Electro Optic Systems
Annual Report 2014

Plain-text annual report

ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED ACN 092 708 364 www.eos‑aus.com 2014 ANNUAL REPORT CONTENTS Review of Operations Directors’ Report Auditors’ Report Directors’ Declaration Consolidated Statement of Profi t or Loss and Other 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 4 14 17 18 19 20 21 22 65 67 68 COMPANY DIRECTORY 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 Web site 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 4766 Designed and Produced by RDA Creative www.rda.com.au REVIEW OF OPERATIONS 1. RESULTS FOR FULL‑YEAR ENDING 31 DECEMBER 2014 The consolidated entity incurred a net loss during the year of $3,017,546 (2013: $1,562,746 profit) on revenues of $23,476,433 (2013: $29,882,393). Net cash provided by operating activities was $1,721,216 (2013 ‑ $2,646,482 used by). As at 31 December 2014, the consolidated entity had cash of $5,803,264 (2013 ‑ $4,048,005) of which $254,146 (2013 ‑ $97,000) 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. The operating loss for the 12 months ended at 31 December 2014 was within management expectations. As expected, a small profit in the second half of 2014 was not sufficient to overcome the first half loss of $3,186,439, leading to a full year loss of $3,017,546. 2. EOS DEFENCE SYSTEMS This sector develops, markets, manufactures and supports remote weapon systems [RWS] and related products in global markets. New Products There is escalation globally of conflicts where EOS products could make a strong contribution provided EOS can meet market expectations for reduced weight, improved performance and reduced prices. This requires new technology and new products. Markets The growth markets for EOS defence exports are currently Asia and the Middle East. In both these markets EOS is well positioned to capture several programs. EOS is in the latter stages of competition for three international contracts. In each case EOS, participating through a local partner, was shortlisted from a broad competition and has led the competition in performance and reliability trials over the past 18 months. The final stage of competition will involve updated pricing proposals. These three programs are expected to proceed to contract award in late 2015 subject to the availability of funds to each customer. Australia is expected to procure turrets for hundreds of armoured vehicles under its LAND 400 program, which will be awarded in 2017, and tenders were called by the Commonwealth on 19 February 2015. EOS intends to participate in this procurement. The deployed base of EOS weapon systems world‑wide is now generating increasing revenue for maintenance, upgrades and spare parts. This market is expected to grow into the future. 3. EOS SPACE SYSTEMS This sector builds telescopes and dome enclosures and develops long‑range space sensors to acquire data to support the provision by EOS of data and/or services in global space markets. EOS sensors are deployed and operated by EOS or its strategic partners to obtain data for commercial sale. During the period EOS achieved all its planned objectives for its two new RWS products: Space Data A. R‑400S Weapon System The R‑400S is a significantly upgraded version of the R‑400 weapon system which was developed for the US Army and produced in quantity. The R‑400S provides double the firepower at half the weight of any weapon system available previously. B. Remote Turret System The EOS turret has completed development, and met all customer performance requirements. The product has now successfully completed reliability testing and will be ready for production from late 2015. During 2013 EOS completed all developments required for commercialisation of its space tracking technology. These developments included customer‑funded efforts to achieve the sensitivity, accuracy and cost‑effectiveness required for achieving sustainable operations. During 2014 the EOS space tracking sensor which had been under development for 10 years was accepted as a contributing sensor for the USAF Space Surveillance Network [SSN]. This is the first time a non‑US sensor has been qualified to contribute data to the SSN. 1 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 REVIEW OF OPERATIONS (CONT) At this point EOS committed its own funds to the construction of a new space tracking site in Western Australia to be equipped with the new EOS sensors to expand significantly the volume of space data available to EOS. This was announced on 5 August 2014. EOS then entered into a strategic cooperation agreement with Lockheed Martin Corporation for the expansion of this new site in Western Australia with even more EOS sensors to be funded by Lockheed Martin. This was announced on 26 August 2014. The new site is scheduled to be operational in early 2016. It will combine with other assets available to EOS and Lockheed Martin to significantly contribute to the space tracking capacity available to the commercial space industry globally, and with higher accuracy and responsiveness than other available data. With current and proposed deployments of its proprietary sensors in EOS sites, EOS is well placed to become a significant provider of space data going forward. Further expansion of tracking infrastructure at other sites is likely. EOS Space Systems has a backlog of funded orders of over $20 million. This backlog will convert to revenue over the next 18 months. There is now substantial momentum towards achievement of sufficient sensors and data under control of EOS and Lockheed Martin, acting in cooperation, for that team to provide risk reduction in space operations for space assets facing the highest risk from space debris. The value of protected assets will increase in future as more sites and sensors are added. Partnerships EOS space sensors will be deployed to obtain data which will provide the basis for information‑based services to be marketed to the space community. The core technologies which underpin the EOS space sensors can also be applied to future solutions for the removal of space debris. Although development of the sensor technology was undertaken principally by EOS with some customer funding support, EOS plans to undertake the next development phases in collaboration with other space entities. On 1 September 2014 EOS executed an agreement with the Commonwealth of Australia relating to the establishment of an international research collaboration in space technology. Under the agreement the Commonwealth will provide around $20 million towards a 5‑year research budget of $60 million for developing technologies for mitigating and ultimately eliminating the threat from space debris. Joining the Commonwealth and EOS in this collaboration are the Australian National University, the Royal Melbourne Institute of Technology, Optus, Lockheed Martin [USA] and the National Institute for Communications Technology [Japan]. The collaboration will be performed through an incorporated not‑for‑profit entity called the Space Environment Research Centre. Commercial benefits issuing from the research will be distributed amongst the collaboration participants according to their respective contributions. EOS also collaborates with a diverse group of aerospace entities globally to facilitate customer access to EOS space data in those markets. 4. FORECAST AND OUTLOOK Demand for advanced defence products is growing globally due to emerging threats and escalating conflict. This demand is limited by current constraints on government spending in most countries, combined with some restrictions on access to EOS products imposed by the Australian government. The net effect is generally positive growth but with demand emerging and subsiding as the cycles of threat and funding compete for influence. New weapon system orders typically take 6 months to impact revenue and the current order backlog for defence systems products is below its long‑term average, suggesting that revenue for 2015 will contract. This contraction will be offset by a reduction in costs for product development because key new products are now market‑ready. EOS expects defence sector financial performance in 2015 to be comparable with 2014 with the outlook improving through 2015 as new products win sales. The reduction in value of the Australian dollar will support new sales. The outlook for space sector is positive. EOS expects its space sector to break even in 2015 after expensing substantial costs relating to the establishment of a new tracking site in Western Australia. 2 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 REVIEW OF OPERATIONS (CONT) Financial uncertainties can adversely impact the governments which are EOS customers. The company cannot be certain that future customer procurements will continue as usual or that business conditions will not deteriorate from current expectations. The financial statements have been prepared on the basis of a going concern as detailed in Note 1(a), however due to uncertainties related to future cash flows beyond a twelve month period, the auditors have included an emphasis of matter in their audit report in relation to going concern. The same emphasis of matter has been included in previous audit reports. Ben Greene Chief Executive Officer 26 March 2015 3 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 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 2014. 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 Fred Bart Particulars Chairman (Age 60). He has been Chairman and Director of numerous public and private companies since 1980, specialising in manufacturing, property, technology and marketable securities. Mr Bart is Chairman of Immunovative Therapies Limited, an Israeli company involved in the manufacture of cancer vaccines for the treatment of most forms of cancer. He is a member of the Australian Institute of Company Directors and is a member of the Remuneration Committee. Appointed to the Board on 8 May 2000. Dr Ben Greene BE (Hons), Phd in Applied Physics (Age 64) is the Chief Executive Officer of Electro Optic Systems. Ian Dennis Mark Ureda Lt Gen Peter Leahy AC Kevin Scully Dr Greene was involved in the formation of Electro Optic Systems. He is published in the subject areas of weapon system design, laser tracking, space geodesy, quantum physics, satellite design, laser remote sensing, and the metrology of time. Dr Greene is a member of Australia’s Prime Ministers Science, Engineering and Innovation Council (PMSEIC), CEO of the Cooperative Research Centre for Space Environment Management and Deputy Chair of the Western Pacific Laser Tracking Network (WPLTN). Appointed to the Board on 11 April 2002. BA, C.A. (Age 57) 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 60). 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. Non‑executive director (Age 62). 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. 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. He is a Professor and the foundation Director of the National Security Institute at the University of Canberra. He is a director of Codan Limited, Citadel Group Limited, a member of the Defence South Australia Advisory Board, Chairman of the Red Shield Appeal in the ACT and the charity Soldier On and a Trustee of the Prince’s Charities Australia. He is Chairman of the Audit Committee. Non‑executive director (Age 57). Appointed to the Board on 19 September 2011. Kevin Scully has more than 30 years of experience in equities research and analysis, corporate advisory and related matters. He has worked in various positions such as the head of research and director of Schroders, HSBC 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. In March 2014 he was appointed Adjunct Professor in the School of Human Development and Social Services at SIM University. Kevin is also a director of PNE Micron Limited and NTUC Income Insurance Co‑Operative Limited. He is a member of the Audit Committee. The above named directors held office during and since the end of the financial year. 4 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 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 Lt Gen Peter Leahy AC Company Period of directorship Audio Pixels Holdings Limited 5 September 2000 to date Audio Pixels Holdings Limited 5 September 2000 to date Codan Limited Citadel Group Limited 19 September 2008 to date 27 June 2014 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 and defence systems business. The company is listed on the Australian Securities Exchange. Review of Operations A detailed review of operations is included on pages 1 to 3 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 and defence systems 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. 5 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 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 or consolidated entity as part of their remuneration. 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 There were no unissued shares or interests under option at year end and no options were exercised during the year. 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. 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, 14 Board meetings, 2 audit committee meetings and no 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 14 14 14 14 14 14 14 14 14 14 13 12 ‑ ‑ 2 ‑ 2 2 ‑ ‑ 2 ‑ 2 2 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 6 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 DIRECTORS’ REPORT (CONT) 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 ‑ ‑ ‑ ‑ ‑ ‑ ‑ There has been no movement in Director shareholdings during the 2014 year. 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) Mr Mark Bornholt (Chief Executive Officer of Defence Systems) (resigned 12 August 2014) Dr Craig Smith (Chief Executive Officer of EOS Space Systems Pty Limited) Mr Scott Lamond (Chief Financial Officer ‑ Electro Optic Systems Pty Limited) This report outlines the remuneration arrangements in place for Directors and Executives of the Group. The Directors are responsible for remuneration policies and packages applicable to the Board members and executives of the Group. The Group 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. Non‑Executive Director remuneration 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. 7 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 DIRECTORS’ REPORT (CONT) Remuneration Report (cont) 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 31 May 2012, when shareholders approved a maximum aggregate remuneration of $350,000 per year excluding options. The amount of aggregate remuneration approved by shareholders, the manner in which it is apportioned amongst Directors, and the policy of granting options to Directors, are reviewed by directors at least every two years. 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. Executive Director and Senior Management remuneration Objective The Group aims to award Executives with a level and mix of remuneration commensurate with their position and responsibilities within the Group and so as to: ■ reward Executives for Group 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. 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 Group. Executive Directors and Senior Management are employed under standard employment contracts which contain no unusual terms. Beyond accrued leave benefits, there are no other termination payments or golden parachutes for any directors or senior executives. 8 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 DIRECTORS’ REPORT (CONT) Remuneration Report (cont) Director remuneration The following tables disclose the remuneration of the directors of the Company: 2014 Mr Fred Bart Dr Ben Greene* Mr Ian Dennis# Mr Mark Ureda Lt Gen Peter Leahy AC Mr Kevin Scully Short term Post Employment Equity Salary & Fees $ Non‑ monetary $ Superannuation $ Options $ Other Long Term Benefits $ 61,000 432,283 157,500 40,875 37,500 40,875 770,033 ‑ ‑ ‑ ‑ ‑ ‑ ‑ 5,719 18,957 3,516 ‑ 3,516 ‑ 31,708 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ * Executive Director during the financial year # Includes fees for additional services provided of $120,000 (2013: $120,000) 2013 Short term Post Employment Equity Salary & Fees $ Non‑ monetary $ Superannuation $ Options $ Mr Fred Bart Dr Ben Greene* Mr Ian Dennis# Mr Mark Ureda Lt Gen Peter Leahy AC Mr Kevin Scully 61,000 370,032 157,500 40,875 37,500 40,875 ‑ 20,054 ‑ ‑ ‑ ‑ 707,782 20,054 5,566 33,476 3,422 ‑ 3,422 ‑ 45,886 ‑ ‑ ‑ ‑ ‑ ‑ ‑ Other Long Term Benefits $ ‑ ‑ ‑ ‑ ‑ ‑ ‑ * Executive Director during the financial year # Includes fees for additional services provided of $120,000 (2013: $120,000) Total $ 66,719 451,240 161,016 40,875 41,016 40,875 801,741 Total $ 66,566 423,562 160,922 40,875 40,922 40,875 773,722 9 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 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: 2014 Short term Post Employment Equity Dr Craig Smith Mr Mark Bornholt** Mr Scott Lamond Salary & Fees $ 210,000 136,286 193,365 539,651 Non‑ monetary $ Superannuation $ Options $ ‑ ‑ ‑ ‑ 19,012 13,181 17,856 50,049 ‑ ‑ ‑ ‑ Other Long Term Benefits $ ‑ ‑ ‑ ‑ Total $ 229,012 149,467 211,221 589,700 ** Mark Bornholt was a full time executive until he resigned on 12 August 2014. Since 12 August 2014, a company associated with Mark Bornholt has received consulting fees for services rendered of $20,067. 2013 Short term Post Employment Equity Dr Craig Smith Mr Mark Bornholt Mr Scott Lamond Salary & Fees $ 210,000 210,000 185,000 605,000 Non‑ monetary $ Superannuation $ Options $ ‑ ‑ ‑ ‑ 19,163 18,575 16,881 54,619 ‑ ‑ ‑ ‑ Other Long Term Benefits $ ‑ ‑ ‑ ‑ Total $ 229,163 228,575 201,881 659,619 Non‑monetary includes the provision for motor vehicles and health benefits. No options were granted to, or exercised by any director or executive during 2013 or 2014 or since the end of the financial year. The following table sets out each key management personnel’s equity holdings (represented by holdings of fully paid ordinary shares in Electro Optic Systems Holdings Limited). 2014 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 Scott Lamond 10 Balance at 1/1/14 Granted as remuneration Received on exercise of options Net other change Balance at 31/12/14 No. 5,309,075 3,954,185 170,050 ‑ 15,000 ‑ ‑ 89,450 ‑ No. No. No. ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ No. 5,309,075 3,954,185 170,050 ‑ 15,000 ‑ ‑ 89,450 ‑ Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 DIRECTORS’ REPORT (CONT) Remuneration Report (cont) 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 below 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. Key management personnel option holdings On 10 December 2009, The Directors’ issued 1,800,000 unlisted options to executives and staff. The options issued to executives and staff had an exercise price of $1.30 and expired on 8 December 2013. These options vested 20% after 12 months, 30% after 2 years and the balance after 3 years. Balance at 1/1/14 Granted as remuneration (Lapsed) Balance at 31/12/13 Balance vested at 31/12/13 Options vested during year No. No. No. No. No. ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ Balance at 1/1/13 Granted as remuneration (Lapsed) Balance at 31/12/13 Balance vested at 31/12/13 Options vested during year No. No. No. No. No. ‑ ‑ ‑ ‑ ‑ ‑ ‑ 160,000 32,000 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ (160,000) (32,000) ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 2014 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 Scott Lamond 2013 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 Scott Lamond 11 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 DIRECTORS’ REPORT (CONT) Remuneration Report (cont) 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. Other transactions with key management personnel During the year, the Company paid a total of $66,719 (2013: $66,566) 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 Nil (2013: $9,822) 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 $41,016 (2013: $40,922) 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 $120,000 (2013: $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 $13,559 (2013: 11,927) 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 table below sets out summary information about the company’s earnings and movements in shareholder wealth for the last 5 financial years. 31 December 2014 $ 31 December 2013 $ 31 December 2012 $ 31 December 2011 $ 31 December 2010 $ Revenue 23,777,387 29,882,393 21,919,748 32,775,391 33,828,658 Net profit / (loss) before tax Net profit/(loss) after tax Share price at start of year Share price at end of year Dividends paid (3,017,546) 1,562,746 (10,181,971) 180,188 3,175,142 (3,017,546) 1,562,746 (10,181,971) 180,188 3,175,142 31 December 2014 $ 31 December 2013 $ 31 December 2012 $ 31 December 2011 $ 31 December 2010 $ 0.42 0.815 ‑ 0.30 0.42 ‑ 0.55 0.30 ‑ 1.35 0.55 ‑ 1.05 1.35 ‑ 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. 12 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 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 9 to the financial statements. Auditor’s Independence Declaration The auditor’s independence declaration is included on page 14 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 26 day of March 2015 13 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 4 1 0 2 T R O P E R L A U N N A | s e i t i t n E d e l l o r t n o C d n a d e t i i m L s g n i d l o H s m e t s y S c i t p O o r t c e l E 14 DIRECTORS’ REPORT (CONT) 17 to 64. 4 1 0 2 T R O P E R L A U N N A | s e i t i t n E d e l l o r t n o C d n a d e t i i m L s g n i d l o H s m e t s y S c i t p O o r t c e l E 15  7 to 12 4 1 0 2 T R O P E R L A U N N A | s e i t i t n E d e l l o r t n o C d n a d e t i i m L s g n i d l o H s m e t s y S c i t p O o r t c e l E 16 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 26 day of March 2015 17 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 Consolidated Company 31 December 2014 $ 31 December 2013 $ 31 December 2014 $ 31 December 2013 $ Note Revenue 2 23,476,433 29,882,393 16,862 77,845 Changes in inventories of finished goods and work in progress 1,383,876 (1,031,378) Raw materials and consumables used (15,009,775) (13,366,167) Employee benefits expense 2(b) (9,932,634) (10,705,460) Administration expenses Amortisation of intangibles Finance costs Depreciation and amortisation of property, plant and equipment Gain/(loss) on disposal of fixed assets Foreign exchange gains Occupancy costs Provision for non‑recovery of loan Other expenses (Loss)/ Profit before income tax benefit Income tax benefit 2(b) 2(b) 2(b) 2(b) 2(b) 2(b) 2 4 (2,286,565) (2,420,883) ‑ ‑ (23,454) (82,464) (295,658) (211,807) (668) 693,815 43,891 507,604 ‑ ‑ ‑ ‑ (360,843) (308,900) (360,467) (343,404) ‑ ‑ ‑ ‑ 936 ‑ ‑ (197) (788) 5,617 ‑ (755,881) (786,814) (13,559) ‑ ‑ (596,709) (1,161,923) (267,035) (266,169) ‑ ‑ (3,017,546) 1,562,746 (1,262,213) (1,783,317) ‑ ‑ ‑ ‑ (Loss)/ Profit for the period 19 (3,017,546) 1,562,746 (1,262,213) (1,783,317) Other comprehensive income Items that may be reclassified subsequently to profit and loss Exchange differences arising on translation of foreign operations (284,267) 20,222 ‑ ‑ Total comprehensive (Loss)/ income for the period (3,301,813) 1,582,968 (1,262,213) (1,783,317) (Loss)/Earnings per share Basic (cents per share) Diluted (cents per share) 3 3 (5.3) (5.3) 2.7 2.7 Notes to the financial statements are included on pages 22 to 64. 18 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2014 CURRENT ASSETS Cash and cash equivalents Trade and other receivables Inventories Other Consolidated Company December 2014 $ December 2013 $ December 2014 $ December 2013 $ 5,803,264 4,048,005 488,109 1,739,217 7,484,235 3,069,803 3,318 5,979 1,477,427 5,320,861 438,441 332,811 ‑ ‑ ‑ ‑ Note 19 6 7 8 TOTAL CURRENT ASSETS 15,203,367 12,771,480 491,427 1,745,196 NON‑CURRENT ASSETS Property, plant and equipment 10 233,833 461,305 TOTAL NON‑CURRENT ASSETS 233,833 461,305 ‑ ‑ ‑ ‑ TOTAL ASSETS 15,437,200 13,232,785 491,427 1,745,196 CURRENT LIABILITIES Trade and other payables Provisions TOTAL CURRENT LIABILITIES NON‑CURRENT LIABILITIES Provisions TOTAL NON‑CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Issued capital Reserves Accumulated losses TOTAL EQUITY 11 12 12 15 17 18 8,860,476 3,882,221 103,879 95,435 5,058,587 4,535,627 ‑ ‑ 13,919,063 8,417,848 103,879 95,435 483,058 483,058 478,045 478,045 ‑ ‑ ‑ ‑ 14,402,121 8,895,893 1,035,079 4,336,892 103,879 387,548 95,435 1,649,761 75,383,567 75,383,567 75,383,567 75,383,567 7,513,711 7,797,978 7,727,803 7,727,803 (81,862,199) (78,844,653) (82,723,822) (81,461,609) 1,035,079 4,336,892 387,548 1,649,761 Notes to the financial statements are included on pages 22 to 64. 19 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 Accumulated losses $ Total $ Issued capital $ Foreign currency translation reserve $ Employee equity settled benefits reserve $ Consolidated 2014 Balance at 1 January 2014 4,336,892 (78,844,653) 75,383,567 70,175 7,727,803 (Loss) for the year (3,017,546) (3,017,546) Exchange differences arising on translation of foreign operations Total comprehensive (loss) for the year (284,267) ‑ (3,301,813) (3,017,546) ‑ ‑ ‑ ‑ (284,267) (284,267) ‑ ‑ ‑ Balance at 31 December 2014 1,035,079 (81,862,199) 75,383,567 (214,092) 7,727,803 2013 Balance at 1 January 2013 2,753,924 (80,407,399) 75,383,567 49,953 7,727,803 Profit for the year 1,562,746 1,562,746 Exchange differences arising on translation of foreign operations Total comprehensive income for the year 20,222 ‑ 1,582,968 1,562,746 ‑ ‑ ‑ Balance at 31 December 2013 4,336,892 (78,844,653) 75,383,567 ‑ 20,222 20,222 70,175 Company 2014 Balance at 1 January 2014 1,649,761 (81,461,609) 75,383,567 (Loss) for the year (1,262,213) (1,262,213) Total comprehensive income for the year (1,262,213) (1,262,213) ‑ ‑ Balance at 31 December 2014 387,548 (82,723,822) 75,383,567 2013 Balance at 1 January 2013 3,433,078 (79,678,292) 75,383,567 (Loss) for the year (1,783,317) (1,783,317) Total comprehensive income for the year (1,783,317) (1,783,317) ‑ ‑ Balance at 31 December 2013 1,649,761 (81,461,609) 75,383,567 Notes to the financial statements are included on pages 22 to 64. ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 7,727,803 7,727,803 ‑ ‑ 7,727,803 7,727,803 ‑ ‑ 7,727,803 20 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2014 Consolidated Company 31 December 2014 $ 31 December 2013 $ 31 December 2014 $ 31 December 2013 $ Note Cash flows from operating activities Receipts from customers 25,281,338 25,626,116 ‑ 9,822 Payments to suppliers and employees (23,555,726) (28,264,414) (671,081) (679,305) Interest received Interest and other costs of finance paid 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 Payment for property, plant and equipment Net cash (outflows) from investing activities Cash flows from financing activities Repayment of borrowings Net cash (outflows) from financing activities 19,058 (23,454) 74,280 (82,464) 16,682 68,023 ‑ ‑ 19(b) 1,721,216 (2,646,482) (654,399) (601,460) ‑ 455 (77,139) (76,684) ‑ (596,709) (1,161,923) 65,466 (143,264) ‑ ‑ ‑ ‑ (77,798) (596,709) (1,161,923) ‑ ‑ (117,223) (117,223) ‑ ‑ ‑ ‑ Net increase/(decrease) in cash and cash equivalents 1,644,532 (2,841,503) (1,251,108) (1,763,383) Cash and cash equivalents at the beginning of the financial year 4,048,005 6,686,194 1,739,217 3,502,600 Effects of exchange rate fluctuations on the balances of cash held in foreign currencies 110,727 203,314 ‑ ‑ Cash and cash equivalents at the end of the financial year 19(a) 5,803,264 4,048,005 488,109 1,739,217 Notes to the financial statements are included on pages 22 to 64. 21 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 1. Summary of Accounting Policies Statement of compliance The financial statements are general purpose financial statements which have 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 26 March 2015. 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, recoverability of deferred tax assets, inventory obsolescence, warranty 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 going concern basis 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 $3,017,546 (2013: $1,562,746 profit). Net cash provided by operating activities was $1,721,216 (2013 ‑ $2,646,482 used by). As at 31 December 2014, the consolidated entity had cash of $5,803,264 (2013 ‑ $4,048,005) of which $254,146 (2013 ‑ $97,000) 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 consolidated entity to continue as going concerns and pay their debts as and when they become due and payable is dependent upon: ■ the ability of the consolidated entity to deliver contracts on hand on time, to the required specification and within budgeted costs; ■ the willingness of key military and government customers to make timely payments for goods supplied in accordance with contractual terms; ■ the future trading prospects of the group; and ■ the ability to raise capital from existing or new shareholders should the need arise 22 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 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 or 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. 1. Summary of Accounting Policies (cont) (a) Going concern (cont) If the company and consolidated entity are unable to achieve successful outcomes in relation to the above matters, significant uncertainty would exist as to the ability of the company and consolidated entity to continue as going concerns and therefore, they may be required to realise their assets and extinguish their liabilities other than in the normal course of business and at amounts different from those stated in the financial report. No adjustments have been made to the financial report relating to the recoverability and classification of recorded asset amounts or to the amounts and classification of liabilities that might be necessary should the company and consolidated entity not continue as going concerns. (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 or 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. 23 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 1. Summary of Accounting Policies (cont) Interest (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. 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. Transaction costs on the issue of equity instruments 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 is classified as an expense consistent with the statement of financial position classification of the related debt. (i) Foreign currency 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 or 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 or loss on disposal of the foreign operation. (j) Goods and services tax Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except: 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. 24 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (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 cost of disposal 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 or 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. 25 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 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. 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 profit or loss and other 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 26 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 1. Summary of Accounting Policies (cont) (r) Basis 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 incorporate the financial statements of the Company and entities controlled by the Company. Control is achieved when the Company: ■ Has power over the investee; ■ Is exposed, or has rights, to variable returns from its involvement with the investee; and ■ Has the ability to use its power to affect its returns. The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss and other comprehensive income from the date the Company gains control until the date when the Company ceases to control the subsidiary. (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. All intra group assets and liabilities, equity, income, expenses, and cash flows relating to transactions between members of the group are eliminated in full on consolidation. 27 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. Decommissioning cost‑ a provision for decommissioning cost 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. 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 Office equipment 3 to 5 years 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. During the period the directors determined to review the adequacy of the warranty provision. Following the review the warranty provision for military contracts was reviewed. The impact of this change was to reduce the loss for the year by $136,082. Contract losses ‑ 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 28 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 1. Summary of Accounting Policies (cont) Impact of the application of AASB 2013‑3 Narrow‑scope amendments to AASB 136 Impairment of Assets addressing the disclosure of information about the recoverable amount of impaired assets if that amount is based on fair value less costs of disposal. The application of AASB 2013‑3 has not had any material impact on the amounts recognised in the consolidated financial statements. Impact of the application of AASB 2013‑9 Part B makes amendments to particular Australian Accounting Standards to delete references to AASB 1031 and minor editorial amendments to various standards. The application of AASB 2013‑9 has not had any material impact on the amounts recognised in the consolidated financial statements. Impact of the application of AASB 2011‑4 Amends AASB 124 Related Party Disclosures to remove the individual key management personnel (KMP) disclosures required by Australian specific paragraphs. As a result the Group only discloses the key management personnel compensation in total for each of the categories required by AASB 124. Such disclosures are more in the nature of governance disclosures that are better dealt with as part of the Corporations Act 2001. The application of AASB 2011‑4 has not had any material impact on the amounts recognised in the consolidated financial statements, but has resulted in adjusted disclosures. (w) Application of New and Revised Accounting Standards The Group has adopted all of the new and revised Standards and Interpretations issued by the Australian Accounting Standards Board (the AASB) that are relevant to their operations and effective for the current year. New and revised Standards and amendments thereof and Interpretations effective for the current year that are relevant to the Group include: ■ AASB 1031 Materiality (2013) ■ AASB 2012‑3 Amendments to AASB 132 ‑ Offsetting Financial Assets and Financial Liabilities ■ AASB 2013‑3 Amendments to AASB 136 ‑ Recoverable Amount Disclosures ■ AASB 2013‑9 Amendments to Conceptual Framework and Materiality ‑ Part B ■ AASB 2011‑4 Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements Impact of the application of AASB 1031 Revised AASB 1031 is an interim standard that cross‑references to other Standards and the Framework for the Preparation and Presentation of Financial Statements (issued December 2013) that contain guidance on materiality. The application of AASB 1031 has not had any material impact on the amounts recognised in the consolidated financial statements. (w) Application of New and Revised Accounting Standards (cont) Impact of the application of AASB 2012‑3 Addresses inconsistencies in current practice when applying the offsetting criteria in AASB 132 Financial Instruments: Presentation. Clarifies the meaning of “currently has a legally enforceable right of set‑off” and” simultaneous realisation and settlement”. This did not result in any changes to the consolidated financial statements. 29 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 1. Summary of Accounting Policies (cont) (w) Application of New and Revised Accounting Standards (cont) 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 2014‑1 Amendments to Australian Accounting Standards ‑Part A: Annual Improvements 2010‑2012 and 2011‑2013 Cycles ‑Part B: Defined Benefit Plans: Employee Contributions ‑Part C: Materiality AASB 2014‑1 Amendments to Australian Accounting Standards ‑Part D Consequential amendments arising from AASB 14 ‑Part E: Financial Instruments AASB 15 Revenue from Contracts with Customers and relevant amending standards AASB 9 Financial Instruments and relevant amending standards Effective for annual reporting periods beginning on or after Expected to be initially applied in the financial year ending 1 July 2014 31 Dec 2015 1 Jan 2018 31 Dec 2018 1 Jan 2017 1 Jan 2018 31 Dec 2017 31 Dec 2018 AASB 2014‑4 Amendments to Australian Accounting Standards ‑ Clarification of Acceptable Methods of Depreciation and Amortisation 1 Jan 2016 31 Dec 2016 Other than in relation to AASB 15, 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. In relation to AASB 15 the directors are currently assessing the impact, if any, of adopting the Standard. (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. 30 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 2. (Loss)/Profit from Operations Consolidated Company 31 December 2014 $ 31 December 2013 $ 31 December 2014 $ 31 December 2013 $ (a) Revenue Revenue from operations consisted of the following items: Revenue from the sale of goods 18,876,061 23,296,205 Revenue from the rendering of services 1,107,082 1,947,178 Construction contract revenue 3,472,580 4,543,313 23,455,723 29,786,696 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ Interest revenue: Bank deposits Other Other 19,058 74,280 16,862 68,023 1,652 21,417 ‑ 23,476,433 29,882,393 16,862 9,822 77,845 31 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 2. (Loss)/Profit from Operations (cont) (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 Depreciation and amortisation ‑ property, plant and equipment (Provision for non‑recovery of loan ‑ wholly‑owned controlled entity Loss/(Profit) on sale of property, plant and equipment Foreign exchange (gain) Operating lease rental expenses: Minimum lease payments Employee benefit expense: Contributions to defined contribution superannuation plans Other employee benefits Consolidated Company 31 December 2014 $ 31 December 2013 $ 31 December 2014 $ 31 December 2013 $ 23,454 82,464 ‑ ‑ 23,454 82,464 295,658 211,807 ‑ ‑ ‑ ‑ ‑ ‑ ‑ 197 ‑ ‑ 596,709 1,161,923 668 (43,891) (693,815) (507,604) ‑ (936) 788 (5,617) 438,931 501,730 ‑ ‑ 814,829 896,508 9,117,805 9,808,952 9,932,634 10,705,460 12,751 348,092 360,843 12,410 348,057 360,467 32 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 3. Earnings/(Loss) per Share Basic earnings/(loss) per share Basic Earnings/(Loss) per Share Earnings/(loss) (a) Weighted average number of ordinary shares (b) Consolidated 31 December 2014 $ 31 December 2013 $ (5.3 cents) 2.7 cents (3,017,546) 1,562,746 56,845,926 56,845,926 (a) Earnings/(loss) used in the calculation of basic earnings per share are the same as the net profit/(loss) in the statement of profit or loss and other comprehensive income. (b) There are no potential ordinary shares and hence diluted earnings per share is the same as basic earnings per share. 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 2014 $ 31 December 2013 $ 31 December 2014 $ 31 December 2013 $ (Loss)/ Profit from operations (3,017,546) 1,562,746 (1,262,213) (1,783,317) Income tax (benefit)/expense calculated at 30% (905,264) 468,824 (378,664) (534,995) (142,495) (50,380) ‑ ‑ Effect of different tax rates of subsidiaries operating in other jurisdictions Non‑deductible (assessable) provision for non‑recovery of loan Other non‑deductible/ non assessable items 194,589 (133,706) ‑ ‑ 179,013 7,403 348,577 (2,488) Unused tax losses and tax offsets not recognised as deferred tax assets Income tax attributable to operating (Loss)/profit (853,170) 284,738 (192,248) (188,906) 853,170 (284,738) 192,248 188,906 ‑ ‑ ‑ ‑ 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. 33 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 4. Income Tax (cont) (b) Unrecognised deferred tax balances The following deferred tax assets have not been bought to account as assets Tax losses ‑ revenue Temporary differences Tax consolidation Consolidated Company 31 December 2014 $ 31 December 2013 $ 31 December 2014 $ 31 December 2013 $ 21,827,098 20,973,928 6,957,677 6,765,429 1,662,494 1,504,102 ‑ ‑ 23,489,592 22,478,030 6,957,677 6,765,429 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 21. 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 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 4,016,132 4,016,132 (4,016,132) (4,016,132) ‑ ‑ ‑ ‑ ‑ ‑ ‑ 204,209 (204,209) ‑ The directors have assessed the carrying value of the unlisted shares held in controlled entities and have determined that, as at 31 December 2014, 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. 34 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 6. Trade and other receivables Current Trade receivables GST receivable Amounts due from customers under construction contracts (Note 27) Other debtors Consolidated Company 31 December 2014 $ 31 December 2013 $ 31 December 2014 $ 31 December 2013 $ 6,412,992 1,849,340 72,837 60,339 996,217 1,153,498 2,189 6,626 ‑ 3,318 ‑ ‑ ‑ 5,979 ‑ ‑ 7,484,235 3,069,803 3,318 5,979 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. Consolidated Company 31 December 2014 $ 31 December 2013 $ 31 December 2014 $ 31 December 2013 $ Ageing of past due not impaired 31‑60 days 61‑90 days 120 days + Ageing of past due and impaired 120 days + Total 7. Current Inventories 803,583 ‑ ‑ 803,583 ‑ ‑ 851,463 17,954 48,302 917,719 ‑ ‑ Raw materials ‑ at net realisable value Work in progress ‑ at cost 515,247 962,180 2,974,805 2,346,056 1,477,427 5,320,861 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 35 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 8. Other Assets Current Prepayments Non‑current Consolidated Company 31 December 2014 $ 31 December 2013 $ 31 December 2014 $ 31 December 2013 $ 438,441 332,811 ‑ ‑ 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 Provision recognised in profit and loss Reversal of provision recognised in profit or loss Balance at the end of the financial year ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 67,016,633 66,419,924 (67,016,633) (66,419,924) ‑ ‑ 66,419,924 65,258,001 596,709 1,161,923 ‑ ‑ 67,016,633 66,419,924 9. Auditors Remuneration (a) Auditor of the Parent Entity Audit or review of the financial report Taxation services (c) Other Auditor Audit or review of the financial report Taxation services 154,700 5,000 159,700 2,478 833 3,311 174,450 25,200 199,650 3,996 2,664 6,660 154,700 5,000 159,700 162,450 25,200 187,650 ‑ ‑ ‑ ‑ ‑ ‑ The auditor of Electro Optic Systems Holdings Limited is Deloitte Touche Tohmatsu. 36 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 10. Property, Plant and Equipment Consolidated Company 31 December 2014 $ 31 December 2013 $ 31 December 2014 $ 31 December 2013 $ (a) Plant and equipment ‑ at cost 6,686,766 6,623,866 Less accumulated depreciation and impairment (6,656,016) (6,497,766) (b) Leased assets ‑ at cost Less accumulated amortisation and impairment 30,750 126,100 13,550 (13,550) ‑ 10,863 (10,863) ‑ (c) Office equipment ‑ at cost 3,704,190 3,343,929 Less accumulated depreciation and impairment (3,506,164) (3,013,886) 198,026 330,043 (d) Furniture, fixtures and fittings ‑ at cost 386,868 316,896 Less accumulated depreciation and impairment (381,811) (311,734) 5,057 5,162 (e) Leasehold improvements ‑ at cost 1,398,969 1,220,701 Less accumulated depreciation and impairment (1,398,969) (1,220,701) (f) Motor vehicle ‑at cost Less accumulated depreciation and impairment (g) Satellite ‑ at cost Less impairment Total net book value of Property, Plant and Equipment ‑ ‑ 25,369 (25,369) ‑ 20,338 (20,338) ‑ 7,000,000 7,000,000 (7,000,000) (7,000,000) ‑ ‑ 233,833 461,305 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 37 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 10. Property, Plant and Equipment (cont) Consolidated Company 31 December 2014 $ 31 December 2013 $ 31 December 2014 $ 31 December 2013 $ Cost Plant and equipment Balance at beginning of year Additions Disposals 6,623,866 5,905,447 63,738 (115,594) 60,541 ‑ Net foreign currency exchange differences 114,756 657,878 Balance at end of year 6,686,766 6,623,866 Leased assets Balance at beginning of year Asset transfer Disposals Net foreign currency exchange differences Balance at end of year 10,863 ‑ ‑ 2,687 13,550 361,997 (324,074) (28,450) 1,390 10,863 Office equipment Balance at beginning of year 3,343,929 2,755,422 Additions Asset transfers Disposals Net foreign currency exchange differences 13,401 ‑ (9,440) 356,300 82,723 324,074 (38,189) 219,899 Balance at end of year 3,704,190 3,343,929 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 15,048 ‑ ‑ (15,048) ‑ ‑ 38 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 10. Property, Plant and Equipment (cont) Consolidated Company 31 December 2014 $ 31 December 2013 $ 31 December 2014 $ 31 December 2013 $ Furniture, fixtures and fittings Balance at beginning of year Net foreign currency exchange differences Balance at end of year Leasehold improvements Balance at beginning of year 316,896 69,972 386,868 280,703 36,193 316,896 1,220,701 1,128,493 Net foreign currency exchange differences 178,268 92,208 Balance at end of year 1,398,969 1,220,701 Motor vehicle Balance at beginning of year Net foreign currency exchange differences Balance at end of year Satellite Balance at beginning of year Balance at end of year 20,338 5,031 25,369 17,736 2,602 20,338 7,000,000 7,000,000 7,000,000 7,000,000 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 39 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 10. Property, Plant and Equipment (cont) Consolidated Company 31 December 2014 $ 31 December 2013 $ 31 December 2014 $ 31 December 2013 $ Accumulated Depreciation/ Amortisation/Impairment Plant and equipment Balance at beginning of year (6,497,766) (5,755,546) Depreciation Disposals (150,395) (95,835) 114,486 ‑ Net foreign currency exchange differences (122,341) (646,385) Balance at end of year (6,656,016) (6,497,766) Leased plant and equipment Balance at beginning of year Amortisation expense Transfers Disposals Net foreign currency exchange differences Balance at end of year (10,863) (144,845) ‑ ‑ ‑ (2,687) (13,550) (2,678) 129,788 8,263 (1,391) (10,863) Office equipment Balance at beginning of year (3,013,886) (2,589,636) Depreciation Transfers Disposals (145,158) ‑ 9,425 (113,189) (129,788) 36,802 Net foreign currency exchange differences (356,545) (218,075) Balance at end of year (3,506,164) 3,013,886 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ (14,063) (197) ‑ 14,260 ‑ ‑ 40 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 10. Property, Plant and Equipment (cont) Consolidated Company 31 December 2014 $ 31 December 2013 $ 31 December 2014 $ 31 December 2013 $ Furniture, fixtures and fittings Balance at beginning of year Depreciation (311,734) (275,436) (105) (105) Net foreign currency exchange differences (69,972) (36,193) Balance at end of year (381,811) (311,734) Leasehold improvements Balance at beginning of year (1,220,701) (1,128,493) Net foreign currency exchange differences (178,268) (92,208) Balance at end of year (1,398,969) (1,220,701) Motor vehicle Balance at beginning of year Net foreign currency exchange differences Balance at end of year Satellite Balance at beginning of year Balance at end of year (20,338) (5,031) (25,369) (17,736) (2,602) (20,338) (7,000,000) (7,000,000) (7,000,000) (7,000,000) ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 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 and determined an impairment (reversal) charge for the year of Nil (2013: Nil). The basis to assess for any potential impairment was fair value less cost for disposal and fair value determined by reference to an active market for second hand manufacturing equipment. 41 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 11. Current trade and other payables Trade payables Accruals Amounts due to customers under construction contracts (Note 27) Consolidated Company 31 December 2014 $ 31 December 2013 $ 31 December 2014 $ 31 December 2013 $ 1,978,851 2,358,432 743,894 1,084,797 5,017 98,862 18,976 76,459 6,137,731 438,992 ‑ ‑ 8,860,476 3,882,221 103,879 95,435 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. 12. Provisions Current Employee benefits (Note 14) Contract losses Decommissioning costs Warranty (Note 13) Non‑current 2,364,350 2,135,760 311,193 250,000 286,084 250,000 2,133,044 1,863,783 5,058,587 4,535,627 Employee Benefits (Note 14) 483,058 478,045 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 42 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 12. Provisions (cont) Consolidated Company 31 December 2014 $ 31 December 2013 $ 31 December 2014 $ 31 December 2013 $ Movement in contract loss provision Balance at 1 January Additional provision recognised Reductions resulting from re‑measurement 286,084 25,109 ‑ 222,191 63,893 ‑ Balance as at 31 December 311,193 286,084 ‑ ‑ ‑ ‑ 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. 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. 13. Warranty Provisions Movement in warranty provision Balance at 1 January 1,863,783 1,507,027 Reductions resulting from re‑measurement (526,842) (356,539) Additional provisions recognised Balance as at 31 December 796,103 713,295 2,133,044 1,863,783 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 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. 43 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 14. Employee Benefits The aggregate employee benefits liability recognised in the financial statements is as follows: Provision for employee entitlements Consolidated Company 31 December 2014 $ 31 December 2013 $ 31 December 2014 $ 31 December 2013 $ 2,364,350 2,135,760 483,058 478,045 ‑ ‑ ‑ ‑ Current (Note 12) Non‑Current (Note 12) 15. Issued capital 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. 44 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 16. Directors and Employee Share Option Plan (a) Unlisted Options issued under the Employee Share Option Plan 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. 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. (b) Unlisted Options issued under the Employee Share Option Plan Balance at the beginning of the financial year (i) 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 2014 2013 Weighted average exercise price $ Number ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ Weighted average exercise price $ 1.30 1.30 ‑ Number 1,025,000 ‑ ‑ (1,025,000) ‑ ‑ 45 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 16. Directors and Employee Share Option Plan (cont) (b) Unlisted Options issued under the Employee Share Option Plan (cont) (i) Balance at the beginning of the year Number Grant date Expiry date Exercise Price Fair value at grant date ‑ ‑ ‑ ‑ $‑ 2014 Staff options 2013 Staff options 1,025,000 10/12/09 8/12/13 $1.30 $987,075 Staff and Director options carry no rights to dividends and no voting rights. (ii) Granted during the year There were no options issued during 2014 or 2013. (iii) Exercised during the year There were no options exercised during 2014 or 2013. (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 2014 Staff 2013 ‑ ‑ Staff 1,025,000 10/12/09 (v) Balance at the end of the financial year 2014 Staff options 2013 Staff options ‑ ‑ ‑ ‑ 8/12/13 $1.30 ‑ ‑ ‑ ‑ ‑ ‑ Number Grant date Expiry date Exercise Price Fair value at grant date ‑ ‑ ‑ ‑ ‑ ‑ 10/12/09 8/12/13 $1.30 $Nil 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 have been issued subsequently. 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 16 to the financial statements. 46 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 17. Reserves Consolidated Company 31 December 2014 $ 31 December 2013 $ 31 December 2014 $ 31 December 2013 $ Foreign currency translation (214,092) 70,175 ‑ ‑ Employee equity‑settled benefits 7,727,803 7,727,803 7,727,803 7,727,803 7,513,711 7,797,978 7,727,803 7,727,803 Foreign currency translation Balance at beginning of financial year Translation of foreign operations Balance at end of financial year 70,175 (284,267) (214,092) 49,953 20,222 70,175 ‑ ‑ ‑ ‑ ‑ ‑ 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. Exchange differences previously accumulated in the foreign currency translation reserve (in respect to translating the net assets of foreign operations) are reclassified to profit or loss on disposal of the foreign operation. Employee equity‑settled benefits Balance at beginning of financial year 7,727,803 7,727,803 7,727,803 7,727,803 Share based payment ‑ ‑ ‑ ‑ Balance at end of financial year 7,727,803 7,727,803 7,727,803 7,727,803 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 16 to the financial statements. Items included in employee equity‑settled benefits reserve will not be reclassified subsequently to profit or loss. 18. Accumulated Losses Consolidated Company 31 December 2014 $ 31 December 2013 $ 31 December 2014 $ 31 December 2013 $ Balance at beginning of financial year (78,844,653) (80,407,399) (81,461,609) (79,678,292) Net profit/ (loss) attributable to members of the parent entity (3,017,546) 1,562,746 (1,262,213) (1,783,317) Balance at end of financial year (81,862,199) (78,844,653) (82,723,822) (81,461,609) 47 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 19. 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 31 December 2014 $ 31 December 2013 $ 31 December 2014 $ 31 December 2013 $ Cash and cash equivalents 5,803,264 4,048,005 488,109 1,739,217 (b) Reconciliation of (Loss)/profit for the year to net cash flows from operating activities Profit/ (Loss) for the period (3,017,546) 1,562,746 (1,262,213) (1,783,317) Loss/(profit) on disposal of fixed assets Depreciation of fixed assets Foreign exchange movements 668 295,658 (43,891) 211,807 (387,164) (196,409) ‑ ‑ ‑ 788 197 ‑ Provision for non‑recovery of loan ‑ ‑ 596,709 1,161,923 (Increase)/decrease in assets Current receivables Inventories Other current assets Increase/(decrease) in liabilities Provisions Current trade and other payables Other (4,414,432) (1,194,907) 2,661 21,004 3,843,434 (1,465,011) (105,630) 256,128 527,973 (379,581) (340,903) 114,919 884,739 572,823 ‑ ‑ ‑ ‑ ‑ ‑ 8,444 (2,055) ‑ ‑ ‑ ‑ Deferred income and amounts due to customers under construction contracts 5,698,739 (3,349,426) Net cash (outflows)/ inflows from operating activities 1,721,216 (2,646,482) (654,399) (601,460) 48 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 20. 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 The aggregate compensation of the key management personnel of the company is set out below: Short term benefits Post employment benefits 31 December 2014 $ 31 December 2013 $ 1,309,684 1,332,836 81,757 100,505 1,391,441 1,433,341 (c) Key management personnel equity holdings (represented by holdings of fully paid ordinary shares in Electro Optic Systems Holdings Limited) 2014 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 Scott Lamond 2013 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 Scott Lamond Balance at 1/1/14 Granted as remuneration Received on exercise of options Net other change Balance at 31/12/14 No. No. No. No. 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 ‑ Balance at 1/1/13 Granted as remuneration Received on exercise of options Net other change Balance at 31/12/13 No. No. No. No. 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 ‑ 49 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 20. Related party disclosures (cont) (d) Key management personnel option holdings Balance at 1/1/14 Granted as remuneration Exercised (Lapsed) Balance at 31/12/14 Balance vested and exercisable at 31/12/14 Options vested during year No. No. No. No. No. ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ Balance at 1/1/13 Granted as remuneration Exercised (Lapsed) Balance at 31/12/13 Balance vested and exercisable at 31/12/13 Options vested during year No. No. No. No. No. ‑ ‑ ‑ ‑ ‑ ‑ ‑ 160,000 32,000 160,000 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ (160,000) (32,000) (160,000) ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 2014 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 Scott Lamond 2013 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 Scott Lamond Mr Hugo Keyner The Company did not issue any options during the year ended 31 December 2010, 2011, 2012, 2013 and 2014 to Key management personnel. Refer to Note 16 for further details of options outstanding. 50 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 20. Related party disclosures (cont) (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. (f) Other transactions with key management personnel During the year, the Company paid a total of $66,719 (2013: $66,566) 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 Nil (2013: $9,822) 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 $41,016 (2013: $40,922) 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 $120,000 (2013: $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 $13,559 (2013: 11,927) 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. (g) Parent entity The parent entity in the consolidated group is Electro Optic Systems Holdings Limited. 51 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 21. Controlled Entities Name of Entity Parent Entity Country of Incorporation December 2014 % December 2013 % 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) 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 # These companies form part of the Australian consolidated tax entity. All entities are audited by Deloitte Touche Tohmatsu apart from EOS Defense Systems Pte Limited. 22. Contingent Liabilities 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. 52 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 23. Commitments (a) Capital commitments An entity within the group has committed to spend up to $5 million under an agreement on capital infrastructure. Consolidated Company 31 December 2014 $ 31 December 2013 $ 31 December 2014 $ 31 December 2013 $ (b) Operating lease commitments Non‑cancellable operating leases contracted for but not recognised in the financial statements: Payable: not later than one year later than one year and not later than five years later than five years Operating Leases Leasing arrangements Operating leases relate to: 247,219 279,490 ‑ ‑ ‑ 247,219 279,490 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ Premises at 2500 N. Tucson Boulevard, Suite 100, Tuscon Arizona with a lease term which expires on 30 September 2015. There is no option to renew after 30 September 2015 and future lease payments are fixed under the contract. There is no option to purchase the property. Premises at 2112 N. Dragoon, Units 11, 12 and 19 Tucson Arizona are subject to an expired lease. The company occupies the property on a month to month basis and there is no make good requirement. 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 with a lease term which expires on 31 December 2015. There is an option to renew after 31 December 2015 and future lease payments are fixed under a contract. There is no option to purchase the property. Premises at 34 Lowe Street, Suite 401, Level 4 Queanbeyan are the subject of an expired lease. The company occupies the property on a month to month basis and there is no make good requirement. 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. 24. Subsequent Events On 6 March 2015, the consolidated entity announced the award of a $6.5 million contract for the refurbishment and upgrade of Australian Defence Force remote weapon systems. Apart from the above, 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. 53 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 25. 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. The directors consider that the carrying amount of financial assets and liabilities recognised in these financial statements approximate their fair values. 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 2014 $ 2013 $ 2014 $ 2013 $ Financial assets Cash and cash equivalents 5,803,264 4,048,005 488,109 1,739,217 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 2014, if interest rates had moved, as illustrated in the table below, with all other variables held constant, post tax (loss) 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 (Loss) Higher/(Lower) Equity Higher/(Lower) 2014 $ 2013 $ 2014 $ 2013 $ 58,033 (29,016) 40,480 (20,240) 58,033 (29,016) 40,480 (20,240) 4,881 (2,441) 17,392 (8,696) 4,881 (2,441) 17,392 (8,696) The movements in profits are due to lower interest rates on cash balances. The cash balances were higher in 2014 than in 2013 and accordingly the sensitivity is higher. 54 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (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 2014, the Group had the following exposure to US$ foreign currency: Financial assets Cash and cash equivalents Trade and other receivables Financial liabilities Trade and other payables Net exposure Consolidated 2014 $ 2013 $ Company 2014 $ 4,745,674 1,252,409 18,200 4,827,713 1,811,154 ‑ 9,573,387 3,063,563 18,200 471,873 1,125,216 ‑ 9,101,514 1,938,347 18,200 2013 $ 7,979 ‑ 7,979 ‑ 7,979 All US$ denominated financial instruments were translated to A$ at 31 December 2014 at the exchange rate of 0.8158 (2013: 0.8874). At 31 December 2014, 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 2014 $ 2013 $ 2014 $ 2013 $ Post Tax Profit Higher/(Lower) Equity Higher/(Lower) Consolidated AUD/USD +10% AUD/USD ‑5% Company AUD/USD +10% AUD/USD ‑5% (827,410) (176,213) (827,410) (176,213) 479,027 102,018 479,027 102,018 (1,655) 958 (725) 420 (1,655) 958 (725) 420 55 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 25. Financial risk management objectives and policies (cont) 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). 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. 56 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 25. Financial risk management objectives and policies (cont) (d) Liquidity risk management (cont) Weighted average effective interest rate % Less than 1 month $ 1‑3 months $ 3 months to 1 year $ 1‑5 years $ Consolidated 2014 Other non interest bearing liabilities 2013 Other non interest bearing liabilities Company 2014 Other non interest bearing liabilities 2013 Other non interest bearing liabilities ‑ ‑ ‑ ‑ 2,722,745 3,443,229 103,879 95,435 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 57 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 25. 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 2014 Non interest bearing Variable interest rate instruments Receivables ‑ ‑ ‑ 4,804,958 ‑ 6,412,992 Fixed interest rate instruments 1.32 902,147 2013 Non interest bearing Variable interest rate instruments Receivables 12,120,097 ‑ ‑ ‑ 1,317,127 ‑ 1,849,340 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 97,493 97,493 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ Fixed interest rate instruments 1.94 2,636,337 5,802,804 15,126 15,126 82,153 82,153 Weighted average effective interest rate % Less than 1 month $ 1‑3 months $ 3 months to 1 year $ 1‑5 years $ Company 2014 Non interest bearing Variable interest rate instruments ‑ ‑ 18,200 ‑ Fixed interest rate instruments 2.28 455,138 2013 Non interest bearing Variable interest rate instruments ‑ ‑ 7,979 ‑ ‑ ‑ ‑ ‑ ‑ Fixed interest rate instruments 2.74 1,717,840 15,126 ‑ ‑ 15,229 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ (e) Price risk The Group’s exposure to commodity price risk is minimal. The Group does not make investments in equity securities. 58 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 26. 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 2013 Annual Report. The Group’s reportable segments are Defence Systems and Space. 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 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. The space sector also manufactures and sells telescopes and dome enclosures for space projects. Defence Systems 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, Australasia, Middle East and other markets. 59 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 26. Segment Information (cont) Segment Revenues Space Defence systems Total of all segments Consolidated 31 December 2014 $ 31 December 2013 $ 3,202,771 5,592,858 20,254,604 24,215,255 23,457,375 29,808,113 Unallocated interest received 19,058 74,280 Total Segment Results Space Defence systems 23,476,433 29,882,393 (236,580) 1,463,696 (2,115,462) 720,444 Total of all segments (2,352,042) 2,184,140 Unallocated holding company costs (665,504) (621,394) (Loss)/profit before income tax expense (3,017,546) 1,562,746 Income tax expense ‑ ‑ (Loss)/profit for the period (3,017,546) 1,562,746 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 who provided in excess of 10% of consolidated revenue. This customer is within the Defence segment with total revenue of $14,329,095 (2013 ‑ $17,975,010). 60 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 26. Segment Information (cont) Segment Assets and Liabilities Space Defence systems Assets Liabilities 31 December 2014 $ 31 December 2013 $ 31 December 2014 $ 31 December 2013 $ 3,713,288 1,240,622 7,968,300 1,829,722 5,920,648 7,944,158 6,433,821 7,066,171 Total all segments 9,633,936 9,184,780 14,402,121 8,895,893 Unallocated cash 5,803,264 4,048,005 ‑ ‑ Consolidated 15,437,200 13,232,785 14,402,121 8,895,893 Assets used jointly by reportable segments are allocated on the basis of the revenue earned by the individual reportable segments. Depreciation, impairment and amortisation of segment assets Acquisition of segment assets 31 December 2014 $ 31 December 2013 $ 31 December 2014 $ 31 December 2013 $ 9,732 150,310 12,008 94,807 5,703 71,436 26,881 116,383 Other Segment Information Space Defence systems Total all segments 160,042 106,815 77,139 143,264 Unallocated management 135,616 104,992 ‑ ‑ Consolidated 295,658 211,807 77,139 143,264 61 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 26. Segment Information (cont) Information on Geographical Segments 31 December 2014 Geographical Segments Australasia North America Germany Total 31 December 2013 Geographical Segments Australasia North America Germany Total Revenue from External Customers $ 23,285,976 189,405 1,052 23,476,433 Revenue from External Customers $ 28,513,050 1,359,718 9,625 29,882,393 Segment Assets $ 14,667,406 751,300 18,494 15,437,200 Segment Assets $ 10,510,079 2,707,757 14,949 13,232,785 Acquisition of Segment Assets $ 12,761 61,776 2,602 77,139 Acquisition of Segment Assets $ 84,936 56,791 1,537 143,264 62 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 27. Construction Contracts Consolidated Company 31 December 2014 $ 31 December 2013 $ 31 December 2014 $ 31 December 2013 $ Construction work in progress 10,301,587 11,157,390 Less Provision for losses Progress billings (311,193) (286,084) (15,131,908) (10,156,800) (5,141,514) 714,506 Recognised and included in the financial statements as amounts due: From customers under construction contracts: Current (note 6) 996,217 1,153,498 To customers under construction contracts: Current (note 11) (6,137,731) (438,992) (5,141,514) 714,506 ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ 63 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 (CONT) 28. 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 4 Shenton Way #28‑01 SGX Centre II Singapore 068807 Tel: +65 6224 0100 Fax: +65 6227 6002 64 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 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 5 March 2015 the following substantial shareholders were registered: Fred Bart Group Technology Investments Pty Limited Group Northrop Grumman Space and Mission Systems Corp. Ordinary Shares 5,309,075 3,954,185 5,000,000 14,263,260 Percentage of total Ordinary shares 9.34% 6.96% 8.80% 25.10% VOTING RIGHTS At 5 March 2015 there were 1,194 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).” 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. 65 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 ASX ADDITIONAL INFORMATION (CONT) DISTRIBUTION OF SHAREHOLDINGS At 5 March 2015 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 223 408 222 267 74 1,194 142,429 1,217,082 1,910,929 8,913,385 44,662,101 56,845,926 There were 127 ordinary shareholders with less than a marketable parcel. There is no current on‑market buy‑back. 66 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 TWENTY LARGEST ORDINARY SHAREHOLDERS - QUOTED TWENTY LARGEST ORDINARY SHAREHOLDERS At 5 March 2015 the 20 largest ordinary shareholders held 55.82% of the total issued fully paid quoted ordinary shares of 56,845,926. Shareholder 1. Citicorp Nominees Pty Limited 2. N & J Properties Pty Limited 3. Technology Transformations Pty Limited 4. Emichrome Pty Limited 5. Mr Justin Casey <2 A/C> 6. Capitol Enterprises Limited 7. A & D Wire Limited 8. Link Traders (Aust) Pty Limited 9. Technology Investments Pty Limited 10. Landed Investments NZ Limited 11. Emichrome Pty Limited 12. HSBC Custody Nominees (Australia) 13. DBS Vickers Securities (Singapore) Pte Ltd 14. Mr Leo Casey A/C 15. Kam Superannuation Fund Pty Limited 16. Mr Kevin Tay Hak Leong 17. Tony Peter Vucic + Diane Vucic 18. Crea8ive Nominees Pty Limited 19. Bond Street Custodians Limited 20. Landed Investments Limited Fully Paid Ordinary Shares Percentage of Total 6,616,007 4,090,000 2,754,185 2,516,488 2,105,000 1,550,000 1,457,276 1,239,900 1,200,000 1,010,000 997,450 902,605 877,000 868,000 693,000 671,228 575,000 560,000 550,000 500,000 11.64% 7.19% 4.84% 4.43% 3.70% 2.73% 2.56% 2.18% 2.11% 1.78% 1.75% 1.59% 1.54% 1.53% 1.22% 1.18% 1.01% 0.99% 0.97% 0.88% 31,733,139 55.82% 67 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 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 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 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 ‑ edition of the Corporate Governance Principles and Recommendations released 27 March 2014 in relation to diversity, remuneration, sustainability, 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 2014 and embrace the Council’s best practice recommendations which are being put in place as appropriate. 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. The Directors and management have considered whether the Company has any material exposure to economic, environmental and social sustainability risks and determined that no material exposure exists. 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 page 4. 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 68 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 CORPORATE GOVERNANCE STATEMENT (CONT) 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. 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 Position Mr. Ian Dennis 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 Position Mr Fred Bart Non‑Executive Chairman Dr Ben Greene Executive 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 Term in Office 13 years 11 years 13 years 9 years 4 years 2 years 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. 69 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 CORPORATE GOVERNANCE STATEMENT (CONT) 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 2014, EOS Group employed 87 (2013 ‑ 94 staff). 20% (17) (2013 ‑ 19) of these staff were female and 2% (2013 ‑ 3%) (2)(2013 ‑ 3) of these women were employed in management roles with management defined as staff having direct report employees. There were no female directors. In 2014 there were no workplace harassment complaints. In 2013 one workplace harassment complaint was investigated and concluded through mediation. 20% (2013 ‑ 17%) (18)(2013 ‑16%) of employees accessed flexible workplace arrangements including early commencement times and alternative work days. 3 (2013 ‑ 5) 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 20 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. 70 Electro Optic Systems Holdings Limited and Controlled Entities | ANNUAL REPORT 2014 CONTENTS Review of Operations Directors’ Report Auditors’ Report Directors’ Declaration 1 4 14 17 18 19 20 21 22 65 67 68 Consolidated Statement of Profi t or Loss and Other 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 COMPANY DIRECTORY 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 Web site 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 4766 Designed and Produced by RDA Creative www.rda.com.au ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED ACN 092 708 364 www.eos‑aus.com 2014 ANNUAL REPORT 

Continue reading text version or see original annual report in PDF format above