedown of inventory 1,342,530 1,650,540 ‑ ‑ (Increase)/decrease in assets Current receivables Inventories Other current assets Increase/(decrease) in liabilities 7,960,131 5,674,434 (5,827) (6,603) 5,506,344 (752,012) (487,623) 152,204 ‑ ‑ ‑ ‑ ‑ ‑ Provisions 178,499 (747,650) Current trade and other payables (1,978,231) (1,146,272) (23,471) (28,474) Other Borrowings for inventory 216,665 (608,056) ‑ (4,182,672) Deferred income and amounts due to customers under construction contracts (1,582,381) (4,100,935) ‑ ‑ ‑ ‑ ‑ ‑ Net cash inflows/(outflows) from operating activities 3,784,501 (3,778,311) (647,108) (458,250) 60 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 22. Notes to the Cash Flow Statement (cont) (c) Non‑Cash Operating Activities In December 2010, a subsidiary company EOS Defense Systems, Inc acquired 32 completed inventory units for a purchase price of US$5,300,000, payable in certain instalments in accordance with and under the terms of a promissory note executed by EOS Defense Systems, Inc. The promissory note provided for interest to be paid at 5% per annum. The principal and interest due and paid in full by 31 January 2012. In September 2011, a subsidiary company EOS Defense Systems, Inc acquired 21 completed inventory units for a purchase price of US$752,027, payable in certain instalments in accordance with and under the terms of a promissory note executed by EOS Defense Systems, Inc. The promissory note provided for interest to be paid at 5% per annum. The principal and interest due and paid in full by 31 January 2012. 23. Related Party Disclosures (a) Equity interests in related parties Details of the percentage of ordinary shares held in subsidiaries are disclosed in Note 24. (b) Key management personnel compensation Details of key management personnel compensation are disclosed in Note 21. (c) Key management personnel equity holdings (represented by holdings of fully paid ordinary shares in Electro Optic Systems Holdings Limited) 2012 Mr Fred Bart Dr Ben Greene Mr Ian Dennis Mr Mark Ureda Lt Gen Peter Leahy AC Mr Kevin Scully Mr Mark Bornholt Mr John Palisi Dr Craig Smith Mr Scott Lamond Mr Hugo Keyner Balance at 1/1/12 No. Granted as remuneration No. Received on exercise of options No. Net other change No. Balance at 31/12/12 No. 5,309,075 3,954,185 170,050 ‑ 15,000 ‑ ‑ ‑ 89,450 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 5,309,075 3,954,185 170,050 ‑ 15,000 ‑ ‑ ‑ 89,450 ‑ ‑ 61 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 23. Related Party Disclosures (cont) 2011 Mr Fred Bart Dr Ben Greene Mr Ian Dennis Mr Mark Ureda Lt Gen Peter Leahy AC Mr Kevin Scully Mr Mark Bornholt Mr Ron Thompson Dr Craig Smith Mr John Palisi Mr Hugo Keyner Balance at 1/1/11 No. Granted as remuneration No. Received on exercise of options No. Net other change No. Balance at 31/12/11 No. 5,309,075 3,954,185 170,050 ‑ 15,000 ‑ ‑ 347,745 89,450 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 5,309,075 3,954,185 170,050 ‑ 15,000 ‑ ‑ 347,745 89,450 ‑ ‑ (d) Key management personnel option holdings. Balance at 1/1/12 No. Granted as remuneration No. Exercised (Lapsed) No. Balance at 31/12/12 No. Balance vested and exercisable at 31/12/12 No. Options vested during year ‑ ‑ ‑ ‑ ‑ ‑ ‑ 160,000 160,000 32,000 160,000 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 160,000 160,000 80,000 (160,000) ‑ ‑ ‑ ‑ 32,000 32,000 160,000 160,000 ‑ 16,000 80,000 2012 Mr Fred Bart Dr Ben Greene Mr Ian Dennis Mr Mark Ureda Lt Gen Peter Leahy AC Mr Kevin Scully Mr Mark Bornholt Dr Craig Smith Mr John Palisi Mr Scott Lamond Mr Hugo Keyner The Company did not issue any options during the year ended 31 December 2010, 2011 and 2012 to Key management personnel. Refer to Note 18 for further details of options outstanding. 62 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 23. Related Party Disclosures (cont) Balance at 1/1/11 No. Granted as remuneration No. Exercised (Lapsed) No. Balance at 31/12/11 No. Balance vested and exercisable at 31/12/11 No. Options vested during year 200,000 964,800 200,000 200,000 ‑ ‑ ‑ 160,000 280,000 160,000 160,000 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ (200,000) (964,800) (200,000) (200,000) ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 160,000 (120,000) 160,000 ‑ ‑ 160,000 160,000 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 80,000 80,000 80,000 80,000 48,000 48,000 48,000 48,000 2011 Mr Fred Bart Dr Ben Greene Mr Ian Dennis Mr Mark Ureda Lt Gen Peter Leahy AC Mr Kevin Scully Mr Mark Bornholt Mr Ron Thompson Dr Craig Smith Mr John Palisi Mr Hugo Keyner Refer to Note 18 for further details of options outstanding. (e) Transactions with other related parties Other related parties includes: ■ the parent entity; ■ entities with significant influence over the consolidated entity; and ■ subsidiaries. Amounts receivable from entities in the wholly‑owned group are disclosed in Note 8 to the financial statements. Certain entities within the group have lent money to other entities within the wholly‑owned group on an interest free basis. The amounts receivable by the ultimate parent entity in the wholly‑owned group are disclosed in Note 8 to the financial statements. The ultimate parent entity in the wholly‑owned group has provided for this amount based upon the net asset position of the controlled entities. On 18 March 2011, Fire Control Systems Pty Limited paid an unfranked dividend of $26,500,000 to Electro Optic Systems Pty Limited. On 31 December 2011, Fire Control Systems Pty Limited paid an unfranked dividend of $7,700,000 to Electro Optic Systems Pty Limited. Both these entities are wholly owned subsidiaries of the Group. 63 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 23. Related Party Disclosures (cont) (f) Other transactions with key management personnel During the year, the Company paid a total of $66,490 (2011: $66,490) to 4F Investments Pty Limited, a company associated with Mr Fred Bart in respect of directors fees and superannuation for Fred Bart. During the year, the Company received $13,868 (2011: $4,361) from 4F Investments Pty Limited, a company associated with Mr Fred Bart in respect of shared Sydney office facilities. During the year, the Company paid $40,875 (2011: $40,875) to Dennis Corporate Services Pty Limited, a company associated with Mr Ian Dennis in respect of directors fees and superannuation for Ian Dennis. During the year, the Company paid $160,000 (2011: $120,000) to Dennis Corporate Services Pty Limited, a company associated with Mr Ian Dennis in respect of consulting fees for company secretarial and accounting services. During the year, the Company paid $5,543 (2011: Nil) to Audio Pixels Holdings Limited, a company of which Fred Bart and Ian Dennis are directors and shareholders in respect of shared Sydney office facilities. The Company also paid a rental deposit of $5,843 (2011: Nil) to Audio Pixels Holdings Limited included in Note 6. (g) Parent entity The parent entity in the consolidated group is Electro Optic Systems Holdings Limited. 24. Controlled Entities Name of Entity Parent Entity Country of Incorporation December 2012 % December 2011 % Electro Optic Systems Holdings Limited Australia # Controlled Entities Electro Optic Systems Pty Limited Fire Control Systems Pty Limited FCS Technology Holdings Pty Limited EOS Space Systems Pty Limited EOS Optronics GmbH EOS Defense Systems Pte Limited EOS USA, Inc. (Inc in Nevada) EOS Technologies, Inc. (Inc in Arizona) EOS Defense Systems, Inc (Inc in Arizona) # These companies form part of the Australian consolidated tax entity. All entities are audited by Deloitte Touche Tohmatsu. Australia # Australia # Australia # Australia # Germany Singapore USA USA USA 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 64 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 25. Contingent Liabilities (a) Entities within the consolidated entity are involved in contractual disputes in the normal course of contracting operations. The directors believe that the entities within the consolidated entity can settle any contractual disputes with customers and should any customers commence legal proceedings against the company, the directors believe that any actions can be successfully defended. As at the date of this report no legal proceedings have been commenced against any entity within the group. 26. Capital and Leasing Commitments (a) Finance leasing commitments Payable ‑ minimum future lease payments not later than one year later than one year and not later than five years later than five years Minimum lease payments Less future finance charges Total lease liability Consolidated Company 31 December 2012 $ 31 December 2011 $ 31 December 2012 $ 31 December 2011 $ 108,663 17,038 ‑ 131,634 125,701 ‑ 125,701 257,335 (8,478) (26,588) 117,223 230,747 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 65 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 26. Capital and Leasing Commitments (cont) Consolidated Company 31 December 2012 $ 31 December 2011 $ 31 December 2012 $ 31 December 2011 $ (b) Finance leasing commitments Payable ‑ Present value of minimum future lease payments not later than one year later than one year and not later than five years later than five years 102,191 15,032 ‑ 113,524 117,223 ‑ Present value of minimum lease payments 117,223 230,747 Represented by: Current liability (Note 13) Non‑current liability (Note 13) (c) Operating lease commitments Non‑cancellable operating leases contracted for but not recognised in the financial statements: Payable: 102,191 15,032 117,223 113,524 117,223 230,747 not later than one year 500,552 556,453 later than one year and not later than five years later than five years ‑ ‑ ‑ ‑ 500,552 556,453 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 66 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 26. Capital and Leasing Commitments (cont) Operating Leases Leasing arrangements Operating leases relate to: Premises at 2500 N. Tucson Boulevard, Suite 100, Tuscon Arizona with a lease term which expires on 30 September 2013. There is no option to renew after 30 September 2013 and future lease payments are fixed under the contract. There is no option to purchase the property. Premises in Queanbeyan, Australia for a 5 year period to 31 December 2008 with a 5 year option. The Company has the first right of refusal in respect of the purchase of the property. The Company is on a month to month basis whilst a new lease is negotiated. Premises at EOS House at Mt Stromlo, Australia are the subject of an expired leases. The Company occupies the premises on a month to month basis. Shared premises in Sydney which are on a month to month arrangement with Audio Pixels Holdings Limited, a company associated with directors Mr Fred Bart and Mr Ian Dennis. Finance Leases Leasing arrangements Finance leases relate to motor vehicles, computer and office equipment with lease terms of between one and three years. The consolidated entity has options to purchase the computer and office equipment for a nominal amount at the conclusion of the lease arrangements. The consolidated entity has options to purchase motor vehicles for agreed residual amounts at the conclusion of the lease arrangements. 27. Subsequent Events The Directors are not aware of any significant subsequent events since the end of the financial period and up to the date of this report. 28. Financial Risk Management Objectives and Policies The Group’s principal financial instruments comprise receivables, payables, borrowings, finance leases, cash and short term deposits. Due to the small size of the group significant risk management decisions are taken by the board of directors. These risks include market risk (including currency risk, fair value interest rate risk and price risk), credit risk, liquidity risk and cash flow interest rate risk. The Group does not use derivative financial instruments to hedge these risk exposures. 67 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 28. Financial Risk Management Objectives and Policies (cont) Risk Exposures and Responses (a) Interest rate risk The Group’s exposure to market interest rates relates primarily to the Group’s cash holdings. At balance date, the Group had the following mix of financial assets and liabilities exposed to Australian variable interest rate risk that are not designated in cash flow hedges: Consolidated Company 2012 $ 2011 $ 2012 $ 2011 $ Financial assets Cash and cash equivalents 6,686,194 4,885,761 3,502,600 1,324,726 Financial Liabilities Lease liabilities (117,223) (230,747) ‑ ‑ 6,568,971 4,655,014 3,502,600 1,324,726 The Group constantly analyses its interest rate exposure. Within this analysis consideration is given to potential renewals of existing positions, alternative financing and the mix of fixed and variable interest rates. At 31 December 2012, if interest rates had moved, as illustrated in the table below, with all other variables held constant, post tax profit and equity would have been affected as follows: Judgements of reasonably possible movements Consolidated +1% (100 basis points) ‑.5% (50 basis points) Company +1% (100 basis points) ‑.5% (50 basis points) Post Tax Profit Higher/(Lower) Equity Higher/(Lower) 2012 $ 2011 $ 2012 $ 2011 $ 66,862 48,858 66,862 48,858 (33,431) (24,429) (33,431) (24,429) 35,026 (17,513) 13,247 (6,624) 35,026 (17,513) 13,247 (6,624) The movements in profits are due to lower interest rates on cash balances. The cash balances were higher in 2012 than in 2011 and accordingly the sensitivity is higher. 68 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 28. Financial Risk Management Objectives and Policies (cont) (b) Foreign currency risk As a result of purchases of inventory denominated in United States Dollars, the Group’s statement of financial position can be affected significantly by movements in the US$/A$ exchange rates. Exchange rates are managed within approved policy parameters using natural hedges and no derivatives are used. The Group also has transactional currency exposures. Such exposures arise from sales or purchases by an operating entity in currencies other than the functional currency. The policy of the Group is to convert surplus foreign currencies to Australian dollars. The group also holds cash deposits in US dollars to secure US dollar bank guarantees to overseas customers. At 31 December 2012, the Group had the following exposure to US$ foreign currency: Consolidated Company Financial assets Cash and cash equivalents Trade and other receivables Financial liabilities 2012 $ 2011 $ 1,176,313 241,350 1,155,120 4,350,913 2,331,433 4,592,263 Trade and other payables 554,568 3,504,284 Promissory note Finance leases ‑ ‑ 1,878,343 ‑ 554,568 5,382,627 2012 $ 520 ‑ 520 ‑ ‑ ‑ ‑ 2011 $ 12,806 ‑ 12,806 ‑ ‑ ‑ ‑ Net exposure 1,776,865 (790,364) 520 12,806 All US$ denominated financial instruments were translated to A$ at 31 December 2012 at the exchange rate of 1.0374 (2011: 1.0176). 69 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 28. Financial Risk Management Objectives and Policies (cont) (b) Foreign currency risk (cont) At 31 December 2012, had the Australian Dollar moved, as illustrated in the table below, with all other variables held constant, post tax profit and equity would have been affected as follows: Judgements of reasonably possible movements Consolidated AUD/USD +10% AUD/USD ‑5% Company AUD/USD +10% AUD/USD ‑5% Post Tax Profit Higher/(Lower) Equity Higher/(Lower) 2012 $ 2011 $ 2012 $ 2011 $ (275,905) 96,491 (275,905) 96,491 (38,911) (13,068) (38,911) (13,068) (64) (7) (1,165) 583 (64) (7) (1,165) 583 Management believes the balance date risk exposures are representative of risk exposure inherent in financial instruments. As noted, foreign currency transactions entered into during the financial year are managed within approved policy parameters using natural hedges. The director’s do not consider that the net exposure to foreign currency transactions is material after considering the effect of natural hedges. (c) Credit risk management Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in a financial loss to the Group. The Group has adopted a policy of only dealing with creditworthy counterparties which are continuously monitored. The credit risk on liquid funds is limited because the counterparties are banks with high credit‑ratings assigned by international credit agencies. (d) Liquidity risk management 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. Ultimate responsibility for liquidity risk management rests with the board of directors, who has built an appropriate risk management framework for the management of the Group’s short, medium and long term funding and liquidity requirements. The Group manages liquidity by maintaining adequate cash reserves by continuously monitoring forecast and actual cash flows and managing maturity profiles of financial assets. Significant uncertainties relating to the ability of the company and the consolidated entity to continue as going concerns and pay their debts as and when they fall due are set out in Note 1(a). 70 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 28. Financial Risk Management Objectives and Policies (cont) (d) Liquidity risk management (cont) Liquidity and interest tables The following tables detail the Company’s and the Group’s remaining contractual maturity for its non‑derivative financial liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The table includes both interest and principal cash flows. Weighted average effective interest rate % Less than 1 month $ 1‑3 months $ 3 months to 1 year $ 1‑5 years $ Consolidated 2012 Other non interest bearing liabilities 0.00 1,985,667 ‑ ‑ ‑ Finance lease liability 10.03 12,067 24,133 108,603 11,857 2011 Other non interest bearing liabilities ‑ 3,519,230 ‑ ‑ ‑ Finance lease liability Promissory note Company 2012 Other non interest bearing liabilities 2011 Other non interest bearing liabilities 9.95 5.00 ‑ ‑ 10,970 21,940 98,730 125,701 1,925,302 97,490 120,961 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 71 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 28. Financial Risk Management Objectives and Policies (cont) (d) Liquidity risk management (cont) The following tables detail the Company’s and the Group’s remaining contractual maturity for its non‑derivative financial assets. The tables have been drawn up based on the undiscounted contractual maturities of the financial assets including interest that will be earned on these assets except where the Company/Group anticipates that the cash flow will occur in a different period. Weighted average effective interest rate % Less than 1 month $ 1‑3 months $ 3 months to 1 year $ 1‑5 years $ Consolidated 2012 Non interest bearing Variable interest rate instruments ‑ ‑ 2,361,884 ‑ Fixed interest rate instruments 3.10 4,320,267 2011 Non interest bearing Variable interest rate instruments 6,682,151 ‑ ‑ 259,045 ‑ Fixed interest rate instruments 3.64 4,434,199 4,693,244 ‑ ‑ 15,197 15,197 ‑ ‑ 40,336 40,336 Company 2012 Non interest bearing Variable interest rate instruments ‑ ‑ 520 ‑ ‑ Fixed interest rate instruments 3.22 3,496,714 19,270 2011 Non interest bearing Variable interest rate instruments ‑ ‑ 12,806 ‑ Fixed interest rate instruments 4.54 1,316,783 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ (e) Price risk The Group’s exposure to commodity price risk is minimal. The Group does not make investments in equity securities. 72 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 29. Segment Information AASB 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess performance. The identification of the Group’s reportable segments has not changed from those disclosed in the previous Annual Report. The consolidated entity operates in Australia, USA, Singapore and Germany in the development, manufacture and sale of telescopes and dome enclosures, laser satellite tracking systems and the manufacture of electro‑optic fire control systems. Product and Services within each Segment Space Systems EOS is a global supplier of large optical systems. During the period the consolidated entity continued the process of completing existing contracts. Space Surveillance EOS’s laser‑based space surveillance systems have been demonstrated in customer trials and EOS is now well‑placed to be a major contributor to the next generation of space tracking capability. Future business is dependent on large government contracts being awarded in the space sector. In addition, EOS has substantial space resources in its own right, and may enter the market for space data provision in the future. Defence EOS develops, manufactures and markets advanced fire control, surveillance, and weapon systems to approved military customers. These products either replace or reduce the role of a human operator for a wide range of existing and future weapon systems in the US, Australia and other markets. 73 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 29. Segment Information (cont) Segment Revenues Space systems Space surveillance Defence Consolidated 31 December 2012 $ 31 December 2011 $ 338,889 824,200 4,446,909 3,214,813 16,962,253 28,387,523 Total of all segments 21,748,051 32,426,536 Unallocated Total Segment Results Space systems Space surveillance Defence 171,697 348,855 21,919,748 32,775,391 (1,272,474) (577,615) 107,423 (395,895) (8,192,150) 1,978,160 Total of all segments (9,357,201) 1,004,650 Unallocated (822,622) (824,462) (Loss)/profit before income tax expense (10,179,823) 180,188 Income tax expense ‑ ‑ (Loss)/profit for the period (10,179,823) 180,188 The revenue reported above represents revenue from external customers. There were no intersegment sales during the period. There were no discontinued operations during the period. The consolidated entity has one customer (2011: two customers) who each provided in excess of 10% of consolidated revenue. These customer(s) are within the Defence segment with total revenue of $15,475,370 (2011 ‑ $24,021,715). 74 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 29. Segment Information (cont) Segment Assets and Liabilities Space systems Space surveillance Defence Assets Liabilities 31 December 2012 $ 31 December 2011 $ 31 December 2012 $ 31 December 2011 $ 169,569 434,378 700,073 803,320 375,689 1,090,208 2,593,756 2,966,952 6,312,533 22,262,394 7,444,127 12,011,474 Total all segments 6,857,791 23,786,980 10,737,956 15,781,746 Unallocated 6,686,194 4,885,761 117,223 230,748 Consolidated 13,543,985 28,672,741 10,855,179 16,012,494 Assets used jointly by reportable segments are allocated on the basis of the revenue earned by the individual reportable segments. Depreciation, impairment and amortization of segment assets Acquisition of segment assets 31 December 2012 $ 31 December 2011 $ 31 December 2012 $ 31 December 2011 $ 6,659 87,380 1,619 6,316 3,048 6,700 7,953 27,598 1,781,830 685,388 35,485 140,139 Other Segment Information Space systems Space surveillance Defence Total all segments 1,875,869 693,323 45,234 175,690 Unallocated Consolidated 707,695 (600,372) ‑ ‑ 2,583,564 92,951 45,234 175,690 75 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 29. Segment Information (cont) Information on Geographical Segments 31 December 2012 Geographical Segments Australasia North America Germany Total 31 December 2011 Geographical Segments Australasia North America Germany Total Revenue from External Customers $ 21,420,123 498,084 1,541 Segment Assets $ 11,276,983 2,239,679 27,323 21,919,748 13,543,985 Revenue from External Customers $ 28,942,040 3,810,273 23,078 Segment Assets $ 22,878,566 5,692,857 101,318 32,775,391 28,672,741 Acquisition of Segment Assets $ 30,223 14,331 680 45,234 Acquisition of Segment Assets $ 138,444 31,104 6,142 175,690 76 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 30. Construction Contracts Consolidated Company 31 December 2012 $ 31 December 2011 $ 31 December 2012 $ 31 December 2011 $ Construction work in progress 12,481,076 9,662,837 Less Provision for losses Progress billings (221,191) (22,422) (15,773,456) (14,411,594) (3,513,571) (4,771,179) Recognised and included in the financial statements as amounts due: From customers under construction contracts: Current (Note 6) 274,847 599,620 To customers under construction contracts: Current (Note 12) (3,788,418) (5,370,799) (3,513,571) (4,771,179) Retentions included in progress billings ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 77 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 (CONT) 31. Additional Company Information Electro Optic Systems Holdings Limited is a listed public company in Australia, incorporated in Australia. The company and its subsidiaries operate in Australia, North America, Singapore and Germany. Principal Place of Business EOS House Mt Stromlo Observatory Cotter Road Weston Creek ACT 2611 Australia Tel: 02 6222 7900 Fax: 02 6299 7687 German Operations Ulrichsberger Str. 17 3 OG 94469 Deggendorf Germany Tel: +49 991 2910083 Fax: +49 991 2910399 Registered Office Suite 2, Level 12 75 Elizabeth Street Sydney NSW 2000 Australia Tel: 02 9233 3915 Fax: 02 9232 3411 USA Operations 2500 N. Tucson Boulevard Suite 100 Tucson, Arizona 85716 USA Tel: +1 (520) 624 6399 Fax: +1 (520) 624 1906 Singapore Operations Co‑Ord Centre Pte Ltd 4 Shenton Way #28‑01 SGX Centre II Singapore 068807 Tel: +65 6224 0100 Fax: +65 6227 6002 78 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 ASX ADDITIONAL INFORMATION Additional information required by the Australian Stock Exchange Listing Rules and not disclosed elsewhere in this report. HOME EXCHANGE The Company’s ordinary shares are quoted on the Australian Stock Exchange Limited under the trading symbol “EOS”. The Home Exchange is Sydney. SUBSTANTIAL SHAREHOLDERS At 11 March 2013 the following substantial shareholders were registered: Fred Bart Group Technology Investments Pty Limited Group Northrop Grumman Space and Mission Systems Corp. Ordinary Shares Percentage of total Ordinary shares 5,309,075 3,954,185 5,000,000 14,263,260 9.33% 6.96% 8.80% 25.09% VOTING RIGHTS At 11 March 2013 there were 1,064 holders of fully paid ordinary shares. Rule 74 of the Company’s Constitution stipulates the voting rights of members as follows: “Subject to any rights or restrictions for the time being attached to any class or classes of shares and to this Constitution: (a) on a show of hands every person present in the capacity of a Member or a proxy, attorney or representative (or in more than one of these capacities) has one vote; and (b) On a poll every person present who is a Member or proxy, attorney or Representative has member present has: (i) For each fully paid share that the person holds or represents ‑ one vote; and (ii) For each share other than a fully paid share that the person holds or represents ‑ that proportion of one vote that the amount paid (not credited) on the shares bears to the total amount paid and payable on the share (excluding amounts credited).” 79 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 ASX ADDITIONAL INFORMATION (CONT) OTHER INFORMATION In accordance with Listing Rule 4.10.19, the Company has used the cash and assets in a form readily convertible to cash that it had at the time of admission in a way consistent with its business objectives. The Company has a sponsored Level 1 American Depositary Receipt (ADR) program on the Over‑The‑Counter (OTC) market in the USA with the ADR ticker symbol of EOPSY. The ration of ADR’s to Ordinary shares is 1:5 and the CUSIP Number is 28520B1070. The local custodian is National Australia Bank Limited and the US Depositary Bank is BNY Mellon. DISTRIBUTION OF SHAREHOLDINGS At 11 March 2013 the distribution of share and option holdings were: Range 1 ‑ 1,000 1,001 ‑ 5,000 5,001 ‑ 10,000 10,001 ‑ 100,000 100,001 and over Ordinary Shareholders Number of Shares 182 362 211 236 73 1,064 105,103 1,076,920 1,836,319 7,765,787 46,061,797 56,845,926 There were 260 ordinary shareholders with less than a marketable parcel. There is no current on‑market buy‑back. 80 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 TWENTY LARGEST SHAREHOLDERS - QUOTED TWENTY LARGEST ORDINARY SHAREHOLDERS ‑ QUOTED At 11 March 2013 the 20 largest ordinary shareholders held 60.17% of the total issued fully paid quoted ordinary shares of 56,845,926. Shareholder Fully Paid Ordinary Shares Percentage of Total 1. Citicorp Nominees Pty Limited 2. N & J Properties Pty Limited 3. Mr Kevin Tay Hak Leong 4. Technology Transformations Pty Limited 5. DBS Vickers Securities (Singapore) Pte Ltd 6. Crea8ive Nominees Pty Limited 7. Capitol Enterprises Limited 8. Emichrome Pty Limited 9. A & D Wire Limited 10. Technology Investments Pty Limited 11. Landed Investments Limited 12. Madam Lim Gek Kuan 13. Landed Investments NZ Limited 14. Rinfast Pty Limited 15. Emichrome Pty Limited16. National Nominees Limited 17. Mr Teo Kian Giap 18. Justin Casey+Anne‑Marie Debelak 19. Kam Superannuation Fund Pty Limited 20. Justin Casey <2 A/C> 5,670,772 4,090,000 2,839,970 2,509,905 1,966,534 1,911,328 1,550,000 1,516,488 1,457,276 1,444,280 1,255,201 1,171,493 1,010,000 1,000,000 997,450 964,409 807,238 788,500 693,000 558,600 9.98% 7.19% 5.00% 4.42% 3.46% 3.36% 2.73% 2.67% 2.56% 2.54% 2.21% 2.06% 1.78% 1.76% 1.75% 1.70% 1.42% 1.38% 1.22% 0.98% 34,202,444 60.17% 81 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 CORPORATE GOVERNANCE STATEMENT The Board of Directors of Electro Optic Systems Holdings Limited is responsible for the corporate governance of the consolidated entity. The Board guides and monitors the business and affairs of Electro Optic Systems Holdings Limited on behalf of the shareholders by whom they are elected and to whom they are accountable. The Directors are committed to protecting stakeholders’ interests and keeping investors fully informed about the performance of the Company, while meeting stakeholders’ expectations of sound corporate governance practices. To ensure the best representation of Shareholder interests, the Board will regularly review its corporate governance practices. The Corporate Governance Statement follows the Australian Stock Exchange Corporate Governance Council’s (the “Council’s”) amendments to the 2nd edition of the Corporate Governance Principles and Recommendations released 30 June 2010 in relation to diversity, remuneration, trading policies and briefings. In accordance with the Council’s recommendations, the Corporate Governance Statement must now contain certain specific information and must disclose the extent to which the Company has followed the guidelines during the period. Where a recommendation has not been followed, that fact must be disclosed, together with the reasons for the departure. Electro Optic Systems Holdings Limited’s Corporate Governance Statement is now structured with reference to the Corporate Governance Council’s principles and recommendations, which are as follows: Principle 1. Lay solid foundations for management and oversight Principle 2. Structure the Board to add value Principle 3. Promote ethical and responsible decision making Principle 4. Safeguard integrity in financial reporting Principle 5. Make timely and balanced disclosure Principle 6. Respect the rights of shareholders Principle 7. Recognise and manage risk Principle 8. Remunerate fairly and responsibly Electro Optic Systems Holdings Limited’s corporate governance practices were in place throughout the year ended 31 December 2012 and embrace the Council’s best practice recommendations which are being put in place as appropriate. The Audit Committee was formed on 28 April 2005 and consists of three non‑executive directors. The members of the Audit Committee are Lt Gen Peter Leahy AC (Chairman), Mr Ian Dennis and Mr Kevin Scully. The majority of the Audit Committee are independent directors and the Chairman is an independent person. The Remuneration Committee was formed on 23 March 2007. The members of the Remuneration Committee are Lt Gen Peter Leahy AC (Chairman), Mr Ian Dennis and Mr Kevin Scully. The majority of the Remuneration Committee are independent directors and the Chairman is an independent person. The Company has documented risk management policies and procedures in accordance with its ISO 9001 certification for its operating activities which are regularly reviewed. During the current year the Directors have adopted a formal risk assessment plan in order to comply with Principle 7. Additional information regarding the Company’s corporate governance policies, its Directors, Insider Trading Policy, Equality and Diversity in the Workplace Policy and other relevant information can be found on the Company’s website: www.eos‑aus.com Structure of the Board The skills, experience and expertise relevant to the position of director held by each Director in office at the date of this Annual Report is included in the Directors’ Report on pages 6 and 7. Directors of Electro Optic Systems Holdings Limited are considered to be independent when they are independent of management and free from any business or other relationship that could materially interfere with, or could reasonably be perceived to materially interfere with, the exercise of their unfettered and independent judgement. In the context of director independence, “materiality” is considered from both the Company and individual director perspective. The determination of materiality requires consideration of both quantitative and qualitative elements. An item is presumed to be quantitatively immaterial if it is equal or less than 5 percent of the appropriate base amount. It is presumed to be material (unless there is qualitative evidence to the contrary) if it is equal to or greater than 10 percent of the appropriate base amount. Qualitative factors considered include whether a relationship is strategically important, the competitive landscape, the nature of the relationship and the contractual or other arrangements governing it and other factors which point to the actual ability of the director in question to shape the direction of the Company’s loyalty. 82 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 CORPORATE GOVERNANCE STATEMENT (CONT) In accordance with the definition of independence above, and the materiality thresholds set, the following Directors of Electro Optic Systems Holdings Limited are considered to be independent: Name Mr. Ian Dennis Position Non‑Executive Director and Company Secretary Lt Gen Peter Leahy AC Non‑Executive Director Mr Kevin Scully Non‑executive Director There are procedures in place, agreed by the Board, to enable directors, in furtherance of their duties, to seek independent professional advice at the Company’s expense. The term in office held by each Director in office at the date of this report is as follows: Name Mr Fred Bart Dr Ben Greene Mr. Ian Dennis Mr Mark Ureda Position Non‑Executive Chairman Executive Director Non‑Executive Director Non‑Executive Director Lt Gen Peter Leahy AC Non‑Executive Director Mr Kevin Scully Non‑Executive Director Term in Office 12 years 10 months 9 years 9 months 12 years 10 months 8 years 10 months 3 year 9 months 1 year 6 months For additional details regarding board appointments, please refer to the Company’s website. Nomination Committee The Board does not currently have a formal Nomination Committee. However, the Board continues to operate within the established guidelines, including when necessary, selecting candidates for the position of Director and, where appropriate, seeking the services of an independent consultant who is not a director of the Company to provide assistance in the recruitment of potential Directors. Performance The performance of the Board and key executives is reviewed regularly against both measurable and qualitative indicators. During the reporting period, an assessment of the performance of each Board member and key executive against specific and measurable qualitative and quantitative performance criteria was undertaken. The performance criteria against which directors and executives are assessed is aligned with the financial and non‑financial objectives of Electro Optic Systems Holdings Limited. Directors whose performance is consistently unsatisfactory may be asked to retire. 83 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 CORPORATE GOVERNANCE STATEMENT (CONT) ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED ACN 092 708 364 EOS Group has a publicly accessible diversity policy which complies with the recommendations of the Australian Stock Exchange Corporate Governance Principles. In relation to the achievement of the diversity policy objectives, as at 31 December 2012, EOS Group employed 104 staff. 17% (18) of these staff were female and 6% (6) of these women were employed in management roles with management defined as staff having direct report employees. There were no female directors. In 2012 three workplace harassment complaints were investigated and concluded through mediation. 19% (20) of employees accessed flexible workplace arrangements including early commencement times and alternative work days. 4 employees accessed company education assistance for tertiary study. The Equality and Diversity Policy of the Company is available on the Company’s web site at www.eos‑aus.com Safeguard Integrity in Financial Reporting The chief executive officer and the chief financial officer are required to state in writing to the board that the company’s financial reports 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. Policy on Trading in Securities Directors and employees of EOSH should not buy or sell securities in EOSH, when EOSH is in possession of price sensitive information that is not generally available to the market. The Securities Trading Policy of the Company is available on the Company’s website at www.eos‑aus.com and has been lodged with ASX Limited. Remuneration One of the Company’s key objectives is to provide maximum stakeholder benefits from the retention of a high quality Board and executive team by remunerating Directors and key executives fairly and appropriately with reference to relevant employment market conditions. A Remuneration Committee was formed on 23 March 2007. The nature and amount of Executive Directors’ and Officers’ emoluments are linked to the Company’s financial and operational performance. The expected outcomes of the remuneration structure are: ■ Retention and motivation of key executives; ■ Attraction of quality management to the Company; and ■ Performance incentives which allow executives to share the rewards of the success of Electro Optic Systems Holdings Limited. For details regarding the amount of remuneration and all monetary and non‑monetary components for Directors and executives, refer to Note 21 of the Notes to the Financial Statements. In relation to the payment of bonuses, options and other incentive payments, discretion is exercised by the Board, having regard to the overall performance of Electro Optic Systems Holdings Limited and the performance of the individual during the period. There is no scheme to provide retirement benefits, other than statutory superannuation, to non‑executive directors. The Board is responsible for determining and reviewing compensation arrangements for the Directors themselves, the Chief Executive Officer and the executive team. Equality and Diversity Policy The Company values diversity and recognises the benefits it can bring to the organisation’s ability to achieve its goals. Accordingly, the Company has issued the Equality and Diversity Policy which outlines its equality and diversity objectives in relation to gender, sexual preference, transgender status, marital status, disability, religion, cultural and racial background, political preference, trade unionism, pregnancy and age. It includes requirements for the Board to establish measurable objectives for achieving diversity, and for the Board to assess annually both the objectives, and the Company’s progress made in achieving them. www.eos‑aus.com 84 12 ANNUAL REPORT 2012 Electro Optic Systems Holdings Limited and Controlled Entities| ANNUAL REPORT 2012 CONTENTS CORPORATE DIRECTORY Review of Operations Directors’ Report Auditors’ Report Directors’ Declaration Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to and forming part of the Financial Statements ASX Additional Information Twenty Largest Shareholders Corporate Governance Statement 1 6 17 20 21 22 23 24 25 79 81 82 Directors Mr Fred Bart (Chairman) Dr Ben Greene (Chief Executive Offi cer) Mr Ian Dennis Mr Mark Ureda Lt Gen Peter Leahy AC Mr Kevin Scully Company Secretary Mr Ian Dennis Registered Offi ce Suite 2, Level 12 75 Elizabeth Street Sydney NSW 2000 Australia Telephone +61 2 9233 3915 Facsimile +61 2 9232 3411 Website www.eos-aus.com Share Registry Computershare Investor Services Pty Limited Level 3, 60 Carrington Street Sydney NSW 2000 GPO Box 7045 Sydney NSW 1115 Australia Telephone 1300 855 080 or +61 3 9611 5711 outside Australia Facsimile 1300 137 341 Auditors Deloitte Touche Tohmatsu Chartered Accountants Eclipse Tower Level 19, 60 Station Street Parramatta NSW 2150 Australia 4535 Designed and Produced by RDA Creative www.rda.com.au ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED ACN 092 708 364 www.eos‑aus.com 12 ANNUAL REPORT 2012