2006 Annual Report Fletcher Building Finance Limited 2006 Annual Report Fletcher Building Finance Limited Title 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information 30 Directory < > 2006 Annual Report Fletcher Building Finance Limited 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information 30 Directory 2 < > Letter from the Chairman I am very pleased to present the fourth annual report to holders of Fletcher Building Finance Limited capital notes. Fletcher Building Finance is a wholly owned subsidiary of Fletcher Building Limited and its results and financial position need to be read in conjunction with the Fletcher Building 2006 annual report, a copy of which is enclosed if you are not also a Fletcher Building shareholder. The terms of issue of the capital notes by the company provide that they are guaranteed on an unsecured subordinated basis ranking pari passu or equally with other capital notes issued by Fletcher Building Limited. So as to ensure that the 2002 capital notes issued by the company will continue to rank pari passu with the capital notes issues by Fletcher Building Limited, the company does not seek to maintain over time significant shareholders’ funds. Equally, it does not intend to be in a shareholders’ funds deficit position. The results of the company need to be considered against this background. funds pursuant to the banking facilities of Fletcher Building. These facilities are fully guaranteed by Fletcher Building. Funds borrowed, including the funds raised by the issue of the capital notes have been lent on interest-bearing terms to other Fletcher Building group companies. The interest payments made to the company give rise to tax credits that are available to the shareholders of Fletcher Building Limited, and are distributed by way of a dividend to Fletcher Building Limited. The dividend paid during the year was $73 million (2005: $28 million). To maintain the company’s solvency ratio, Fletcher Building contributed an additional $70 million of equity during the financial year (2005: $30 million). The company maintains a foreign currency hedge transaction with Fletcher Building to minimise currency impacts on its earnings and financial position. Results for the period Net earnings after tax for the year to 30 June 2006 were $3.7 million (2005: $4.8 million) with shareholder funds of $31.3 million (2005: $29.6 million). Business activities The company was established principally to facilitate the funding for the Laminex acquisition by Fletcher Building but has extended this to a wider role as a financing subsidiary for the group. It has issued capital notes and also borrowed Corporate governance As a wholly owned subsidiary of Fletcher Building, the company is required to comply with the corporate governance practices of its parent. These procedures are wide ranging and include written delegations of authority to the chief executive, and delegations by the chief executive to other executives prescribing those matters that are reserved for approval by the board, and those matters that can be attended by management. In addition, these corporate governance procedures include: 2006 Annual Report Fletcher Building Finance Limited 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information 30 Directory 3 < > Letter from the Chairman – terms of appointment of directors; – terms of reference of the chairman, directors and management; – code of conduct; – charters for audit, remuneration and nomination committees of the board; and – processes for evaluating the independent status and performance of directors. In recognition that the corporate governance procedures of Fletcher Building Limited will apply to the company, and that the Companies Act 1993 allows directors of a subsidiary company such as Fletcher Building Finance Limited to act in the best interests of the parent company, the New Zealand Exchange (NZX) has granted a waiver such that the company does not need to comply with the full corporate governance and other regulatory disclosures, provided that the Fletcher Building annual report include these disclosures, and a copy is provided to all noteholders of the company. Specific governance initiatives instituted by the company include requirements that: – the directors of the company shall only be those persons who are directors of Fletcher Building; – the chairman, chief executive, chief financial officer and company secretary of Fletcher Building shall hold the equivalent roles in the company; – no remuneration shall be payable to any director or executive of the company; – an audit committee be established, the constituency, chairmanship and charter being the same as that of the Fletcher Building audit committee. The directors of the company believe that these initiatives combined with the overarching governance procedures of Fletcher Building provide an appropriate basis for ensuring the company meets its fiduciary obligations to the capital noteholders. Consistent with these governance principles, Jonathan Ling, the newly appointed chief executive of Fletcher Building Limited, has been appointed to the board with effect from 1 September 2006. The financial position of the company is dependent on that of Fletcher Building which I am pleased to report has again performed very well in the June 2006 year. To gain a full appreciation of the activities and performance of the wider Fletcher Building group, I recommend that you read the Fletcher Building annual report and review its website (www.fletcherbuilding.com). If you have any questions on matters relating to Fletcher Building Finance or Fletcher Building, please use the contact details set out in this report. Roderick Deane Chairman This report is dated 30th August 2006 and is signed on behalf of the Board of Fletcher Building Finance Limited by: Roderick Deane Chairman Ralph Waters Chief Executive Officer Earnings Statement and Statement of Movements in Equity For the year ended 30 June 2006 2006 Annual Report Fletcher Building Finance Limited 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report Earnings Statement Investment income Operating expenses Operating earnings Funding costs Earnings before taxation Taxation expense Net earnings Statement of Movements in Equity Total equity At the beginning of the year Net earnings for the year Movement in currency translation reserve Total recognised revenues and expenses for the year Increase in share capital Dividend paid to Fletcher Building Limited 29 Noteholder Information Total equity 30 Directory The accompanying notes form part of and are to be read in conjunction with these financial statements. 4 < > Notes Year Ended June 2006 NZ$ Year Ended June 2005 NZ$ 2 3 4 6 6 5 6 106,663,737 75,827,322 (494,677) (373,553) 106,169,060 75,453,769 (97,527,703) (68,255,188) 8,641,357 7,198,581 (4,937,632) (2,408,850) 3,703,725 4,789,731 29,565,471 22,775,283 3,703,725 1,048,948 4,752,673 4,789,731 457 4,790,188 70,000,000 30,000,000 (73,000,000) (28,000,000) 31,318,144 29,565,471 Balance Sheet As at 30 June 2006 Assets Current assets: Cash and liquid deposits Provision for current taxation Debtors Total current assets Non-current assets: Notes June 2006 NZ$ June 2005 NZ$ 2,417 571 8 97,196,696 8,768,329 1,219 97,200,332 8,768,900 Amounts owing by related companies 13 1,490,173,825 1,437,329,287 Total non-current assets Total assets 1,490,173,825 1,437,329,287 1,587,374,157 1,446,098,187 2006 Annual Report Fletcher Building Finance Limited 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information 30 Directory 5 < > 2006 Annual Report Fletcher Building Finance Limited Balance Sheet continued As at 30 June 2006 Liabilities Accrued interest Creditors Amounts owing to related companies Total current liabilities Non-current liabilities: Capital notes Term debt Amounts owing to related companies Total non-current liabilities Total liabilities Equity Reported capital Reserves Total equity Total liabilities and equity Notes June 2006 NZ$ June 2005 NZ$ 13 9 10 13 5 7 5,765,065 95,447 1,088,056,982 5,760,095 1,150,267 1,093,917,494 6,910,362 148,873,712 147,432,473 313,264,807 279,171,210 983,018,671 462,138,519 1,409,622,354 1,556,056,013 1,416,532,716 150,000,000 80,000,000 (118,681,856) (50,434,529) 31,318,144 29,565,471 1,587,374,157 1,446,098,187 The accompanying notes form part of and are to be read in conjunction with these financial statements. On behalf of the Board, 9 August 2006 Roderick Deane Chairman of Directors Ralph Waters Managing Director 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information 30 Directory 6 < > 2006 Annual Report Fletcher Building Finance Limited Statement of Cashflows For the year ended 30 June 2006 Cashflow from operating activities: Revenue received Payments to suppliers, employees and other Interest paid Taxes paid Net cash from operating activities Cashflow from financing activities: Advances from/(to) related companies Issue of shares Dividend paid to Fletcher Building Limited Net cash from financing activities Net movement in cash held 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows Add opening cash and liquid deposits Effect of exchange rate changes on net cash Closing cash and liquid deposits The accompanying notes form part of and are to be read in conjunction with these financial statements. 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information 30 Directory 7 < > Year Ended June 2006 NZ$ Year Ended June 2005 NZ$ 108,103,910 76,846,789 (75,479,186) (373,553) (98,867,247) (67,209,245) (34,023,178) (15,668,493) (100,265,701) (6,404,502) 103,267,326 4,393,654 70,000,000 30,000,000 (73,000,000) (28,000,000) 100,267,326 6,393,654 1,625 571 221 2,417 (10,848) 11,473 (54) 571 2006 Annual Report Fletcher Building Finance Limited Reconciliation of Net Earnings to Net Cash from Operating Activities For the year ended 30 June 2006 Cash was received from net earnings Adjustment for items not involving cash: Taxation Prepayments Trade creditors and accruals Cash was (paid)/received on financial instruments Net cash from operating activities The accompanying notes form part of and are to be read in conjunction with these financial statements. Year Ended June 2006 NZ$ Year Ended June 2005 NZ$ 3,703,725 4,789,731 (29,085,546) (13,259,643) 1,440,173 (1,341,583) 925,991 119,952 (74,982,470) 1,019,467 (100,265,701) (6,404,502) 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information 30 Directory 8 < > 2006 Annual Report Fletcher Building Finance Limited 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information 30 Directory 9 < > Statement of Accounting Policies For the year ended 30 June 2006 Basis of presentation The financial statements presented are those of Fletcher Building Finance Limited (the company). Fletcher Building Finance Limited is a company domiciled in New Zealand, is registered under the Companies Act 1993, and is an issuer in terms of the Securities Act 1978 and the Financial Reporting Act 1993. The registered office of the company is 810 Great South Road, Penrose, Auckland. The company is also registered in Australia as an overseas company under the Australian Corporations Act 2001. The financial statements comprise the earnings statement, statement of movements in equity, balance sheet, statement of cashflows, and significant accounting policies, as well as the notes to these financial statements. Accounting convention The financial statements are based on the general principles of historical cost accounting, except that financial assets and liabilities as described below are stated at their fair value. These financial statements have been prepared in accordance with New Zealand standards that comply with International Financial Reporting Standards (NZ IFRS). The financial statements for the year ended 30 June 2006 are the first annual financial statements prepared under New Zealand Equivalent to International Financial Reporting Standard 1 First-time Adoption of New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS 1). The company’s financial statements were previously prepared under New Zealand generally accepted accounting practice (NZ GAAP). Reconciliations and descriptions of the effects of the transition from NZ GAAP to NZ IFRS including the impact on the company’s earnings, equity and balance sheet are provided in the notes to the financial statements, as attached. The policies set out as follows have been consistently applied to the comparative year and the 30 June 2004 opening balance sheet, except those relating to the classification and measurement of financial instruments. The company has used the exemptions available under NZ IFRS 1 to only apply NZ IAS 32 and NZ IAS 39 “Financial Instruments” from 1 July 2005 and comparative balances have not been restated for these, and instead follow the treatment under previous NZ GAAP. Estimates The preparation of financial statements in conformity with NZ IFRS requires the directors to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. The estimates and assumptions are reviewed on an ongoing basis. Valuation of assets Debtors Debtors are valued at estimated net realisable value. The valuation is net of a specific provision maintained for doubtful debts. All known losses are written off to earnings in the period in which it becomes apparent that the debts are not collectable. Trade debtors normally have 30 to 90 day terms. 2006 Annual Report Fletcher Building Finance Limited 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information 30 Directory 10 < > Statement of Accounting Policies For the year ended 30 June 2006 Cash Cash and liquid deposits comprise cash and demand deposits with banks or other financial institutions and highly liquid investments that are readily convertible to cash. Foreign currency Translation of the financial statements of foreign operations The assets and liabilities of the company’s overseas operations are translated into New Zealand currency at the rates of exchange ruling at balance date. The revenue and expenditure of these entities are translated using an average exchange rate reflecting an approximation of the appropriate transaction rates. Exchange variations arising on the translation of these entities are recognised directly in the currency translation reserve. Exchange differences Monetary assets and liabilities in foreign currencies at balance date which are not covered by forward exchange contracts, are translated at the rates of exchange ruling at balance date. Monetary assets and liabilities in foreign currencies at balance date which are covered by forward exchange contracts, are effectively translated at the exchange rates specified in those contracts. Non-monetary assets in foreign currencies are translated at the exchange rates in effect when the amounts of these assets were determined. Net investments in foreign operations Exchange differences arising from the translation of the net investment in foreign operations, and of related hedges are taken to the currency translation reserve and are released to earnings upon disposal. Valuation of liabilities Derivative financial instruments Derivative financial instruments including foreign exchange contracts, interest rate swaps, currency swaps, options and forward rate agreements are utilised to reduce exposure to market risks. Company policy specifically prohibits the use of derivative financial instruments for trading or speculative purposes. All the company’s derivative financial instruments are held to hedge risk on underlying assets, liabilities and forecast or committed trading transactions. The fair value of derivative financial instruments, as disclosed in the financial instrument note, is estimated based on quoted market prices. The company holds derivative instruments until expiry except where the underlying rationale from a risk management point of view changes, such as when the underlying asset or liability which the instrument hedges no longer exists, in which case early termination occurs. Derivative financial instruments are initially recorded at fair value and are then revalued to fair value at each balance sheet date. The gain or loss on revaluation is recorded either in earnings or equity depending on whether the instruments qualify for hedge accounting and the nature 2006 Annual Report Fletcher Building Finance Limited 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information 30 Directory 11 < > Statement of Accounting Policies For the year ended 30 June 2006 of the item being hedged. For a derivative instrument to be classified and accounted for as a hedge, it must be highly correlated with, and effective as a hedge of the underlying risk being managed and this relationship must be documented from inception. Derivatives that do not qualify for hedge accounting Where a derivatives financial instrument does not qualify for hedge accounting, or where hedge accounting has not been elected, any gain or loss is recognised directly in earnings. Fair value hedges Where a derivative financial instrument is designated as a hedge of a recognised asset or liability, or a firm commitment, any gain or loss is recognised directly in earnings together with any changes in the fair value of the hedged item. Cashflow hedges Where a derivative financial instrument is designated as a hedge of the variability in cashflows of assets or liabilities, or of a highly probable forecasted transaction, the effective part of any gain or loss is recognised directly in the cashflow hedge reserve within equity and the ineffective part of any gain or loss is recognised immediately in earnings. The effective portion is transferred to earnings when the underlying cashflows affect earnings. Net investment hedges Where the derivative financial instruments are designated as a hedge of a net investment in a foreign operation, the derivative financial instruments are accounted for similarly to cashflow hedges through the currency translation reserve within equity. Taxation The provision for current tax is the estimated amount due for payment during the next 12 months by the company. The provision for deferred taxation has been calculated using the balance sheet liability method. Deferred tax is recognised on the temporary difference between the carrying amount of assets and liabilities and their taxable value. Deferred tax assets are not recognised unless recovery is considered probable. Borrowings Interest bearing borrowings are initially recognised at fair value, less any transaction costs which are amortised over the period of the loans. Creditors Trade creditors and other liabilities are stated at cost or the estimated liability where accrued. Provisions A provision is recognised when the company has a current obligation and it is probable that economic benefits will be required to settle this. Statement of Accounting Policies For the year ended 30 June 2006 Equity Share capital Ordinary shares are classified as shareholders funds. Incremental costs directly attributable to the issue of new shares or options are shown in shareholders funds as a reduction from the proceeds. Dividends are recognised as a liability in the period in which they are declared. Income determination Investment revenue Interest income is taken to earnings when received or accrued in respect of the period for which it was earned. Dividends and distributions are taken to earnings when received or accrued where declared prior to balance date. Funding costs Net funding costs comprise interest expense, interest income, amortisation of prepaid expenses and gains/losses on certain financial instruments that are recognised in earnings. 2006 Annual Report Fletcher Building Finance Limited 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information 30 Directory 12 < > Notes to the Financial Statements 1 Changes in accounting policies In December 2002, the New Zealand Accounting Standards Review Board announced that New Zealand standards which comply with International Financial Reporting Standards (IFRS) will apply to New Zealand entities for periods commencing 1 January 2007. Entities also have the option of early adoption from 1 January 2005, in line with Australian and European requirements. The company’s financial statements comply with NZ IFRS for the year commencing 1 July 2005. In preparing the financial statements, the company has restated the comparative financial statements, except for financial instruments. As permitted by NZ IFRS 1, the company has adopted IAS 32 and IAS 39 “Financial Instruments” prospectively from 1 July 2005, and comparative balances have not been restated. There has been no impact on the financial statements in complying with IAS 32 and IAS 39 from 1 July 2005. There has been no change to the earnings statement, the statement of cashflows or the statement of movements in equity. The company has reclassified prepaid borrowing costs of $2,567,527 at June 2005 in the balance sheet against the capital notes liability, rather than being shown as a separate asset as previously treated under NZ GAAP. The International Accounting Standards Board has issued a number of standards, amendments and interpretations which are not yet effective. The company has not yet applied these and the application of these standards, amendments and interpretations is not expected to have a material impact on the company’s results but will require further disclosures. There have been no other changes in accounting policy in the year ended 30 June 2006, however certain comparatives were restated to conform with the current year’s presentation. 2 Investment income Investment income includes interest received from related companies: Fletcher Building Limited Fletcher Building (Australia) Pty Limited Year Ended June 2006 NZ$ Year Ended June 2005 NZ$ 16,031,899 17,480,428 90,631,838 58,346,894 106,663,737 75,827,322 2006 Annual Report Fletcher Building Finance Limited 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information 30 Directory 13 < > 2006 Annual Report Fletcher Building Finance Limited Notes to the Financial Statements 3 Funding costs Interest payable on: Term debt Capital notes interest Interest paid to related companies: Fletcher Building (Australia) Finance Pty Limited Fletcher Challenge Investments Overseas Limited Income from short-term deposits Plus bank fees, share registry and issue expenses 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information 30 Directory 14 < > Year Ended June 2006 NZ$ Year Ended June 2005 NZ$ 17,952,684 16,806,337 12,993,325 12,985,932 24,200,378 21,420,364 42,006,145 16,042,603 (575,748) (8,453) 96,576,784 67,246,783 950,919 1,008,405 97,527,703 68,255,188 2006 Annual Report Fletcher Building Finance Limited Notes to the Financial Statements 4 Taxation expense Earnings before taxation: New Zealand Overseas Taxation at 33 cents per dollar Adjusted for: Tax rate adjustment Tax in respect of prior years Foreign dividend withholding tax payable Non assessable income Current taxation: New Zealand Overseas Shareholder tax credits Dividend withholding payment credit account: 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information Dividend withholding payment credits at the beginning of the year 30 Directory 15 < > Dividend withholding payment credits received from taxation payments Dividend withholding payment credits attached to dividends paid Year Ended June 2006 NZ$ Year Ended June 2005 NZ$ 2,662,395 4,053,309 5,978,962 3,145,272 8,641,357 7,198,581 (2,851,648) (2,375,532) 179,369 69,221 94,105 (30,393,431) (18,318,849) 28,058,857 18,191,426 (4,937,632) (2,408,850) (3,213,165) (1,431,529) (1,724,467) (977,321) (4,937,632) (2,408,850) 1,520,940 89,996 33,714,434 15,221,989 (35,235,374) (13,791,045) 1,520,940 2006 Annual Report Fletcher Building Finance Limited Notes to the Financial Statements 5 Capital Reported capital: Reported capital at the beginning of the year Issue of shares 02 Letter from the Chairman Number of shares: 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information 30 Directory 16 < > Number of shares at the beginning of the year Issue of shares All ordinary shares carry equal rights in respect of voting, dividend payments and distribution upon winding up. 6 Reserve movements Reserves at the beginning of the year Net earnings Dividend paid to Fletcher Building Limited Net currency translations Year Ended June 2006 NZ$ Year Ended June 2005 NZ$ 80,000,000 50,000,000 70,000,000 30,000,000 150,000,000 80,000,000 Year Ended June 2006 Year Ended June 2005 80,000,000 50,000,000 70,000,000 30,000,000 150,000,000 80,000,000 Year Ended June 2006 NZ$ Year Ended June 2005 NZ$ (50,434,529) (27,224,717) 3,703,725 4,789,731 (73,000,000) (28,000,000) 1,048,948 457 (118,681,856) (50,434,529) 2006 Annual Report Fletcher Building Finance Limited Notes to the Financial Statements 7 Reserve balances Reserves comprise: Revenue reserves Net currency translation 8 Provision for current taxation Opening provision for taxation Currency translation Taxation in the earnings statement Taxation in reserves Intercompany payment Net taxation payments 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information 30 Directory 17 < > June 2006 NZ$ June 2005 NZ$ (122,693,426) (53,397,151) 4,011,570 2,962,622 (118,681,856) (50,434,529) 8,768,329 (6,439,874) (173,752) (924) (4,937,632) (2,408,850) 75,351,873 (1,015,743) (15,835,300) 2,965,227 34,023,178 15,668,493 97,196,696 8,768,329 2006 Annual Report Fletcher Building Finance Limited Notes to the Financial Statements 9 Capital notes Capital notes Coupon Election date Series 2008 Series 2010 Prepaid expenses 8.60% 8.85% 15 March 2008 15 March 2010 June 2006 NZ$ June 2005 NZ$ 112,670,000 112,670,000 37,330,000 37,330,000 (1,126,288) (2,567,527) 148,873,712 147,432,473 Capital notes are long-term fixed rate unsecured subordinated notes. On each election date, the coupon rate and term to the next election date of that series of the capital notes will be reset. Holders may then choose either to keep their capital notes on the new terms or to convert the principal amount and any accrued but unpaid interest into shares of Fletcher Building Limited, at approximately 98 percent of the current market price. Instead of Fletcher Building Limited issuing shares to holders who choose to convert, Fletcher Building Finance Limited may, at its option, purchase or redeem the capital notes for cash at the principal amount plus any accrued but unpaid interest. If interest is not paid when due it is compounded on each subsequent interest payment date at the same rate as applicable to the principal of the capital notes. Non payment of interest does not constitute a default by the company or Fletcher Building Limited. However, each of the company and Fletcher Building Limited have covenanted not to pay dividends on, or make any distribution in respect of, in the case of the company, its ordinary shares, and in the case of Fletcher Building Limited, Fletcher Building shares, while any interest payments on the capital notes which have not been paid on the due date remain outstanding. The capital notes do not carry voting rights and do not participate in any change in value of the issued shares of Fletcher Building Limited. If the principal amount of the capital notes were to be converted to shares, 16.7 million (June 2005 22.2 million) Fletcher Building Limited shares would be issued at the share price as at 30 June 2006, of $9.15 (June 2005 $6.91). 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information 30 Directory 18 < > 2006 Annual Report Fletcher Building Finance Limited Notes to the Financial Statements 10 Term debt Loans subject to the negative pledge Floating loans June 2006 NZ$ June 2005 NZ$ 313,264,807 279,171,210 313,264,807 279,171,210 Summary of repayment terms and interest rates by repayment period June 2006 NZ$ June 2006 Int. Rate % June 2005 NZ$ June 2005 Int. Rate % Due for repayment: within one year within two years within three years within four years within five years after five years 264,317,181 6.50 235,550,708 48,947,626 6.58 43,620,502 313,264,807 6.51 279,171,210 6.13 6.13 6.13 Credit rating The company has not sought and does not hold a credit rating from an accredited rating agency. 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information 30 Directory 19 < > Notes to the Financial Statements 11 Financial instruments Exposures to currency and interest rate risks arise in the normal course of the company’s business. To manage and limit the effects of these financial risks the company operates within the following policies and utilises the following financial instruments. Management policies The company does not enter into derivative financial instruments for trading or speculative purposes. Currency balance sheet risk There is no foreign exchange exposure to balance sheet currency risk as the assets and liabilities are naturally hedged. The company has entered into currency forwards and swaps to hedge the taxation exposure arising from the translation of the Australian operations for up to three years. The gains and losses on these instruments are taken to the currency translation reserve. Currency trade risk It is company policy that no currency exchange risk may be entered into or allowed to remain outstanding should it arise on trade transactions. The company has no trade transactions. Interest rate risk The company is a wholly owned subsidiary of Fletcher Building Limited and does not have an independent policy regarding interest rate risk but complies with the group policy. It is group policy to manage the fixed interest rate ratio on its debt and capital notes portfolio within the range of 40 to 70 percent. The position in this range is managed depending upon underlying interest rate exposures and economic conditions. Credit risk and liquidity risk The company is a wholly owned subsidiary of Fletcher Building Limited and does not have an independent position regarding credit risk and liquidity risk. The company only has credit risk exposure to the Fletcher Building group and has no external credit risk exposure. Liquidity risk is the risk that the company will encounter difficulty in meeting its financial commitments as they fall due. The company manages its liquidity risk by having a spread of maturity dates of the company’s debt facilities. Furthermore at 30 June 2006, the Fletcher Building group had $1,267 million of committed bank facilities of which $577 million was undrawn (June 2005 $1,242 million; $403 million). 2006 Annual Report Fletcher Building Finance Limited 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information 30 Directory 20 < > Notes to the Financial Statements 11 Financial instruments continued Outstanding derivative transactions Financial instruments are used as a means of reducing exposure to fluctuations in foreign exchange rates and interest rates. While these financial instruments are subject to the risk of market rates changing subsequent to acquisition, such changes would generally be offset with an opposite effect on the items being hedged. The principal or contract amounts of forward exchange contracts and financial instruments for the company are as follows: Principal or contract amount: Currency forward exchange contracts To pay To receive Gain accrued at year end June 2006 NZ$ June 2005 NZ$ 689,692,533 614,640,901 (689,703,508) (614,640,901) (10,975) The cash settlement amounts of these instruments, if they had settled on 30 June 2006, approximates the principal or contract amount. 2006 Annual Report Fletcher Building Finance Limited 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information 30 Directory 21 < > 2006 Annual Report Fletcher Building Finance Limited 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information 30 Directory 22 < > Notes to the Financial Statements 11 Financial instruments continued Interest rate repricing The following tables set out the interest rate repricing profile and weighted average interest rate of the company’s income earning financial assets and liabilities by the total portfolio and class of assets. Creditors, debtors and investments are not interest rate sensitive and these are not included in the tables. Total portfolio June 2006 NZ$ June 2006 Int. Rate % June 2005 NZ$ June 2005 Int. Rate % Interest rate repriced: (including average interest rate) within one year within two years within three years within four years within five years after five years Asset class June 2006 313,264,807 6.51 279,171,210 6.13 112,670,000 8.60 37,330,000 8.85 112,670,000 8.60 37,330,000 8.85 463,264,807 7.21 429,171,210 7.01 Interest Rate % Floating NZ$ Fixed up to One Year NZ$ Fixed One to Five Years NZ$ Fixed over Five Years NZ$ Total NZ$ Bank loans – Australian dollars Term debt 6.51 6.51 313,264,807 313,264,807 Amounts owing to related companies 6.42 1,088,056,982 Amounts owing by related companies Cash and liquid deposits Capital notes 6.96 4.00 8.66 (88,639,084) (1,401,534,741) (2,417) 150,000,000 6.80 1,312,680,288 (1,401,534,741) 150,000,000 313,264,807 313,264,807 1,088,056,982 (1,490,173,825) (2,417) 150,000,000 61,145,547 2006 Annual Report Fletcher Building Finance Limited 11 Financial instruments continued Notes to the Financial Statements Asset class June 2005 Interest Rate % Floating NZ$ Fixed up to One Year NZ$ Fixed One to Five Years NZ$ Fixed over Five Years NZ$ Total NZ$ Bank loans – Australian dollars Term debt Amounts owing to related companies Amounts owing by related companies Cash and liquid deposits Capital notes 6.13 6.13 6.77 7.21 4.00 8.66 279,171,210 279,171,210 983,018,671 (188,327,989) (1,249,001,298) (571) 150,000,000 7.18 1,073,861,321 (1,249,001,298) 150,000,000 279,171,210 279,171,210 983,018,671 (1,437,329,287) (571) 150,000,000 (25,139,977) 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information 30 Directory 23 < > Notes to the Financial Statements 11 Financial instruments continued Fair values The estimated fair values of the company’s financial assets and liabilities compared to their carrying values are as follows: Debtors Accrued interest Creditors June 2006 Carrying value NZ$ June 2006 Fair value NZ$ June 2005 Carrying value NZ$ June 2005 Fair value NZ$ 1,219 1,219 (5,765,065) (5,765,065) (5,760,095) (5,760,095) (95,447) (95,447) (1,150,267) (1,150,267) Cash and liquid deposits 2,417 2,417 571 571 Capital notes Bank loans (150,000,000) (151,954,088) (150,000,000) (153,360,274) (313,264,807) (313,264,807) (279,171,210) (279,171,210) Amounts owing to related companies (1,088,056,982) (1,088,056,982) (983,018,671) (983,018,671) Amounts owing by related companies 1,490,173,825 1,490,173,825 1,437,329,287 1,437,329,287 The carrying values are different from the fair values for the capital notes and currency forward exchange contracts when valued using rates at balance date. The fair value of derivative financial instruments is estimated based on the quoted or estimated market prices of those instruments. The fair value of interest bearing loans are based on the net present value of the future principal and interest cashflows. The fair value of debtors, cash and liquid deposits, creditors and accrued interest, and loans to and from related companies is deemed to be the carrying amount. For interest bearing loans and interest rate derivatives the government stock or swap interest rate curves at balance date in the appropriate currency plus an applicable margin are used. 2006 Annual Report Fletcher Building Finance Limited 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information 30 Directory 24 < > Notes to the Financial Statements 12 Contingent liabilities and capital commitments There were no contingent liabilities or capital commitments as at 30 June 2006 (June 2005 nil). The Fletcher Building group borrows funds based on covenants and a negative pledge and guarantee arrangement. The principal borrowing covenants relate to gearing, interest cover and minimum net tangible assets and at 30 June 2006, the Fletcher Building group was in compliance with all its covenants. The negative pledge ensures that external senior indebtedness ranks equally in all respects and includes the covenant that security can be given only in very limited circumstances. The guarantee states that Fletcher Building and certain of its subsidiaries, including Fletcher Building Finance Limited, guarantee the debt of the group that has the benefit of the negative pledge and guarantee. As at 30 June 2006 the guaranteeing group had debt subject to the negative pledge and guarantee and covenants of $628 million (June 2005 $798 million). Where the company enters into financial guarantee contracts to guarantee the performance or indebtness of other companies within the group, the company considers these to be insurance arrangements and accounts for them as such. In this respect, the company treats the guarantee contract as a contingent liability until such time as it becomes probable that the company will be required to make a payment under the guarantee. 2006 Annual Report Fletcher Building Finance Limited 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information 30 Directory 25 < > Notes to the Financial Statements 13 Related party transactions The company is a wholly owned subsidiary of Fletcher Building Limited, which is also the ultimate holding company. All other related companies are also subsidiaries of Fletcher Building Limited. June 2006 NZ$ June 2005 NZ$ Term receivable owing from related companies Fletcher Building Limited 1 Fletcher Building (Australia) Pty Limited 2 Fletcher Building (Australia) Pty Limited 3 Term payable owing to related companies Fletcher Challenge Investments Overseas Limited 4 Fletcher Building (Australia) Finance Pty Limited 4 77,051,427 170,026,772 1,401,534,741 1,249,001,298 11,587,657 18,301,217 1,490,173,825 1,437,329,287 665,073,431 629,660,538 422,983,551 353,358,133 1,088,056,982 983,018,671 1 This unsecured advance represents long term funding even though it is for no fixed term and bears interest at 9.75% (June 2005 9.75%). 2 This advance represents 1,145,334,190 (June 2005 1,145,334,190) fixed rate debentures of Australian $1.00 each and each tranche has a five year term from the date of issue, but may be repaid earlier by the borrower. The debentures are due for repayment on; 19 December 2007, 489,000,000; 30 September 2008, 115,000,000 and 1 March 2010, 541,334,190. The advance is secured by a guarantee provided by Fletcher Building Holdings Limited. As at 30 June 2006 the interest rate was 6.805% (June 2005 7.2125%). 3 This unsecured advance represents long term funding even though it is for no fixed term and bears interest at 7.0% (June 2005 6.7675%). 4 These advances represent long term funding. They are unsecured and for a fixed term to 31 March 2007. The company will seek to renew these for a further fixed term. As at 30 June 2006 the interest rate was 6.42% (June 2005 6.7675%). 2006 Annual Report Fletcher Building Finance Limited 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information 30 Directory 26 < > 2006 Annual Report Fletcher Building Finance Limited Notes to the Financial Statements 14 Segmental information The company is a finance company and operates in New Zealand and Australia. Geographical segments Investment income Earnings before taxation Total assets Investment income Earnings before taxation Total assets New Zealand NZ$ June 2006 Australia NZ$ June 2006 Total NZ$ June 2006 16,031,899 90,631,838 106,663,737 2,662,395 5,978,962 8,641,357 176,172,303 1,411,201,854 1,587,374,157 June 2005 June 2005 June 2005 17,480,428 58,346,894 75,827,322 4,053,309 3,145,272 7,198,581 179,127,930 1,266,970,257 1,446,098,187 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information 30 Directory 27 < > 2006 Annual Report Fletcher Building Finance Limited 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information 30 Directory 28 < > Audit Report To the shareholder of Fletcher Building Finance Limited We have audited the financial statements set out on pages 4 to 27. The financial statements provide information about the past financial performance of the company and its financial position as at 30 June 2006. This information is stated in accordance with the accounting policies set out on pages 9 to 12. Directors’ responsibilities The directors are responsible for the preparation of financial statements which give a true and fair view of the financial position of the company as at 30 June 2006 and the results of its operations and cash flows for the year ended on that date. Auditor’s responsibilities It is our responsibility to express an independent opinion on the financial statements presented by the directors and report our opinion to you. Basis of opinion An audit includes examining, on a test basis, evidence relevant to the amounts and disclosures in the financial statements. It also includes assessing: – the significant estimates and judgments made by the directors in the preparation of the financial statements; – whether the accounting policies are appropriate to the company’s circumstances, consistently applied and adequately disclosed. We conducted our audit in accordance with New Zealand Auditing Standards. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to obtain reasonable assurance that the financial statements are free from material misstatements, whether caused by fraud or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Our firm has also provided other services to the company in relation to taxation and general accounting services. These matters have not impaired our independence as auditors of the company. The firm has no other relationship with, or interest in, the company. Unqualified opinion We have obtained all the information and explanations we have required. In our opinion: – proper accounting records have been kept by the company as far as appears from our examination of those records; – the financial statements on pages 4 to 27; - comply with New Zealand generally accepted accounting practice; - give a true and fair view of the financial position of the company as at 30 June 2006 and the results of its operations and cash flows for the year ended on that date. Our audit was completed on 9 August 2006 and our unqualified opinion is expressed as at that date. KPMG Auckland, New Zealand 2006 Annual Report Fletcher Building Finance Limited 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information 30 Directory 29 < > Noteholder Information Noteholders with enquiries about transactions or changes of address should contact: Computershare Investor Services Limited, Private Bag 92 119, Auckland 1142, New Zealand Level 2, 159 Hurstmere Road, Takapuna, North Shore 0622, New Zealand Tel: +64 9 488 8777, Fax: +64 9 488 8787 Other investor enquiries Fletcher Building Finance Limited, Private Bag 92 114, Auckland 1142, New Zealand Tel: +64 9 525 9000, Fax: +64 9 525 9032, Email: moreinfo@fb.co.nz Website: www.fletcherbuilding.com Interest payment dates Interest on capital notes is paid semi-annually on 15 March and 15 September. The company recommends that all noteholders have their interest payments direct credited to their bank account to ensure security and promptness of receipt. If you do not already have your payments direct credited, please contact Computershare Investor Services to register your bank account details. Quotation and transfers The Fletcher Building Finance capital notes are quoted on the New Zealand Exchange under codes FBF010 and FBF020 and may be bought and sold through sharebrokers. No transfer will be registered if it would result in the transferor or the transferee holding capital notes with an aggregate principal amount of less than $5,000. Subject to this minimum holding, transfers must be in multiples of $1,000. Fletcher Building website Details on Fletcher Building and its operations for the year ended 30 June 2006 can be viewed on its website, at www.fletcherbuilding.com. It contains all news releases to the New Zealand Exchange and financial presentations made by Fletcher Building. Other information The New Zealand Exchange has granted a waiver to the company from Listing Rule 10.5 – Annual and Half-Yearly Reports, subject to the following conditions: a) that the company send copies of the annual and half-yearly reports of Fletcher Building (with financial information relating to the Fletcher Building Group) to its noteholders, b) that the company’s annual report include any specific relevant disclosures required by the Companies Act 1993 and certain sections of Listing Rule 10.5, and c) that the Fletcher Building annual report contain details of the spread of the company’s noteholders and the corporate governance policies, practices and processes. 2006 Annual Report Fletcher Building Finance Limited 02 Letter from the Chairman 04 Earnings Statement 04 Statement of Movements in Equity 05 Balance Sheet 07 Statement of Cashflows 09 13 Statement of Accounting Policies Notes to the Financial Statements 28 Audit Report 29 Noteholder Information 30 Directory 30 < > Directory Directors Roderick S Deane Paul E A Baines Hugh A Fletcher Jonathan P Ling Geoffrey J McGrath Sir Dryden Spring Kerrin M Vautier Ralph G Waters Management Chairman Chair of the Audit Committee Member of the Audit Committee Appointed with effect from 1 September 2006 Member of the Audit Committee Chief Executive Officer and Managing Director Martin C Farrell Bill J Roest Don Le Quesne Company Secretary Chief Financial Officer Australian Branch Manager Registered Offices New Zealand Australia Trustee Fletcher Building Finance Limited, Private Bag 92 114, Auckland 1142, New Zealand Fletcher House, 810 Great South Road, Penrose, Auckland 1061, New Zealand Tel: +64 9 525 9000 Fletcher Building Finance Limited, Locked Bag 7013, Chatswood DC, NSW 2067, Australia Level 5, Tower A, Zenith Centre, 821 Pacific Highway, Chatswood, NSW 2067, Australia Tel: +61 2 9928 3532, ARBN 102 568 178 The capital notes are constituted under a Trust Deed dated 12 November 2002 and noteholders are entitled to the benefit of, are bound by, and are deemed to have notice of the provisions of the Trust Deed. The Trustee is: Perpetual Trust Limited, PO Box 3376, Auckland 1140, New Zealand Level 17, HSBC Centre, 1 Queen Street, Auckland 1010, New Zealand Tel: +64 9 366 3290