Freedom Foods Group Limited Annual Report 2012

Plain-text annual report

Freedom Foods Group Limited Annual Report 2012 Contents Financial Highlights and Five Year Summary ..........................................................................................................................1 Chairman’s Letter ......................................................................................................................................................................................2 Managing Director’s Review of Operations .............................................................................................................................3 Directors’ Report ........................................................................................................................................................................................9 Lead Auditor’s Independence Declaration............................................................................................................................17 Corporate Governance Statement .............................................................................................................................................18 Consolidated Statement of Comprehensive Income .....................................................................................................26 Consolidated Statement of Financial Position ....................................................................................................................27 Consolidated Statement of Cash Flows ..................................................................................................................................28 Consolidated Statement of Changes in Equity ...................................................................................................................29 Notes to the Financial Statements ..............................................................................................................................................30 Directors’ Declaration ..........................................................................................................................................................................77 Independent Auditor’s Report ......................................................................................................................................................78 Shareholder Statistics ..........................................................................................................................................................................80 Corporate Directory .............................................................................................................................................................................83 Annual General Meeting Date 26 October, 2012 Time 11.30 am Venue Deloitte Touche Tohmatsu Level 9, Grosvenor Place 225 George Street Sydney NSW 2000 FREEDOM FOODS GROUP LIMITED ABN 41 002 814 235 Annual Report for the year ended 30 June 2012 Financial Highlights and Five Year Summary n Financial Highlights and Five Year Summary Sales Revenue ($000's) OPERATING EBDITA ($000's)* Net Profit after Tax ($000's)** Basic Earnings per Share (cents) Number of Ordinary Shares Issued (000's) Number of Convertible Redeemable Preference Shares Issued (000's) Ordinary Dividend per Share (cents) Convertible Redeemable Preference Dividend per Share (cents) Dividend Paid ($000's) Total Assets ($000's) Shareholders Equity ($000's) Net Assets Per Share (cents) Net Tangible Asset Backing (cents) 2012 58,132 5,447 3,012 3.9 77,996 19,415 0.50 3.40 1,020 103,881 47,270 49 24 2011 45,256 4,041 4,387 5.7 77,497 19,415 0.50 1.00 405 75,456 49,983 52 29 2010 44,071 3,816 3,357 5.0 77,435 - - - - 71,090 40,263 52 22 2009 48,596 3,494 1,320 2.4 54,660 - 1.00 - 545 63,659 30,161 55 13 2008 54,082 3,203 956 2.0 54,607 - 2.00 - 891 56,295 29,239 54 13 * Earnings before depreciation, interest, tax and amortisation ** Net Profit after Tax in 2010 and 2011 had an income tax benefit of $263,000 and $138,000 respectively compared to an income tax expense in FY 2012 of $238,000. 1 Freedom Foods Group Limited Chairman’s Letter n Chairman’s Letter Dear Shareholder In the 2012 financial year, Freedom Foods Group Limited (“FFG”) achieved Operating EBDITA of $5.4m, an increase of 34.7% against the prior corresponding period, reflecting the consolidation of Pactum Australia for 3 months, improving sales in the Freedom Foods business, and a contribution from Specialty Seafood in line with prior year. Operating Pre-tax Profit was $3.5 million for the 12 months ended 30th June 2012, reflecting a 36% increase on the previous corresponding 12 month period. The Reported Net Profit of $3.0 million included non-operating expenses relating to non-recurring acquisition costs for the Pactum acquisition ($120k pre-tax) and employee share option expense ($106k pre-tax). The previous corresponding 12 month period included non-operating items that contributed $1.78 million to Net Profit, comprising primarily the profit on sale of the Company’s 50% interest in A2 Dairy Products Australia Pty Ltd (A2DPA), and a write-down in the carrying value of Thorpedo Foods. The result included strong sales growth for Freedom Cereals of 19%, compared to the previous corresponding period, with business unit EBDITA in line with FY 2011 given increased marketing investment. Dairy alternative beverage sales continued their trend from the half year with sales growth of 35% compared to the previous corresponding period. Speciality Seafood business unit maintained its share of the Salmon and Sardine categories, with the Paramount brand growing its share to the No 1 branded position in Pink Salmon segment. Pactum Australia contributed a strong sales and business contribution and provides a significant growth platform for the Company. While the Board is pleased with these results, we are focussed on achieving continued improvement in Freedom Foods’ to deliver an improved business contribution in FY 13 and meeting our benchmark 15% return on funds employed in the medium term. The Managing Director’s report provides further commentary on operations. In April 2012, the Company completed the acquisition of the 50% of the shares in Pactum not owned by the Company for $6 million. As part of its growth strategy, Pactum is nearing completion of an approximate $7 million capital program to expand its packaging capability at its southern Sydney site to provide portion pack UHT (200-330ml configuration) for value added beverages, with initial customer production to commence in November 2012. During the year, the Company under the terms of an option agreement between A2C and FNP, subscribed for 18.7 million fully paid ordinary shares in A2C at a price of NZ$0.13 (A$0.11) for a total consideration of A$2.06 million, which resulted in the Company becoming the largest single shareholder in A2C. The strategic investment in A2C provides the Company and its shareholders with potentially significant value creation opportunity through A2C’s growth in Australia and international markets. With improving profitability, the Board has recommended payment of a final fully franked dividend of $0.01 per ordinary share in November 2012, consistent with the total dividend paid (comprising interim and final) for the FY 2011 financial year. Dividend priority remains with the converting preference shareholders, with a further dividend to be paid in accordance with the terms of the converting preference shares in early November 2012. The Board thanks the senior management team, our employees, suppliers, customers and shareholders for the contribution they have made to our Company, and we look forward to the year ahead. Perry Gunner Chairman 2 Annual Report 2012Managing Director’s Review of Operations n Managing Director’s Review of Operations Group Summary Result Year ended 30th June Gross Sales Revenues (1) Net Sales Revenues EBDITA (Operating) (2) EBITA (Operating) (2) Equity Associates Share of Profit Pre Tax Profit (Operating) Pre Tax Profit (Reported) Net Profit (Operating) Net Profit (Reported) Interim Ordinary Dividend (cps) Final Ordinary Dividend (cps) Interim CRPS Dividend (cps) Final CRPS Dividend (cps) (3) EPS (cents per share)( Fully Diluted for CRPS) Net Debt / Equity Net Assets per Share Net Tangible Assets per Share Notes: 2012 $’000 72,556 58,134 5,447 4,075 1,214 3,476 3,250 3,305 3,012 - $0.010 $0.014 $0.014 3.03 82% $0.49 $0.26 2011 $’000 57,664 45,353 4,041 2,949 1,136 2,556 4,249 3,735 4,387 $0.005 $0.005 - $0.020 4.90 36% $0.52 $0.29 % Change +25.8% +28.2% +34.7% +38.1% +6.8% +36.0% -23.5% -11.5% -31.3% - - - - -38.1% +125% -5.7% -10.3% (1) Gross Sales Revenues excludes Royalty income received from Yakult and does not include revenues from group associate entities, a2 Dairy Products, A2 Corporation. Includes Pactum for 3 months April to June 2012. (2) Operating EBDITA and EBITA, excludes abnormal or non-operating charges with an add back of non cash employee share option expense of $106k and Pactum acquisition costs expense of $120k. (3) CRPS dividend in 2011 of $0.02 included 6 month period and catch up period for 4 months based on issue date of CRPS of Dec 2010 The company achieved an Operating EBDITA of $5.4 million, reflecting consolidation of Pactum Australia for 3 months, improving sales in the Freedom Foods business, and a contribution from Specialty Seafood in line with prior year. Operating Pre-tax Profit was $3.5 million for the 12 months ended 30th June 2012, reflecting a 36% increase on the previous corresponding 12 month period. The Reported Net Profit of $3.0 million included non-operating expenses relating to non-recurring acquisition costs for Pactum acquisition ($120k pre-tax) and employee share option expense ($106k pre-tax). The previous corresponding 12 month period included non-operating items that contributed $1.78 million to Net Profit, comprising primarily the profit on sale of the Company’s 50% interest in A2 Dairy Products Australia Pty Ltd (A2DPA), and write-down in the carrying value of Thorpedo Foods. Equity Associates contributions of $1.2m reflected profitability from the Pactum Australia (JV basis) for 9 months and increased share of estimated year end profits from A2 Corporation. Net assets at 30 June 2012 were impacted by the accounting for the Pactum acquisition under common control accounting principles. No goodwill is recognised on going in the Company’s balance sheet for the Pactum acquisition. The excess of cost over net assets acquired is treated as a debit to reserves. 3 Freedom Foods Group LimitedManaging Director’s Review of Operations (continued...) HIGHLIGHTS Highlights for the year included: • • • • • • • Group Operating EBDITA of $5.4 million, a 35% increase on the previous corresponding period. Operating Pre-tax Profit was $3.5 million for the 12 months ended 30th June 2012, reflecting a 36% increase on the previous corresponding 12 month period. Sales growth in Freedom Cereals of 19%, compared to the previous corresponding period, with business unit EBDITA in line with FY 2011 given increased marketing investment. Dairy alternative beverage sales continued their trend from the half year with sales growth of 35% compared to the previous corresponding period. Speciality Seafood business unit maintained its share of the Salmon and Sardine categories, with the Paramount brand growing its share to the No 1 branded position in Pink Salmon segment. Pactum Australia contributed a strong sales and business contribution and provides a significant growth platform for the Company: • • In April 2012, the Company completed the acquisition of the 50% of the shares in Pactum not owned by the Company for $6 million; and Pactum is nearing completion of an approximate $7 million capital program to expand its packaging capability to provide portion pack UHT (200-330ml configuration) for value added beverages, with production to commence in November 2012. A2 Corporation (25.8% FNP shareholding) reported continued strong growth in the Australian fresh milk business with market share by value in grocery increasing above 5%. A2C current market capitalisation (at 25 September 2012) implies a value for the Company’s 25.8% investment of approximately A$79 million (NZ$0.65 cents per FNP ordinary share), materially above book value and in excess of the Company’s current market capitalisation. • • • Net Debt / Equity at 82% from 36% at June 2012, reflecting the financing of A2C share option subscription in July 2011, acquisition of 50% of Pactum Australia and assumption of Pactum Australia financing. On the basis that a planned exercise of outstanding share options by the Perich Group for $6.3m had been affected at year end, Net Debt / Equity would have materially reduced to 60%. Net assets per share at $0.49 and net tangible assets of $0.26 per share, with A2C investment recorded at book value of $12.3m. The Company is to pay a final dividend for FY 2012 commensurate with the total dividend of $0.01 per ordinary share paid in the FY 2011 financial year. A fully franked converting preference share dividend to be paid in October 2012. 4 Annual Report 2012Managing Director’s Review of Operations (continued...) BUSINESS UNITS - WHOLLY OWNED Freedom Foods The Freedom Foods business unit continued to build momentum from the prior financial year, delivering overall gross sales growth of 21% compared to the previous corresponding period. The business invested significantly during the year in driving the Freedom branded portfolio through a focus on effective promotional price points, new product innovation and a marketing campaign comprising national radio and selected state based television campaign. As a result, the business recorded volume growth in its core Cereals category of 22% and gross sales growth of 19%, compared to the previous corresponding period. Overall the impact of this increased investment during the year resulted in business unit EBDITA in line with FY 2011. A key contributor to Freedom’s growth during the year was the ongoing benefits of the dedicated gluten, wheat and nut free manufacturing facility near Leeton NSW, a facility which the Company believes is the only integrated scale manufacturing capability in Australia and overseas for cereals and snacks “free from” key allergens such as gluten, nuts and dairy. In the later part of the 2012 year, Freedom completed the commissioning of its snack bar line, consistent with the strategy to leverage its Cereal base into breakfast snack alternatives, as well as meeting demand for “nut free” snacks. New product innovation and reformulation of existing snack bar lines is expected to deliver sales growth and efficiencies in the near term. Dairy alternative beverage sales (soy, rice and almond) continued the trend from FY 2011 with volume growth of 27% and sales growth of 35% compared to the previous corresponding period reflected increased market share of the Australia’s Own Organic brand from marketing investment and improved distribution. As part of a focus on developing its range of beverages, the business launched an Australia’s Own Organic branded Almond Milk reflecting increasing consumer awareness of health benefits of Almond based products. In addition, in conjunction with Pactum Australia and Blue Diamond Growers of California, the business launched under licence the Blue Diamond Almond Breeze Milk range into the mainstream market in Australia. This product range has become the fastest growing Almond milk product in the Australian market. In late June, the business secured ranging for 3 cereal products in Whole Food’s Stores in USA, reflecting Freedom’s unique point of differentiation in offering a Cereal range free of all common allergens to lowest detectable standards globally. The focus for the business remains on increasing sales through growth in distribution channels and increased awareness of the brand and products across a broader consumer market. The business will continue to drive 5 Freedom Foods Group LimitedManaging Director’s Review of Operations (continued...) category leadership of the health channel and support private label development that is complimentary to this both in Australia and internationally. Aligned with the increasing sales base is a strong focus on improving sales margins and operational efficiencies at the Leeton site with the business progressing to meeting our benchmark 15% return on funds employed in the medium term. Specialty Seafood The Speciality Seafood business performed in line compared to the previous corresponding period, notwithstanding an inventory shortfall in Salmon in the 1st quarter, lower sales in New Zealand and increased competitor activity. In Salmon, Paramount as the No 2 proprietary brand in the category, increased its share to the No 1 branded position in Pink Salmon segment ahead of John West and Own Brand labels. Brunswick sardines maintained its No 1 brand leadership position in Australia and New Zealand. While the business has seen the benefit of higher exchange rates on inventories purchased in $USD and $CAD, this has continued to assist in managing cost increases in salmon and sardine procurement, while facilitating increased trade investment. The business continued to utilise the procurement power of Bumble Bee Foods of North America, with Bumble Bee securing inventory requirements through priority access to Salmon catch volumes. The business is focussed on driving category leadership of the speciality seafood channel through introducing new product opportunities from the Bumble Bee Foods procurement base and supporting private label supply in Specialty Seafood. Pactum Australia Pactum Australia which provides contract manufacture of long life (UHT) beverages for private label and proprietary customers delivered a strong sales and business EBDITA contribution. Pactum Australia production volumes increased during the year to support the growth of the Freedom dairy alternative beverage range. The business continued to focus on increasing its mix of value added UHT products to a range of private label and proprietary customers. As part of its growth strategy, Pactum is nearing completion of an approximate $7 million capital program to expand its packaging capability at its southern Sydney site to provide portion pack UHT (200-330ml configuration) for value added beverages, with initial customer production to commence in November 2012. The expansion positions Pactum as the only independent low cost contract manufacturer of a broad range of UHT products on the east coast of Australia, with capability to meet the increasing demands from its private label and proprietary customer base. As foreshadowed in April, Pactum is investigating establishment of a new state-of-the-art UHT processing plant in South East Australia. The primary focus of the new capacity will be on supply of high quality UHT dairy milk for export markets to proprietary and private label customers in South East Asia, including China. The new production capacity would enable the business to meet growing demand for UHT dairy milk, while 6 Annual Report 2012Managing Director’s Review of Operations (continued...) providing additional capacity for value added beverages at its Sydney facility. Pactum expects final feasibility to be completed by November 2012. As a significant strategic growth platform going forward, the Company completed in April 2012 the acquisition of the 50% of the shares in Pactum, held by the Perich Group for $6 million. The business currently delivers financial returns above the Company’s benchmark 15% return on funds employed. The Group equity accounted 50% of the NPAT of Pactum for the nine months of 2012 for $564K ($841K 2010) and consolidated Pactum’s EBDITA for three months. STRATEGIC EQUITY ASSOCIATES A2 Corporation Limited (A2C), 25.8% Equity Interest The Company is the largest single shareholder in A2 Corporation (A2C). A2C owns and commercialises unique and comprehensive intellectual property rights relating to a2™ brand milk and related dairy products in international markets. a2™ brand milk is the fastest growing milk brand in the Australian market and the major driver of category growth nationally, accounting for in excess of 5.0% of grocery channel market share by value. A2C recently took important steps towards the marketing of its products in the UK and Ireland by forming a partnership with Robert Wiseman Dairies, Britain’s largest fresh milk company. A launch of a2™ brand milk in the UK has been scheduled for September 2012. A2C is separately advancing plans to launch an a2™ infant formula product into the Chinese market, in conjunction with a strong local marketing partner. In March, A2C successfully raised NZ$5.2m in capital at an issue price of NZ$0.37 cents per share to provide additional flexibility for growth. A2C announced in April that it is undertaking a strategic review of its options to accelerate growth and maximise shareholder value. This review is being carried out in light of the Company’s strong growth options as well as approaches received from parties potentially interested in partnering with A2C. In July 2011, FNP announced that under the terms of an option agreement between A2C and FNP, FNP subscribed for 18.7million fully paid ordinary shares in A2C at a price of NZ$0.13 (A$0.11) for a total consideration of A$2.06 million, which resulted in FNP increasing its shareholding in A2C to become the largest single shareholder in A2C. A2C is listed on the alternative market (NZAX) of the New Zealand Stock Exchange (NZX:ATM), with a market capitalisation (based on average price of NZ$0.49 between 30 June and 27 September 2012) of approximately NZ$299 million (A$233 million), implying a value for FNP’s 25.8% investment of approximately A$60 million, materially above the book value of approximately A$12.3 million and in excess of FNP’s current quoted market capitalisation. The Company equity accounted 25.8% of the estimated NPAT of A2C for the twelve months of $650K ($295K 2011). Capital Management The Company’s Net Debt / Equity at year end was 82% from 36% at June 2012, reflecting the financing of A2C share option subscription in July 2011, acquisition of 50% of Pactum Australia and assumption of Pactum’s finance facilities including financing for new processing and packaging capacity coming on line in FY13. 7 Freedom Foods Group LimitedManaging Director’s Review of Operations (continued...) The Company has received notification from the Perich Group that they intend to exercise 15.9m ordinary share options with an exercise price of $0.40 cents for a total consideration of $6.3m. The consideration will be applied to reduction of the outstanding short term loans with the Perich Group. The Perich Group is expected to exercise its options on or before 31st October 2012. On the basis that the Company was in receipt of the option exercise funds at 30th June 2012, the net debt / equity ratio at 30th June would have materially reduced from 82% to 60%. The Company continues to repay debt through amortisation of bank facilities of approximately $3.5 million per annum. The Company had $10.7 million of debtor finance facilities classified under accounting standards as current debt. The debtor finance facilities form part of the Company’s medium term financing facilities not due until December 2013. Dividends As foreshadowed at the half year, with the continued improvement in group business units’ performance, the Company will pay a final fully franked dividend for FY 2012 of $0.01 per ordinary share, consistent with the total dividend (comprising interim and final) paid for the FY 2011 financial year. The dividend will be paid in November 2012. Ordinary share dividend growth will be in line with the improving financial returns of the Company. The Company will pay a fully franked converting preference share dividend to be paid in accordance with the terms of the converting preference shares in early November 2012. Outlook The Company continues to make good progress in the development of its unique business platforms in specialised areas of the food market, with two key growth opportunities in Freedom Foods and Pactum Australia, a stable business base in Specialty Seafood and a strategic opportunity in A2C. The expansion of packaging capabilities in Pactum provides opportunity to increase sales and profitability through meeting the increasing demands of its private label and proprietary customer base. Additional opportunities are being explored to increase exposure to value added beverages for growing export markets in China and SE Asia. The consolidation of Pactum will assist in building more critical mass in earnings and cashflow of the group. The strategic investment in A2C provides the Company and its shareholders a potentially significant value creation opportunity through A2C’s growth in Australia and international markets. Overall the Company anticipates improved sales, operating profitability and return on funds employed in the FY 13 financial year. Rory J F Macleod Managing Director Freedom Foods Group Limited +612 9526 2555 8 Annual Report 2012n Directors’ Report Your Directors submit the financial report of Freedom Foods Group Limited (the Company) for the year ended 30 June 2012. In order to comply with the provisions of the Corporations Act 2001, the Directors’ report is as follows: Directors For the names and particulars of the Directors of the Company during or since the end of the financial year, refer to the Corporate Governance Statement. Company Secretary Mr Rory J F Macleod held the position of Company Secretary during and at the end of the financial year. He has been with the Company for over 9 years and is the Managing Director. Principal activities The principal activities of the consolidated entity during the financial year were: • manufacture, distribution and marketing of allergen free cereals, nutritional snacks and biscuits; • manufacture and distribution of long life beverages; • • distribution and marketing of canned seafood; investment in branded dairy milk manufacture, marketing and distribution activities. There were no significant changes in the nature of the principal activities during the financial year. Review of operations The consolidated entity’s profit attributable to equity holders of the Company, after providing for income tax, amounted to $3,012,000 (2011 profit: $4,387,000). Refer to the commentary in the Managing Director’s Review of Operations. Dividends paid or recommended In respect of the financial year ended 30 June 2012, the Directors are recommending that a final ordinary dividend of $0.01 per share be paid in November 2012 and a converting preference share (CRPS) dividend of $0.014 per CRPS be paid at the beginning of November 2012. Significant changes in state of affairs During the financial year, Pactum Australia (Pactum) was consolidated into the Company through the acquisition of the 50% of the shares in Pactum held by the Perich Group. The net purchase consideration for the shares was $6m. The Company believes Pactum represents a significant strategic growth opportunity as well as providing synergies in servicing common customers and materials purchasing with the Company’s Freedom Foods business. The acquisition is expected to provide the Company with a number of benefits including: • • • • full consolidation of the financial results and access to 100% of the cashflows of Pactum; participate in potential sales and earnings growth opportunities provided by the expansion of Pactum’s packaging capabilities at its southern Sydney site from late 2012; simplify the Group’s reporting and corporate structure; and the transaction is expected to be earnings accretive in its first year of full ownership in FY 2013. Directors’ Report 9 Freedom Foods Group LimitedDirectors’ Report (continued...) Subsequent Events No matters or circumstances have arisen since the end of the financial year which 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. Future developments Likely developments in the operations of the consolidated entity and the expected results of these operations have not been included in this report as the Directors believe, on reasonable grounds, that inclusion of such information would be likely to result in unreasonable prejudice to the consolidated entity. Environmental regulations The consolidated entity’s operations are subject to environmental regulation under the law of the Commonwealth (AQIS) and the State (Workcover, EPA, Sydney Water, Safe Food NSW) and local council regulations. • • • The consolidated entity operates under a Dangerous Goods Licence issued by Workcover. There were no breaches of environmental laws, regulations or permits during the year. The consolidated entity is currently operating in accordance with local council consent in regard to hours of operation. Indemnification of officers and auditors The Company has not, during or since the financial year, in respect of any person who is or has been an officer or auditor of the Company or a related body corporate: • • indemnified or made any relevant agreement for indemnifying against liability incurred as an officer, including costs and expenses in successfully defending legal proceedings; or paid or agreed to pay, a premium in respect of a contract insuring against a liability incurred as an officer for the costs or expenses to defend legal proceedings; with the exception of the following matter: During the financial year the Company paid premiums to insure each of the Directors against liabilities for costs and expenses incurred by them in defending any legal proceedings arising out of their conduct while acting in the capacity of an officer of the Company. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. Rounding off of amounts The Company is an entity to which ASIC Class Order 98/0100 applies. Accordingly amounts in the financial report have been rounded off to the nearest thousand dollars, unless otherwise stated. Meetings of Directors During the financial year 14 meetings of Directors (including committees) were held. 10 Annual Report 2012The following persons acted as Directors of the company during or since the end of the financial year with attendances to meetings of Directors as follows: Directors’ Report (continued...) Directors Meeting Remuneration & nomination committee meetings Audit, risk & compliance committee meetings Eligible to attend Attended Eligible to attend Attended Eligible to attend Attended 2 1 - 2 - - - 10 10 10 10 10 10 10 10 9 7 9 10 10 9 - 2 - 2 2 2 - - 1 - 2 2 - - 2 1 - 2 - - - P.R. Gunner G.H. Babidge A.M. Perich R. Perich M. Miles R.J.F. Macleod M.R. Perich (alternate director) Remuneration report - audited This report details the nature and amount of remuneration for each Director and the Executives receiving the highest remuneration. Key management personnel include: P.R. Gunner - Chairman and Non-Executive Director R.J.F. Macleod - Managing Director G.H. Babidge - Non-Executive Director A.M. Perich - Non-Executive Director R. Perich - Non-Executive Director M. Miles - Non-Executive Director M. Bracka - CEO Freedom Brands A. Haddad - CEO Pactum Australia M. Gauci, Operations Manager Pactum Australia P. Brown - Executive General Manager Sales, Freedom Brands P. Bartier - National Supply Chain Manager, Freedom Brands Remuneration policy Remuneration arrangements for key management personnel of the Company and Group (“the Directors and Executives”) are set competitively to attract and retain appropriately qualified and experienced Directors and Executives. As part of its agreed mandate, the Remuneration and Nomination Committee obtains independent advice when required on the appropriateness of remuneration packages given trends in comparable companies and the objectives of the consolidated entities remuneration strategy. The remuneration structures explained below are designed to attract suitably qualified candidates. The remuneration structures take into account: • • • The capability and experience of the Directors and Executives; The Directors and Executives’ ability to control the relevant operational performance; and The amount of incentives within each Director and Executive’s remuneration. 11 Freedom Foods Group LimitedDirectors’ Report (continued...) Managing Director and Executives Fixed remuneration consists of base remuneration (which is calculated on a total cost basis and includes any FBT charges related to employee benefits including motor vehicles), as well as employer contributions to superannuation funds. The Managing Director and Executives remuneration levels are reviewed annually by the Remuneration and Nomination Committee through a process that considers the overall performance of the Group. Performance based remuneration Performance based remuneration is at the discretion of the Remuneration and Nomination Committee. These can take the form of share options or cash bonuses. During the year, cash bonuses were paid to A Haddad (Pactum Australia) and M Gauci (Pactum Australia) and 6,250,000 options were granted to RJF Macleod, M Bracka and A Haddad under the Company’s Employee Share Option Plan (ESOP). The ESOP allows the Company to grant options over shares to all directors (excluding Ron and Tony Perich) and permanent full time or part time employees, or their respective nominees, of a company in the group (Group Companies), which includes related bodies corporate of the Company and a body corporate in which the Company has voting power of 20% or more, whom the Board determines to be eligible to participate. The Board believes that Options granted are appropriate to aligning key executive performance with long term performance and growth of the Company. Options are valued using the binomial method. Non-Executive Directors The maximum aggregate amount of fees that can be paid to Non-Executive Directors is subject to approval by shareholders at the Annual General Meeting. Total fees for all Non-Executive Directors, last voted upon by shareholders was in October 2006, was not to exceed $300,000 in total. Total fees paid to Non-Executive Directors for 2012 was $181,033 (2011: $158,800). To align director interests with shareholder interests, the Directors are encouraged to hold shares in the Company. The Chairman receives twice the base fee of Non-Executive Directors. Non-Executive Directors do not receive performance related remuneration. Directors’ fees cover all main Board activities. Non- Executive Directors who sit on the Remuneration and Nomination Committee and the Audit, Risk and Compliance Committee receive an additional payment of $1,000 and the Chairman of each receives $2,000. There are no termination or retirement benefits for Non-Executive Directors. Service agreements Neither the Managing Director or any other Executive has a fixed term contract. All senior executive management are employed under contract. The agreements outline the components of the remuneration paid to executives including annual review. The agreements do not obligate the business to increase fixed remuneration, pay a short term incentive, make termination benefits or offer a long term incentive in any given year. The Company may terminate the contract at any time without notice if serious misconduct has occurred. Where termination with cause occurs, the executive is only entitled to that portion of remuneration that is fixed, and only up to the date of termination. The agreements may be terminated by written notice from either party or by the employing entity within the Group making a payment in lieu of notice. The notice periods are 9 months for the Managing Director and 6 months for CEO Freedom Brands and CEO Pactum Australia. Other notice periods for other executives is between 1 and 2 months. 12 Annual Report 2012Directors’ Report (continued...) Company performance, shareholder wealth and directors and senior management remuneration The remuneration policy of the company and group through short term (cash bonuses) and long term incentive structures (employee share options) aligns the remuneration of the Managing Director and senior Executives to long term performance and growth of the Company and development of shareholder wealth. The following table shows the revenue, profits, dividends and earnings per share for the past five years for the consolidated entity. Revenue ($000s) Net Profit / (Loss) After Tax ($000s) Ordinary Dividends Per Share (cents) CRPS Dividends Per Share (cents) Basic Earnings per Share (cents) 2012 58,132 3,012 0.50 3.40 3.9 2011 45,256 4,387 0.50 1.00 5.7 2010 44,071 3,357 - - 5.0 2009 48,596 1,320 1.00 - 2.4 2008 54,082 956 2.00 - 2.0 The Remuneration and Nomination Committee considers that the Company’s remuneration structure is appropriate to building shareholder value in the medium term. Directors and executive officers emoluments The benefits of each Director who held office and other key management personnel for the year ended 30 June 2012 are as follows: Short-term employee benefits Post employ- ment benefits Share based payments % of total being Non-cash Benefits $ Superannuation Contributions $ 2012 Directors P.R. Gunner R.J.F. Macleod G.H. Babidge A.M. Perich R. Perich M. Miles Executive Officers M Bracka (CEO, Freedom Brands) A. Haddad (1) (CEO, Pactum Australia) P. Brown (Executive General Manager Sales) P. Bartier (National Supply Chain Manager) M. Gauci (2) (Operations Manager) Salary $ - 259,800 - - - - 309,800 59,150 164,220 159,204 33,935 Directors' Fees $ Committee Fees $ 61,000 - 20,333 31,700 30,000 30,000 - - - - - 2,000 - 1,000 1,000 2,000 2,000 - - - - - Other $ - - - - - - - 62,000 - - 31,200 986,109 173,033 8,000 93,200 - - - - - - - - - - - - Options Total Options $ - $ 68,670 76,088 351,663 - - - - 24,213 32,700 34,880 34,880 - 22% - - - - 5,670 15,775 2,880 - 2,880 2,880 15,775 60,870 386,445 16% 5,066 53,261 179,477 30% 14,780 13,056 3,800 - - - 179,000 172,260 68,935 - - - 82,562 190,219 1,533,123 12% (1) Salary is for the period from 1 April 2012 to 30 June 2012 during which Pactum was a subsidiary of the Group. Other is bonus of $62,000. (2) Salary is for the period from 1 April 2012 to 30 June 2012 during which Pactum was a subsidiary of the Group. Other is bonus of $31,200. 13 Freedom Foods Group LimitedDirectors’ Report (continued...) 2011 Short-term employee benefits Directors P.R. Gunner R.J.F. Macleod G.H. Babidge (1) A.M. Perich R. Perich M. Miles Executive Officers M Bracka (2) (Chief Operating Officer) P. Wilson (3) (General Manager Leeton Manufactur- ing Operations) P. Bartier (National Supply Chain Manager) P. Brown (Executive General Manager Sales) C. Pensini (4) (Manufacturing and Operations Manager) Salary Directors' Fees Committee Fees Other $ - 259,800 64,133 - - - 232,351 151,000 148,409 162,385 137,614 $ 60,000 - - 31,800 30,000 30,000 $ 3,000 - - - 2,000 2,000 $ - - 75,425 - - - - - - - - - - - - - - - - - - 1,155,692 151,800 7,000 75,425 Non- cash Benefits $ - - - - - - - - - - - - Post employ- ment benefits Share based payments % of total being Superannuation Contributions Options Total Options $ 5,670 15,199 2,533 1,125 2,880 2,880 11,399 - 11,890 12,444 11,728 $ - 43,680 43,680 - - - - - - - - $ 68,670 318,679 185,771 32,925 34,880 34,880 243,750 151,000 160,299 174,829 149,342 - 14% 10% - - - - - - - - 77,748 87,360 1,555,025 6% (1) Other is payment for leave and other statutory entitlements relating to change in role from executive to non executive director in September 2010 (2) Commenced 17 October 2010 (3) Resigned April 2011 (4) Resigned 30 June 2012 No Director or senior management person appointed during the year received a payment as part of his or her consideration for agreeing to hold the position. Bonus payments as compensation for the current financial year Bonus payments are payable to Pactum Australia Pty Limited employees with respect to the financial year ended 30 June 2012. 14 Annual Report 2012Directors’ Report (continued...) Employee share options During the financial year share options have been granted to key management personnel of the Company and consolidated entity as part of their remuneration. Details of unissued shares or interests under option granted to key management personnel as at the date of this report are: Issuing entity Freedom Foods Group Limited (i) Grant date (i) Issued 1 February 2012 Recipients (i) Issued 1 February 2012 Issued 1 February 2012 Issued 1 February 2012 Number of shares under option 6,250,000 Class of shares Ordinary Exercise price of options $0.40 Expiry date of options 1 February 2017 Name R.J.F. Macleod M. Bracka A. Haddad Number 2,500,000 2,000,000 1,750,000 Fair Value ($) 300,000 240,000 210,000 Fair value at grant $0.12 Conditions Employment Employment Employment There are no further performance criteria that need to be met in relation to options granted. Options vest over a period of 3 years and relate to an employee’s service period only. The holders of these options do not have the right by virtue of the option, to participate in any share issue or interest issue of any other body corporate or registered scheme. Directors’ shareholding Refer to Principle 2 “Structure of the Board to add value” in the Corporate Governance Statement. Non-audit services During the year Deloitte Touche Tohmatsu, the auditors have performed certain other services in addition to their statutory duties. With respect to the non-audit services provided during the year by the auditor, the Board has considered written advice provided and a recommendation of the Audit, Risk and Compliance Committee. The Board is satisfied that the provision of those non-audit services during the year by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporation Act 2001 for the following reasons: • • all non-audit services were subject to the corporate governance procedures adopted by the Company and have been reviewed by the Audit, Risk and Compliance Committee to ensure they do not impact the integrity and objectivity of the auditor; and the non-audit services provided do not undermine the general principles relating to auditor independence as set out in the Code of Conduct APES 110 Code of Ethics for Professional Accountants issued by The Accounting Professional & Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the company, acting as advocate for the company or jointly sharing economic risks and rewards. 15 Freedom Foods Group LimitedDirectors’ Report (continued...) Details of the amounts paid/payable to the auditor of the consolidated entity, Deloitte Touche Tohmatsu for audit and non-audit services provided during the year are set out below: Audit Services Auditors of the Company - Deloitte Touche Tohmatsu - audit and review of financial reports - taxation advice - research and development advice Consolidated 2012 $ 209,010 72,937 34,504 316,451 2011 $ 171,740 58,952 19,751 250,443 Auditor’s independence declaration A copy of the auditor’s independence declaration as required under Section 307C of the Corporations Act follows the Directors’ Report. Proceedings on behalf of Company No person has applied for leave of Court to bring proceedings on behalf of the Company or intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all of those proceedings. Signed in accordance with a resolution of the Board of Directors made pursuant to s.298(2) of the Corporations Act 2001. On behalf of the Directors Perry Gunner Chairman Dated at Sydney 28 September 2012 Rory J F Macleod Managing Director 16 Annual Report 2012 Lead Auditor’s Independence Declaration n Lead Auditor’s Independence Declaration Deloitte Touche Tohmatsu ABN 74 490 121 060 The Barrington Level 10 10 Smith Street Parramatta NSW 2150 PO Box 38 Parramatta NSW 2124 Australia DX 28485 Tel: +61 (0) 2 9840 7000 Fax: +61 (0) 2 9840 7001 www.deloitte.com.au The Board of Directors Freedom Foods Group Limited 80 Box Road TAREN POINT NSW 2229 Dear Board Members Freedom Foods Group Limited In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of Freedom Foods Group Limited. As lead audit partner for the audit of the financial statements of Freedom Foods Group Limited for the financial year ended 30 June 2012, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) any applicable code of professional conduct in relation to the audit. Yours sincerely DELOITTE TOUCHE TOHMATSU Catherine Hill Partner Chartered Accountants Sydney, 28 September 2012 Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited 17 Freedom Foods Group LimitedCorporate Governance Statement n Corporate Governance Statement Freedom Foods Group Limited (the Company) is committed to implementing the highest possible standards of corporate governance and ensures, wherever possible, that its practices are consistent with the Second Edition of the Australian Securities Exchange (ASX) Corporate Governance Council’s Principles and Recommendations. Each of the eight principles are listed in turn. In certain circumstances, due to the size and stage of development of the Company and its operations, it may not be practicable or necessary to implement the ASX Principles in their entirety. In such instances, the Company will identify the areas of divergence. The Corporate Governance Statement, policies and Charters are published on the Company’s website: http://www.ffgl.com.au. Principle 1 Lay solid foundations for management and oversight by the Board The Board’s responsibilities are encompassed in a charter which (the is published on http://www.ffgl.com.au Company’s website). The Board is responsible for, and has the authority to determine, all matters relating to the strategic direction, policies, practices, establishing goals for management and the operation of the Company. Without intending to limit this general role of the Board, the specific functions and responsibilities of the Board include: (1) oversight of the Company, including its control and accountability systems; (2) appointing and removing the Managing Director (or equivalent) for the ongoing management task of developing and implementing suitable strategies consistent with the Company’s policies and strategic direction, including approving remuneration of the Managing Director and remuneration policy and succession plans for the Managing Director; (3) ratifying the appointment and, where appropriate, the removal of the CFO (or equivalent) and the Company Secretary; (4) reviewing and determining the strategic direction and policies of the Company, the allocation of resources, planning for the future and succession planning; (5) reviewing and ratifying systems of risk management and internal compliance and control, codes of conduct and legal compliance; (6) monitoring executive management performance and implementation of strategy and ensuring appropriate resources are available; (7) approving and monitoring the progress of major capital expenditure, capital management and acquisitions and divestitures; (8) continuously monitoring and overseeing the Company’s financial position; and (9) approving and monitoring financial and other reporting. Key responsibilities of the Board include the overseeing of the strategic direction of the Company, determining its policies and objectives and monitoring executive management performance. The Board adopts a three-year business plan and a 12 month operating plan for the Company. Financial results and general performance are closely monitored against the operating plan objectives. To assist in carrying out its responsibilities, the Board has established the following committees of its members. They are: (1) Audit, Risk and Compliance Committee; and (2) Remuneration and Nomination Committee. The responsibilities delegated by the Board to the Company’s management, as set out in the Company’s Statement of Delegated Authority, include managing the day-to-day operations of the Company and Consolidated entities. The Statement of Delegated Authority has been posted to the Company’s website (http://www.ffgl.com.au). The Managing Director and Senior Executive management service contracts and position descriptions have respectively setting out their duties, responsibilities, and conditions of service and termination entitlements. Any new Directors appointed will receive formal letters of appointment setting out the key terms, conditions and expectations of their appointment. The Managing Director and Senior Executive management are subject to a formal performance review process on an annual basis. The Remuneration and Nomination Committee reviews the performance of the Managing Director and Senior Executive management against clear secondary performance objectives. Principal and objectives for the financial year have been established 18 Annual Report 2012 which are evaluated against and includes monthly monitoring of performance. A performance evaluation was undertaken in August 2012 in accordance with the process disclosed. Principle 2 Structure of the Board to add value The Board determines the Board’s size and composition, subject to limits imposed by the Company’s Constitution. The Constitution provides for a minimum of three Directors and a maximum of ten. At this time the Board comprises of six Directors (excluding alternate Director),two of whom are non-executive independent Directors including the Chairman. A Director is deemed to be independent if he or she is a Non-Executive Director and: (1) is not a substantial shareholder; (2) has not been employed in an executive capacity in the Company in the last three years; (3) has not acted as a material consultant to the Company in the last three years; (4) is not a material supplier or customer of the Company; (5) has no material contractual relationship with the Company; (6) has not served on the Board for a period which could materially interfere with his or her ability to act in the best interests of the Company; and (7) is free from any interest which could materially interfere with his or her ability to act in the best interests of the Company. The test of independence for Directors is set out in detail under section 4 of the Board Charter, which has been posted on the website of the Company: (http://www.ffgl. com.au). Materiality thresholds referred to above are assessed on a case-by-case basis. Whilst the Board is not structured with a majority of independent directors in terms of the ASX Corporate Governance Council’s discussion of independent status, the Board believes that the Directors are able, and do make, quality and independent judgement in the best interests of the Company on all relevant issues before the Board. The Board considers that the Company is not currently of a size, nor are its affairs of such complexity to justify the expense of the appointment of a majority of independent Directors. The Board aims to attract and maintain a Board which has an appropriate mix of skills, experience, expertise and diversity. Corporate Governance Statement (continued...) The names and particulars of the Directors of the Company during or since the end of the financial year are: Mr P.R. Gunner Chairman (Non-Executive), Age 65. Appointed in April 2003, Director 9 years. B.Ag.Sc - is former Chairman and CEO of Orlando Wyndham Wine Group, a current Director of A2 Corporation, Deputy Chairman of Viterra Inc and Director of Australian Vintage Ltd. Appointed Chairman in July 2006. Chairman of the Remuneration & Nomination Committee. Interest in shares and options are 510,732 ordinary shares, 159,604 convertible redeemable preference shares and 159,604 $0.40 options over ordinary shares. Measured independence criteria adopted by the against the Company, Mr. Gunner is considered an independent Director. Mr R.J.F. Macleod Managing Director Age 44. Appointed Director in May 2008, Director 4 years. B.Econ (Hons) - currently Managing Director and director of all Group entities. Mr Macleod has been with the group for the past 9 years, responsible for strategic and corporate development and finance and administration. Former Senior Director, corporate finance for UBS in Australasia and Europe where he gained extensive experience in strategy and commercial development, mergers and acquisitions and corporate analysis. Interest in shares and options are 182,775 ordinary shares, 6,666 convertible redeemable preference shares, 6,666 $0.40 options over ordinary shares and 2,500,000 options (exercisable at $0.40) under the group employee share option scheme. Mr Macleod, being Managing Director of the Company, is not considered independent. Mr G.H. Babidge Non Executive Director, Age 59. Appointed Director in January 2002, Director 10 years. B.Comm., ACA – extensive public company experience within the food industry. Currently Managing Director of A2 Corporation Limited. Former Managing Director of Freedom Foods Group Limited, former CEO of the major milling and baking group, Bunge Defiance and many years Managing Director of the dairy interests of National Foods Limited. Interest in shares and options are 98,057 ordinary shares, 30,643 convertible redeemable preference shares, 30,643 $0.40 options over ordinary shares. Mr Babidge, being a former Executive Officer of the Company within the past 3 years, is not considered independent. 19 Freedom Foods Group Limited Corporate Governance Statement (continued...) Mr A.M. Perich Director (Non-Executive), Age 71. Appointed Director in July 2006, Director 6 years. Member of the Order of Australia - Joint Managing Director of Arrovest Pty Limited, Leppington Pastoral Company, one of Australia’s largest dairy producers, and various other entities associated with Perich Enterprises Pty Limited. He is also a property developer, farmer and business entrepreneur. Outside of the Perich Group Mr. A.M. Perich holds a number of other directorships which include, Greenfields Narellan Holdings, East Coast Woodshavings Pty Limited, Breeders Choice Woodshavings Pty Limited, Austral Malaysian Mining Limited, Pulai Mining Sdn Bhd (Malaysia) and Institute. Memberships include Narellan Chamber of Commerce, Narellan Rotary Club, Urban Development Institute of Australia, Urban Taskforce, Property Council of Australia, past President of Narellan Rotary Club and Past President of Dairy Research at Sydney University. Inghams Health Research Interest in shares and options are 51,620,094 ordinary shares, 15,995,142 convertible redeemable preference shares and 15,995,142 $0.40 options over ordinary shares. Being a substantial shareholder of the Company, Mr. A.M. Perich is not considered an independent Director. Mr R. Perich Director (Non-Executive), Age 69. Appointed Director in April 2005, Director 7 years. Joint Managing Director of Arrovest Pty Limited, Leppington Pastoral Company, one of Australia’s largest dairy producers, and various other entities associated with Perich Enterprises Pty Limited. He is also a property developer, farmer and business entrepreneur. Former Director of United Dairies Limited. Appointed Director in April 2005. Member of the Audit, Risk & Compliance Committee and member of the Remuneration & Nomination Committee. Interest in shares and options are 51,620,094 ordinary shares, 15,995,142 convertible redeemable preference shares and 15,995,142 $0.40 options over ordinary shares. Being a substantial shareholder of the Company, Mr. R. Perich is not considered an independent Director. Mr M. Miles Director (Non-Executive), Age 63. Appointed Director in November 2006, Director 5 years. B.Sc (Hons) F.I.B.D. - former Vice President of Carlton and United Breweries and Foster’s Group, former Director of Carlton & United Breweries & its subsidiaries and former Chairman of South Pacific Distilleries, Fiji. Member of the Strategic Planning Committee of the Institute of Brewing and Distilling Asia Pacific. Chairman of Audit, Risk & Compliance Committee and member of the Remuneration and Nomination Committee. Interest in shares and options are 212,812 ordinary shares, 64,584 convertible redeemable preference shares and 64,584 $0.40 options over ordinary shares. Measured against the independence criteria adopted by the Company, Mr. Miles is considered an independent director. Mr M.R. Perich Alternate Director (Non-Executive), Age 37. Appointed Alternate Director for A.M Perich and R. Perich in March 2009, Director 3 years. B AppSci (SysAg), Director of Arrovest Pty Limited, Leppington Pastoral Company, one of Australia’s largest dairy producers, and various other entities associated with Perich Enterprises Pty Limited. Former Director of Contract Beverages Packers of Australia Pty Limited, a joint venture controlled equally by the Company and Arrovest, Director of Australian Dairy Conference and Dairy NSW, Vice President of Dairy Research Foundation and Graduate Member of the Australian Institute of Company Directors post nominals. Interest in shares and options are 51,620,094 ordinary shares, 15,995,142 convertible redeemable preference shares and 15,995,142 $0.40 options over ordinary shares. Being a substantial shareholder of the Company, Mr. M. Perich is not considered an independent Director. In order to facilitate independent judgement in decision making, each Director may seek independent professional advice at the Company’s expense. If advice is sought by the Chairman, he must obtain board approval if the fees for such advice exceeds $50,000 (exclusive of GST), such approval is not to be unreasonably withheld. Where advice is sought by the other Directors, prior written approval by the Chairman is required but approval will not be unreasonably withheld. If the Chairman refuses to give approval, the matter must be referred to the Board. All Directors are made aware of the professional advice sought and obtained. There is a clear division of responsibility between the Chairman and Managing Director. The Remuneration and Nomination Committee of the Board comprises of three Non-Executive Directors-Messrs. P.R Gunner, R.Perich and G Babidge. Two out of three committee members are independent. Mr Gunner, who is an independent Director, is the Committee Chairman. The Committee Charter which has been posted on the website of the Company: http://www.ffgl.com.au details out the 20 Annual Report 2012process and timing for re election of directors. The Board’s policy for nomination and appointment of Directors also forms part of the Charter. The Company Constitution states that at each Annual General Meeting (AGM) one-third of the Directors for the time being, or if their number is not three or a multiple of three, then the nearest number greater than one-third, shall retire from office. A retiring Director shall be eligible for re-election. No Director (other than a Managing Director) may hold office without re-election past the third annual general meeting following their appointment or three years, whichever is longer or, in the case of a Director appointed by the Directors as an additional Director or to fill a casual vacancy, past the next annual general meeting of the company. Any Director appointed by the Board since the 1st AGM must stand for election at the next AGM. is The Remuneration and Nomination Committee responsible for ensuring that the Board is of a size and composition that allows for: (1) decisions to be made expediently; (2) a range of different perspectives to be put forward regarding issues before the Board; (3) a range of different skills to be brought to Board deliberations; and (4) Board decisions to be made in the best interests of the Company as a whole rather than of individual shareholders or interest groups. The Committee’s functions are to review and report to the Board on: - - - - - remuneration policy for the entire consolidated entity (including Managing Director, Senior Executives and Non-Executive Directors); identifying nominees for Directorships and other key Executive appointments; assessing Director competencies; evaluating the Board’s performance annually; and remuneration policies and practices. The Remuneration and Nomination Committee responsible for the: is (1) evaluation and review of the performance of the Board (excluding the Chairman); (2) evaluation and review of the performance of individual Directors; (3) review of and making of recommendations on the size and structure of the Board; and (4) review of the effectiveness and programme of Board meetings. Corporate Governance Statement (continued...) A review of the performance of the individual Directors occurs each year. The Board undertook an evaluation of itself and its committees in August 2012, with all Directors providing input as to the effectiveness of the board processes, meetings, composition and reporting with Directors having an opportunity to discuss and comment on such matters with the Chairman. The Board review its performance and composition on an annual basis to ensure that it has the appropriate mix of expertise and experience. The Board also reviews the performance and composition of its committees on an annual basis. The Committee meets as frequently as required and at least once a year. The quorum for such meetings is two members, at least one of whom shall be independent. Details of the Committee members’ attendance at Committee meetings are set out in the Directors’ Report. Subject to normal privacy requirements, each Director has the right of access to all of the Company’s records, information and senior Executives. They receive regular detailed reports on financial and operational aspects of the Company’s business and may request elaboration or explanation of these reports at any time. New Directors undergo an induction process in which they are given a full briefing of the operations of the Company. Where possible, this includes meetings with key Executives, tours of the operating sites (if practicable), provision of an induction package containing key corporate information and presentations. Directors and Executives are encouraged to broaden their knowledge of the Company’s business and to keep abreast of developments in business more generally by attendance at relevant courses, seminars, conferences, etc. The Company meets expenses involved in such activities. Names of Members of Committees Remuneration and Nomination Committee 3 3 - 3 - - Audit Risk and Compliance Committee - 3 - 3 3 - P.R. Gunner G.H. Babidge A.M. Perich R. Perich M. Miles R.J.F. Macleod Principle 3 Promote ethical and responsible decision-making The Directors acknowledge the need for, and continued maintenance of, a high standard of corporate governance 21 Freedom Foods Group Limited Corporate Governance Statement (continued...) practices and ethical conduct by all Directors and employees. its ethical standards, the Company will: In maintaining (1) behave with integrity in all its dealings with customers, shareholders, employees, suppliers, business partners and the community; (2) ensure its actions comply with applicable laws and regulations; (3) not engage in any activity that could be construed to involve an improper inducement; (4) achieve a working environment where: b. within the period of 1 month prior to the issue of a prospectus; and c. where there is price sensitive information that has not been disclosed because of an ASX Listing Rule exemption; and d. any additional period arising from time to time that the Board imposes a prohibition on trading by Key Management Personnel as an ‘ad-hoc’ prohibition on trading of Securities. Further details of the policies are available on the website of the Company: http://www.ffgl.com.au. (i) equal opportunity is rigorously practised; Diversity Policy (ii) harassment and other offensive forms of behaviour are not tolerated; (iii) confidentiality of commercially sensitive information is protected; and (iv) employees are encouraged to discuss concerns and ethical behaviour with Directors and senior Executives. The Board, senior Executives and all employees of the Company are committed to implementing this Code of Ethics and each is accountable for such compliance. A copy of the Code is made available to Directors, employees, contractors and relevant personnel on the Company’s website: http://www.ffgl.com.au. individual implementing for Senior Executive management establishing, the effectiveness of the Code of Ethics as well as for overseeing that all of the Company’s employees and contractors understand, and act in accordance with the Code. responsible reviewing is and The Board has implemented a range of procedures designed to oversee that the Company complies with the law and achieves high ethical standards in identifying and resolving or managing conflicts of interest. All Directors must advise the Chairman of all business dealings with the Company. As a part of active promotion of ethical behaviour, any behaviour that does not comply with the Code must be duly reported. Protection will be provided for those who report violations in good faith. The Company’s Securities Trading Policies for Directors and senior executives generally allow Directors and senior executives to deal in the Company’s securities other than the following: a. from 1 month prior to the release of the annual or half yearly accounts; 22 In accordance with the ASX Corporate Governance Recommendations on diversity, the Board established a diversity policy in the 2012 financial year which includes: a. a requirement that the Board establish measurable objectives for achieving gender diversity; and b. a requirement for the Board to assess annually both the gender objectives and the progress in achieving them. This policy once adopted will be available on the website of the Company http://www.ffgl.com.au and assessments will be reported in the annual report. The Company acknowledges the positive outcome that can be achieved through a diverse workforce and is committed to actively managing diversity as a means of enhancing the Company’s performance. for The Board will establish measurable objectives achieving gender diversity in the upcoming financial year and will report on the progress in achieving them in the following years annual report. As at 30 June 2012, the proportion of women employed by the Company was as follows: - - - Board of Directors: 0% Senior Executive positions: 0% Total Company workforce: 35% Principle 4 Safeguard integrity in financial reporting The Board has established an Audit, Risk and Compliance Committee comprising three Non-Executive Directors, with appropriate experience. Every member of the Committee must be able to read and understand financial Annual Report 2012Corporate Governance Statement (continued...) statements with experience in financial and accounting matters. Currently, the Committee comprises of Mr M. Miles (Chairman), Mr R. Perich and Mr G H Babidge. One out of the three Committee members are independent. The Chairman of the Committee is an independent Director and is not Chairman of the Board. The Managing Director, other senior management and external audit partner attend Committee meetings at the discretion of the Committee. The external auditors have a direct line of communication at any time to either the Chairman of the Audit, Risk and Compliance Committee or the Chairman of the Board. record of proceedings. At the subsequent Board meeting the Chairman of the Committee reports on the Committee’s conclusions and recommendations. The candidates for the position of external auditor must be able to demonstrate complete independence from the Company and an ability to maintain independence throughout the engagement period. The external auditors have advised, after consultation with the Company, that the audit engagement partner shall be rotated every five years. The Board may select an external auditor based on the criteria relevant to the business of the Company such as experience in the industry in which the Company operates, references, costs, and any other matters deemed relevant by the Board. The Audit, Risk and Compliance Committee is responsible for: Principle 5 (1) reviewing and reporting to the Board on the half Make timely and balanced disclosure yearly and annual reports and financial statements of the Company and consolidated entities; (2) nominating the external auditor and reviewing the adequacy, scope and quality of the annual statutory audit and half yearly statutory review; (3) reviewing the effectiveness of the Company’s internal control systems; (4) monitoring and reviewing the reliability of financial reporting; (5) monitoring and reviewing the compliance of the Company with applicable laws and regulations; (6) monitoring the Australian Accounting Standards and Interpretations; (7) monitoring financial risks and exposure of the Company’s assets; (8) monitoring the risk management policy and plans; (9) reviewing the Company’s Occupational Health and Safety obligations and the Company’s compliance; (10) reviewing the Company’s insurance policies and coverage; and (11) overseeing the independence of external auditors and annually reviewing the Company’s policy on maintaining the independence of external auditor. The Committee has a formal Charter which is posted on the website of the Company http://www.ffgl.com.au. The Committee meets as frequently as required and at least twice a year. The quorum for such meetings is two members, at least one of whom shall be independent. Details of the Committee members’ attendance at Committee meetings are set out in the Directors’ Report. The minutes of each Committee meeting are reviewed at the subsequent Board meeting and signed as an accurate The purpose of the Continuous Disclosure Policy is to ensure that there are mechanisms in place to provide all investors with equal and timely access to material information concerning the Company. Such information must be presented in a clear and balanced way so as not to omit any material information. This Policy is designed to ensure that the Company meets its continuous disclosure obligations under the ASX Listing Rules and has been posted to the website of the Company http://www.ffgl.com.au. Type of information that needs to be disclosed Listing Rule 3.1 states that any information that a reasonable person would consider to have a material effect on the value of the Company securities must be disclosed. Examples of such information include a change in revenue, asset values or significant transactions. Directors receive copies of all announcements immediately after notification to the ASX. All announcements are posted to the Company’s website. A report is submitted to each Board meeting of disclosures to the ASX since last meeting with the Disclosure File available for review. Disclosure Officer The Board has appointed the Company Secretary to act as the Disclosure Officer, responsible for communications with the ASX. The Company Secretary in discussion with the Managing Director and Chairman (as required) decides what information must be disclosed. The Disclosure Officer holds the primary responsibility for ensuring that the Company complies with its disclosure obligations. In addition, Directors, employees or consultants are all 23 Freedom Foods Group LimitedCorporate Governance Statement (continued...) responsible for reporting price sensitive information that is not generally available to the Disclosure Officer. To enhance clarity and balance of reporting and to enable investors to make an informed assessment of the Company’s performance, financial results are accompanied by commentary. Principle 6 Respect the rights of shareholders The Company aims to keep shareholders informed of the Company’s performance in an ongoing manner. Apart from information provided pursuant to the Company’s regarding legal and ASX Listing Rules obligations continuous disclosure of information, the Company also communicates with shareholders through the: (1) Annual Report which is available to all shareholders. The Annual Report includes relevant information about the Company’s operations and performance; (2) Invitation to the annual general meeting and all accompanying papers; (3) The Company’s website at http://www.ffgl.com.au; (4) Reports to the ASX and the press; (5) Half year and full year profit announcements; and (6) Information and presentations to analysts (which are released to the ASX). The Annual General Meeting provides an important opportunity for shareholders to express their views and respond to initiatives being proposed by the Board. The Company also requests that the external auditor attend the Annual General Meeting and be available to answer shareholder questions about the audit and the preparation and content of the audit reports. In accordance with Principle 6 of the ASX Principles, the Company will establish a Communications with Shareholder Policy, incorporating matters disclosed above. The policy once adopted will be available on the website of the Company http://www.ffgl.com.au. Principle 7 Recognise and manage risk Risk oversight and management policies The Company’s Risk Management Policy is available on its website http://www.ffgl.com.au. The Policy covers the areas of oversight, risk management, risk profile, compliance and control and assessment of effectiveness. The Audit, Risk and Compliance Committee (details and composition of which have been set out earlier) is responsible for providing the Board with advice and recommendations regarding the ongoing development of the Policy. Risk management and risk profile The Committee is responsible for: (1) providing the Board with advice and recommendations regarding the Company’s: (i) (ii) risk management system; and risk profile that describes the material risks (including financial and non-financial risks) (2) reviewing the effectiveness of the Company’s implementation of the risk management system at least once a year; (3) regularly reviewing and updating the Company’s risk profile; and (4) ensuring that the appropriate Executives have established and implemented a system for identifying, assessing, monitoring and managing risk throughout the organisation. The system is to include the Company’s internal compliance and control systems. Executive management provide the Committee and Board with regular reports on operational, financial, regulatory and commercial matters within their business divisions. This ensures Management accountability. Executive management is responsible for designing and implementing a risk management and internal control system to manage the Company’s material business risks. Executive management identifies and reviews the major risks impacting each area of the business and develops strategies to effectively mitigate these risks. As required by the ASX Principles, Executive management has reported to the Board on the effectiveness of the management of its material business risks. The ultimate responsibility for risk oversight and management rests with the Board. Due to the size and scale of operations of the Company, there is no separate internal audit function. Executive Management Assurances As part of the structure of financial review and authorisation, the Managing Director and Senior Executive management are required to provide written assurances that the financial reports present a true and fair view of the Company’s and consolidated entities financial position in all material aspects and that the integrity of the financial statements is founded on a system of risk management 24 Annual Report 2012Corporate Governance Statement (continued...) and internal compliance and control which implements the policies adopted by the Board and is operating efficiently and effectively in all material aspects in relation to financial reporting risks. As part of internal management reporting policy relevant senior personnel provide written assurances regarding the integrity of the financial reports to support the Managing Director and Senior Executive management assurances to the Board. The Board received the written assurances with respect to the 2012 financial year. Principle 8 Remunerate fairly and responsibly The Board has established a Remuneration and Nomination Committee to consider and report on, among other matters, remuneration policies and packages applicable to Board members and to senior executives of the Company. The Committee is responsible for ensuring that any equity-based Executive or Non-Executive Director remuneration is made in accordance with any thresholds approved by shareholders. The composition and details of the Committee have been detailed earlier in this Statement. In respect of remuneration issues, the responsibilities of the Committee include determining, evaluating and reporting to the Board with respect to: (1) executive remuneration and incentive policies, The Board believes that Directors are properly rewarded through payment of a fee which is reviewed annually in the light of market conditions and has regard to the responsibilities placed on the Directors by the legal and financial framework within which they act. The Committee’s main functions include: (1) Conditions of service and remuneration of Executive management and their direct reports: (2) Performance of the Executive management; (3) Ensure that the remuneration policy achieves both a level and composition of remuneration that is both competitive and reasonable. Remuneration policies are designed to attract and maintain talented and motivated Directors and employees as well as raising the level of performance of the Company. (4) Recommendation to the Board, which has the discretion to reward eligible employees with the payment of bonuses, share options and other incentive payments. These incentive payments are designed to link reward to performance and are determined by both financial and non-financial imperatives. Executive management attend meetings of the Remuneration and Nomination Committee by invitation report on, and discuss, senior when management performance, remuneration matters, etc. required to including ensuring that the remuneration policies and practices of the Company are consistent with its strategic goals and human resource objectives; Non-Executive Directors receive fees determined by the Board, but within the aggregate limit approved by Shareholders at a General Meeting. (2) (3) (4) (5) the Company’s recruitment, retention and termination policies and procedures for executives; incentive schemes; superannuation arrangements; and the remuneration framework for Directors. The Committee operates independently of the senior management of the Company in its recommendations to the Board in relation to: (1) (2) (3) reviewing on an annual basis the performance and salary of the Executive management group including Executive and Employee Share Option Plan participation; the remuneration packages and other terms and conditions of appointment and continuing employment of senior Executives; and reviewing Non-Executive Directors’ remuneration within the maximum amount approved by shareholders. The structure of remuneration for Non-Executive Directors and Managing Director is different. As explained in the Remuneration Report, the Managing Director and key management personnel receive fixed remuneration, employer contributions to superannuation funds and options. Options are valued using the binomial method and are not linked to the performance of the Company, but to the personnel’s employment. The Securities Trading Policy for Directors and senior executives restricts entering into transactions with securities in associated products which operate to limit the economic risk of any unvested entitlements under any equity based remuneration scheme offered by the Company. Remuneration packages of Non-Executive Directors are fee based. Non-Executive Directors do not participate in bonus payments or any retirement benefits other than statutory superannuation. 25 Freedom Foods Group Limited Consolidated Statement of Comprehensive Income n Consolidated Statement of Comprehensive Income For the financial year ended 30 June 2012 Notes Consolidated $000 5 5 6 37 34 35 7 9 9 2012 58,137 (40,549) 17,588 468 (2,419) (6,746) (3,550) (1,372) (1,813) - - (120) 564 650 3,250 (238) 3,012 - 3,012 3,012 - 3,012 3,012 - 3,012 3.88 3.03 0.50 2.00 1.40 2011 45,353 (31,262) 14,091 403 (2,042) (5,338) (3,160) (1,092) (1,529) 3,884 (1,778) (326) 841 295 4,249 138 4,387 - 4,387 4,387 - 4,387 4,387 - 4,387 5.67 4.90 0.50 - 1.00 Revenue from sale of goods Cost of sales Gross profit Other income Marketing expenses Selling and distribution expenses Administrative expenses Depreciation Finance costs Profit on sale of A2DP shares Impairment of Goodwill Write off of legal expense and unrecoverable amounts Share of profit of joint ventures accounted for using the equity method Share of profit of associates accounted for using the equity method Profit before tax Income tax (expense)/benefit Profit for the year Other comprehensive income Total comprehensive income for the year Profit attributable to: Owners of the company Non-controlling interests Total comprehensive income attributable to: Owners of the company Non-controlling interests Earnings per share From continuing operations: Basic earnings per share (cents per share) Diluted earnings per share (cents per share) Ordinary Dividends per share paid - Final 2011 (cents per share) CRPS Dividends per share paid - Final 2011(cents per share) CRPS Dividends per share paid - Interim 2012 (cents per share) Notes to the statement of comprehensive income are included on pages 30 to76. 26 Annual Report 2012Consolidated Statement of Financial Position n Consolidated Statement of Financial Position For the financial year ended 30 June 2012 ASSETS Current assets Cash and cash equivalents Trade and other receivables Other financial assets Inventories Prepayments Total Current Assets Non-current assets Investments in associates Deferred tax assets Property, plant and equipment Goodwill Other intangible assets Total non-current assets TOTAl ASSETS lIABIlITIES Current liabilities Trade and other payables Borrowings Current tax liabilities Loans payable to related parties Other liabilities Provisions Total current liabilities Non-current liabilities Trade and other payables Borrowings Provisions Total non-current liabilities TOTAl lIABIlITIES NET ASSETS EquITY Capital and Reserves Equity attributable to owners of the company Issued capital Reserves Retained earnings TOTAl EquITY Notes to the statement of comprehensive income are included on pages 30 to 76. Notes 22(a) 10 11 12 11 7 14 13 13 15 16 7 16 11 17 15 16 17 18 19 20 Consolidated $000 2012 2011 767 17,746 81 13,144 644 32,382 12,357 2,035 35,619 5,214 16,274 71,499 103,881 15,196 19,001 816 8,064 - 902 43,979 73 12,395 164 12,632 56,611 47,270 39,508 (3,901) 11,663 47,270 182 10,097 - 5,349 665 16,293 11,440 2,140 24,095 5,214 16,274 59,163 75,456 5,579 10,357 - - 53 855 16,844 504 7,995 130 8,629 25,473 49,983 39,288 1,006 9,689 49,983 27 Freedom Foods Group LimitedConsolidated Statement of Cash Flows n Consolidated Statement of Cash Flows For the financial year ended 30 June 2012 Notes Consolidated $000 2012 2011 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Cash generated from operations Interest paid Income tax (paid)/received Receipt of government grants Net cash generated by operating activities 22(b) Cash flows from investing activities Proceeds from disposal of property, plant and equipment Payment for property, plant and equipment Investment in Equity Interest Net cash inflow on acquisition of subsidiary Costs associated with Sale of Joint Venture Advance to Joint Venture Net cash used in investing activities Cash flows from financing activities Proceeds from issue of equity instruments of the company Payment of share issue costs Dividends paid Proceeds from borrowings Repayment of borrowings Proceeds from related parties Net cash provided by financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of financial year Cash and cash equivalents at end of financial year Notes to the statement of comprehensive income are included on pages 30 to 76. 22(a) 55,926 (50,495) 5,431 (1,808) (119) 182 3,686 18 (5,144) (2,064) 168 - (1,438) (8,460) 211 (6) (1,020) 7,511 (3,401) 2,064 5,359 585 182 767 44,143 (40,061) 4,082 (1,612) 152 75 2,697 - (2,460) (812) - (383) (356) (4,011) 5,825 (192) (359) 11,108 (13,520) - 2,862 1,548 (1,366) 182 28 Annual Report 2012Consolidated Statement of Changes in Equity n Consolidated Statement of Changes in Equity For the financial year ended 30 June 2012 ATTRIBuTABlE TO EquITY hOlDERS OF ThE PARENT Notes Fully paid ordinary shares $’000 CRPS Shares Retained earnings $’000 $’000 Equity - settled employee benefits reserve $’000 Other Reserve $’000 Asset revaluation reserve $’000 Total $’000 Non controlling interest $’000 Total Equity $’000 - 5,707 446 CONSOlIDATED Balance as at 30 June 2010 Equity issues Share issue costs Related income tax Profit for the year Other comprehensive income for the year Total comprehensive income for the year Recognition of share-based payments Dividends paid Balance as at 30 June 2011 Equity issues Share issue costs Related income tax Acquisition of subsidiary under common control Profit for the year Other comprehensive income for the year Total comprehensive income for the year Recognition of share-based payments Dividend paid 18 18 19 21 18 18 19 19 21 33,655 5,633 33,637 18 - - - - - - - 229 (9) - - - - - - - 5,824 (272) 81 - - - - - 4,387 - - 4,387 - - - - - - - - - - - (405) 9,689 - - - - 3,012 - - 3,012 - (1,038) 11,663 - - - - - - - - - - - - - (5,013) - - - - - - - - - - - 87 - 533 - - - - - - - 106 - 473 40,263 - - - - - 5,842 (272) 81 4,387 - - - - - - - 40,263 5,842 (272) 81 4,387 - - 4,387 - 4,387 - - 87 (405) - - 87 (405) 473 49,983 - 49,983 - - - - - - 229 (9) 0 (5,013) 3,012 - - - - - - - 229 (9) 0 (5,013) 3,012 - - 3,012 - 3,012 - - 106 (1,038) Balance as at 30 June 2012 33,875 5,633 639 (5,013) 473 47,270 Notes to the statement of comprehensive income are included on pages 30 to 76. - - 106 (1,038) - 47,270 29 Freedom Foods Group Limited Notes to the Financial Statements n Notes to the Financial Statements For the financial year ended 30 June 2012 1. General Information The financial report of Freedom Foods Group Limited (“Group” or “Company”) for the year ended 30 June 2012 was authorised for issue in accordance with resolution of Directors on 28th September 2012. Freedom Foods Group Limited is a company incorporated in Australia whose shares are publicly traded on the Australian securities exchange. The company is trading under the symbol ‘FNP’. The nature of the operations and principal activities of the Group are described in note 4. 2. Adoption of New and Revised Accounting Standards 2.1 Standards and Interpretations affecting amounts reported in the current period (and/or prior periods) The following new and revised Standards and Interpretations have been adopted in the current year and have affected the amounts reported in these financial statements. Details of other Standards and Interpretations adopted in these financial statements but that have had no effect on the amounts reported are included in section 2.2. Standards affecting presentation and disclosure Amendments to AASB 7 ‘Financial Instruments: Disclosure’ Amendments to AASB 101 ‘Presentation of Financial Statements’ AASB 1054 ‘Australian Additional Disclosures’ and AASB 2011-1 ‘Amendments to Australian Accounting Standards arising from Trans-Tasman Convergence Project’ AASB 124 ‘Related Party Disclosures’ (revised December 2009) 2.2 Standards and Interpretations adopted with no effect on financial statements The following new and revised Standards and Interpretations have also been adopted in these financial statements. Their adoption has not had any significant impact on the amounts reported in these financial statements but may affect the accounting for future transactions or arrangements. AASB 2009-12 ‘Amendments to Australian Accounting Standards’ AASB 2010-5 ‘Amendments to Australian Accounting Standards’ AASB 2010-6 ‘Amendments to Australian Accounting Standards – Disclosures on Transfers of Financial Assets’ 2.3 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. 30 Annual Report 2012 Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 2. Adoption of New and Revised Accounting Standards (continued...) Standard/Interpretation AASB 2010-8 ‘Amendments to Australian Accounting Standards – Deferred Tax: Recovery of Underlying Assets’ AASB 2011-9 ‘Amendments to Australian Accounting Standards – Presentation of Items of Other Comprehensive Income’ AASB 9 ‘Financial Instruments’ AASB 2009-11 ‘Amendments to Australian Accounting Standards arising from AASB 9’ AASB 2010-7 ‘Amendments to Australian Accounting Standards arising from AASB 9 (December 2010)’ AASB 10 'Consolidated Financial Statements' AASB 11 'Joint Arrangements' AASB 12 'Disclosure of Interests in Other Entities' AASB 128 'Investments in Associates and Joint Ventures' AASB 13 ‘Fair Value Measurement’ AASB 2011-8 ‘Amendments to Australian Accounting standards arising from AASB 13’ AASB 119 ‘Employee Benefits’ AASB 2011-10 ‘Amendments to Australian Accounting Standards arising from AASB 119 (2011)’ AASB 2011-7 ‘Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements standards’ Disclosures – Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7) AASB 127 ‘Separate Financial Statements’ AASB 2011-4 ‘Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements’ Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32) Mandatory Effective Date of IFRS 9 and Transition Disclosures (Amendments to IFRS 9 and IFRS 7) Effective for annual reporting periods beginning on or after 1 January 2012 1 July 2012 1 January 2013 1 January 2013 1 January 2013 1 January 2013 1 January 2013 1 January 2013 1 January 2013 1 January 2013 1 January 2013 1 January 2013 1 January 2013 Expected to be initially applied in the financial year ending 30 June 2013 30 June 2013 30 June 2014 30 June 2014 30 June 2014 30 June 2014 30 June 2014 30 June 2014 30 June 2014 30 June 2014 30 June 2014 30 June 2014 30 June 2014 1 January 2013 30 June 2014 1 January 2013 1 January 2013 30 June 2014 30 June 2014 1 July 2013 30 June 2014 1 January 2014 1 January 2015 30 June 2015 30 June 2016 3. Significant Accounting Policies The following significant accounting policies have been adopted in the preparation and presentation of the financial report: (a) Statement of compliance These financial statements are general purpose financial statements which have been prepared in the Corporations Act 2001, accordance with Accounting Standards and Interpretations, and comply 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, is a for-profit entity. Accounting the Company Standards include Australian Accounting Standards. Compliance with Australian Accounting Standards ensures that the financial statements and notes of the company and the Group comply with International Financial Reporting Standards (‘IFRS’). The financial statements were authorised for issue by the directors on 28th September 2012. (b) Basis of preparation The financial report has been prepared on the historical cost basis, except for the revaluation of certain non-current assets and financial instruments. Cost is based on the fair values of the consideration given in exchange for assets. The financial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars ($’000) unless otherwise stated under the option available to the Parent under ASIC Class Order 98/0100, dated 10 July 1998. The Parent is an entity to which the class order applies. (c) Going concern As at balance date the Group’s current liabilities exceeded its current assets by $11,598,000. This resulted from the use of current liabilities in financing the acquisition of non-current assets, as well as the existence of $10,662,000 of debtor finance facility debt which, in line with the Accounting Standards, is required to be shown as a current liability but not expected to be payable until at least 31 December 2013. 31 Freedom Foods Group LimitedNotes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 3. Significant Accounting Policies (continued...) intangible assets of the consolidated entity are set out in note 13. The directors consider the going concern basis of accounting is appropriate for the preparation of the financial report for the following reasons: • • the Group will continue to use the debtor finance facility through normal trading, which will have the effect of retaining $10-11 million of debt throughout the next year, the exercise of unlisted share options held by Arrovest Pty Limited which is expected to contribute $6.2 million in cash within 6 months from the balance date. (d) Critical accounting judgments and key sources of estimation uncertainty is required to make In the application of the Group’s accounting policies, judgments, management 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 other factors that are considered to be relevant. 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. Key sources of estimation uncertainty: Impairment of goodwill and other intangible assets Determining whether goodwill or other intangible assets are impaired requires an estimation of the value in use of the cash generating units to which the goodwill or other intangible assets have been allocated. The value in use calculation requires the directors to estimate the future cash flows expected to arise from the cash generating unit and a suitable discount rate in order to calculate the present value. The value of the goodwill as at the end of the financial year was $5,214,000, with $1,778,000 impairment loss charged against this goodwill in 2011. The value of other intangible assets as at the end of the financial year was $16,274,000, with no impairment loss charged against the other intangible assets. Further details in relation to the goodwill and other 32 (e) Basis of consolidation The consolidated financial statements incorporate the financial statements of Freedom Foods Group Limited and its subsidiaries as at 30 June each year (‘the Group’). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group. All intra-group transactions, balances, income and expenses are eliminated in full on consolidation. (f) Business combinations liabilities Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The cost of the business combination is measured as the aggregate of the fair values (at the date of exchange) of assets given, incurred or assumed, and equity instruments issued by the group in exchange for control of the acquiree. Acquisition related costs are recognised in profit and loss as incurred. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under AASB 3 ‘Business Combinations’ are recognised at their fair values at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for sale in accordance with AASB 5 ‘Non-current Assets Held for Sale and Discontinued Operations’, which are recognised and measured at fair value less costs to sell. Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in profit or loss. Annual Report 2012Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 3. Significant Accounting Policies (i) Property, plant and equipment (continued...) The interest of minority shareholders in the acquiree is initially measured at the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. Acquisition of Pactum Australia Pty Limited The acquisition of Pactum Australia Pty Limited (“Pactum”) has been accounted for as a common control transaction as at the time of this transaction both Freedom Foods Group Limited and Pactum Australia Pty Limited were controlled by the same shareholder group. As a common control transaction, the acquisition does not reflect the fair value of assets and liabilities acquired or any recording of additional goodwill at the time of the acquisition of Pactum. The acquisition balance sheet of Pactum reflects the values for assets and liabilities acquired from Pactum’s accounting records. The difference between the fair value of the consideration given and the carrying value of the assets and is recognised as a common control reserve in the consolidated financial statements. liabilities acquired (g) Interests in joint ventures The Group’s interest in joint ventures represent jointly controlled entities which have been measured by applying the equity method of accounting. Under the equity method of accounting the carrying amounts of interests in joint venture entities are increased or decreased to recognise the Group’s share of the post acquisition profits or losses and other changes in net assets of the joint ventures. (h) Foreign currency translation Both the functional and presentation currency of Freedom Foods Group Limited and its Australian subsidiaries is Australian dollars (AUD). Transactions in foreign currencies are initially recorded in the functional currency at the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are restated at the rate of exchange ruling at the end of each reporting period. Exchange differences are recognised in the profit or loss in the period in which they arise. Plant and equipment, motor vehicles and equipment less under finance accumulated depreciation and impairment. lease are stated at cost and less any fair value, impairment depreciation losses. Fair value Land and Buildings held for use in the production of goods, are carried in the statement of financial subsequent position at subsequent accumulated accumulated is determined on the basis of an independent valuation prepared by external valuation experts, based on discounted cash flows or capitalisation of net income, as appropriate. Revaluations are performed with sufficient regularity such that the carrying amounts do not differ materially from those that would be determined using fair values at the end of each reporting period. Any revaluation increase arising on the revaluation of land and buildings is credited to a revaluation reserve, except to the extent that it reverses a revaluation decrease for the same asset previously recognised as an expense in the profit or loss, in which case the increase is credited to the profit or loss to the extent of the decrease previously charged. A decrease in carrying amount arising on the revaluation of land and buildings is charged as an expense in profit or loss to the extent that it exceeds the balance, if any, held in the revaluation reserve relating to a previous revaluation of that asset. Construction in progress is stated at cost. Cost includes expenditure that is directly attributable to the acquisition or construction of the 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. including Depreciation is provided on property, plant and freehold buildings but equipment, excluding land. Depreciation is calculated on a straight line basis so as to write off the net cost of each asset over its expected useful life to its estimated residual value. The estimated useful lives, residual values and depreciation method are reviewed at the end of each annual reporting period, with the effect of any changes recognised on a prospective basis. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease. The gain or loss arising on disposal or retirement of an item of property, plant and equipment is 33 Freedom Foods Group LimitedNotes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 3. Significant Accounting Policies (l) Goodwill (continued...) determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss. The following depreciation rates are used in the calculation of depreciation: Class of Fixed Assets Buildings Plant and equipment Leased plant and equipment Motor vehicles Depreciation Rate 2-6% 4-20% 4-20% 15-33% (j) Non-current assets classified as held for sale Non-current assets and disposal groups classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the asset (or disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for such a sale and the sale is highly probable. The sale of the asset (or disposal group) must be expected to be completed within one year from the date of classification, except in the circumstances where sale is delayed by events or circumstances outside the Group’s control and the Group remains committed to a sale. (k) Borrowing costs to the Borrowing costs directly attributable acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation. All other borrowing costs are recognised in profit or loss in the period in which they are incurred. 34 Goodwill acquired in a business combination is initially measured at its cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised at the is subsequently date of acquisition. Goodwill measured at its cost less any impairment losses. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units (CGUs) or groups of CGUs, expected to benefit from the synergies of the business combination. CGUs (or groups of CGUs) to which goodwill has been allocated are tested for impairment annually, or more frequently if events or changes in circumstances indicate that goodwill might be impaired. If the recoverable amount of the CGU (or group of CGUs) is less than the carrying amount of the CGU (or groups of CGUs), the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU (or groups of CGUs) and then to the other assets of the cash-generating units pro-rata on the basis of the carrying amount of each asset in the CGU (or groups of CGUs). An impairment loss recognised for goodwill is recognised immediately in profit or loss and is not reversed in a subsequent period. On disposal of an operation within a CGU, the attributable amount of goodwill is included in the determination of the profit or loss on disposal of the operation. (m) Intangible assets Brand names Brand names recognised by the group have an indefinite useful life and are not amortised. Each period, the useful life of this asset is reviewed to determine whether events and circumstances continue life assessment for the asset. Such assets are tested for impairment in accordance with the policy in note 3(n). indefinite useful to support an Intangible assets acquired in a business combination Intangible assets acquired in a business combination are from identified and recognised separately goodwill where they satisfy the definition of an intangible asset. 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. Annual Report 2012Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 3. Significant Accounting Policies (continued...) (n) Impairment of long-lived assets excluding goodwill At each reporting date the Group reviews the carrying amounts of its 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 Group estimates the recoverable amount of the CGU to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash- generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified. that the asset may be 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 impaired. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a post-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 CGU) is estimated to be less than its carrying amount, the carrying amount of the asset (CGU) is reduced to its recoverable amount. An is recognised in profit or loss immediately. impairment loss Where an impairment loss subsequently reverses, the carrying amount of the asset (CGU) 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 (CGU) in prior years. A reversal of an recognised immediately in profit or loss. impairment loss is (o) Inventories Inventories are measured at the lower of cost and net realisable value. Costs incurred in bringing each product to its present location and condition are accounted for as follows: Raw materials: purchase cost on a first-in, first-out basis; Manufactured finished goods: cost of direct materials, direct labour and an appropriate portion of manufacturing variable and fixed overheads based on normal operating capacity but excluding borrowing costs; Purchased finished goods: purchase cost on a weighted average cost basis. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. (p) Cash and cash equivalents Cash and short-term deposits in the statement of financial position comprise cash at bank and in hand and cash equivalents, which are short-term deposits with an original maturity of three months or less. For the purposes of the Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities in the statement of financial position. (q) Other financial liabilities Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. interest method The effective is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period. (r) Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. 35 Freedom Foods Group LimitedNotes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 3. Significant Accounting Policies (continued...) The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flow estimated to settle the present obligation, its carrying amount is the present value of those cash flows. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the recoverable amount is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. (s) Employee benefits A liability is recognised 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. Liabilities recognised in respect of short term employee benefits are measured at the remuneration rate expected to apply at the time of settlement. Liabilities recognised in respect of long term employee benefits are measured at the present value of the estimated future cash outflows to be made by the Group in respect of services provided by employees up to reporting date. their nominal values using Defined contribution plans Contributions to defined contribution superannuation plans are expensed when incurred. (t) Share-based payments Equity-settled payments with employees and others providing similar services are measured at the fair value of the equity instrument at the grant date. Fair value is measured by use of a binomial model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations. Further details on how share-based the transactions has been determined can be found in note 29. fair value of equity-settled 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 Group’s estimate of shares that will eventually vest. At each reporting date, the Group revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognised in profit or loss over the remaining vesting period, with corresponding adjustment to the equity-settled employee benefits reserve. (u) Leased Assets Group as lessor Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease. However, contingent rentals arising under operating leases are recognised as income in a manner consistent with the basis on which they are determined. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised on a straight-line basis over the lease term. Leases are classified as finance leases when the terms of the lease transfer substantially all the risks and rewards incidental to ownership of the leased asset to the lessee. All other leases are classified as operating leases. Group as lessee leases are Assets held under finance 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, unless they are directly attributable to the qualifying assets, in which case they are capitalised in accordance with the Group’s general policy on borrowing costs. Refer to note 3(k). Contingent rentals are recognised as expenses in the periods in which they are incurred. Finance leased assets are amortised on a straight line basis over the estimated useful life of the asset. 36 Annual Report 2012Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 3. Significant Accounting Policies Interest revenue (continued...) 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 leased asset are consumed. benefits from the Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred. 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 expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. (v) Revenue Revenue is measured at the fair value of the consideration received or receivable. Revenue is reduced rebates and other similar allowances. for terms, Sale of goods Revenue from the sale of goods is recognised when all the following conditions are satisfied: • • • • • the Group has transferred to the buyer the significant risks and rewards of ownership of the goods the Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; the amount of revenue can be measured reliably; it is probable that the economic benefits associated with the transaction will flow to the entity; and the costs incurred or to be incurred in respect of the transaction can be measured reliably. Licensing fees is recognised on an accrual basis Revenue in accordance with the substance of the relevant agreement. Revenue is calculated on the basis of the turnover of the licensee. Interest is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount. Rental income Revenue from operating leases is recognised in accordance with the Group’s accounting policy outlined in note 3(u). (w) Government grants Government grants are assistance by the government in the form of transfers of resources to the Group 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 group other than the requirement to operate in certain regions or industry sectors. Government grants are not recognised until there is reasonable assurance that the Group will comply with the conditions attaching to them and the grants will be received. Government grants whose primary condition is that the Group should purchase, construct or otherwise acquire long-term assets are recognised as deferred income in the statement of financial position and recognised as income on a systematic and rational basis over the useful lives of the related assets. Other government grants are recognised as income over the periods necessary to match them with the related costs which they are intended to compensate, on a systematic basis. are receivable Government grants as that compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Group with no future related costs are recognised as income of the period in which it becomes receivable. (x) Income tax Current tax Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of 37 Freedom Foods Group LimitedNotes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 3. Significant Accounting Policies (continued...) the taxable profit or 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 on the basis of temporary differences between the tax base of an asset or liability and its carrying amount in the statement of financial position. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. 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 a 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 the initial recognition of goodwill. Deferred tax liabilities are recognised for taxable temporary differences associated with investments in branches and associates and interests in joint ventures except where the Group is able to control the reversal of the temporary differences and its probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets arising 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. from deductible Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period(s) when the asset and liability 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 Group 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/Group intends to settle 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 profit or loss, 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. (y) Goods and services tax Revenues, expenses and assets are recognised net of the amount of goods and services tax (‘GST’) except: • where the amount of GST incurred is not recoverable from the taxation authority, in which case the GST is recognised as part of acquisition of the asset or as part of the expense item as applicable; or • for receivables and payables which are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position. Cash flows are included in the Statement of Cash Flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified within operating cash flows. (z) Financial instruments Recognition of investments Investments are initially measured at fair value, net of transaction costs, except for those financial assets carried at fair value through profit and loss, which are initially measured at fair value when the related contractual rights or obligations exist. Subsequent to initial recognition these investments are measured as set out below. Financial assets at fair value through profit and loss A financial asset is classified in this category if acquired principally for the purpose of selling in the 38 Annual Report 2012Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 3. Significant Accounting Policies (continued...) Recognition short term if so designated by management and within the requirements of AASB 139 Financial Instruments: and Measurement. Derivatives are also categorised as held for trading unless they are designated as hedges. Realised and unrealised gains and losses arising from changes in their fair value of these assets are included in the statement of comprehensive income in the period in which they arise. asset expire, or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. Effective interest method Impairment of financial assets interest method The effective 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 (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period. Income is recognised on an effective interest rate basis for debt instruments other than those financial assets ‘at fair value through profit or loss’. Loans and receivables Loans and receivables have fixed or determinable payments that are not quoted in an active market and are stated at amortised cost using the effective interest rate method Interest less income is recognised by applying the effective interest rate. impairment. Held-to maturity investments These investments have fixed maturities, and it is the group’s intention to hold these investments to maturity. Any held-to-maturity investments held by the group are stated at amortised cost using the effective interest rate method less impairment. Available-for-sale financial assets Available-for-sale financial assets include any financial assets not included in the above categories. Available- for-sale financial assets are reflected at fair value. Unrealised gains and losses arising from changes in fair value are taken directly to equity. Derecognition of financial assets The Group derecognises a financial asset only when the contractual rights to the cash flows from the Financial assets, other than those at fair value through profit or loss, are assessed for indicators of impairment at the end of each reporting period. Financial assets are impaired where there is objective evidence that as a result of one or more events that occurred after the initial recognition of the financial asset the estimated future cash flows of the investment have been impacted. Financial liabilities Non-derivative financial liabilities are recognised at amortised cost, comprising original debt less principal payments and amortisation. (aa) Derivative financial instruments The Group enters into a variety of derivative financial instruments to manage its exposure to foreign exchange rate risk, including foreign exchange forward contracts. Further details of derivative financial instruments are disclosed in note 26 to the financial initially statements. Derivatives are recognised at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The resulting gain or loss is recognised in profit is or designated and effective as a hedging instrument, in which event, the timing of the recognition in profit or loss depends on the nature of the hedge relationship. The Group has not adopted hedge accounting during the financial year or previous corresponding period. immediately unless the derivative loss 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 their fair value with changes in fair value recognised in profit or loss. 39 Freedom Foods Group LimitedNotes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 4. Operating Segments The Group is organised into four segments which is the basis on which the Group reports. The principal products and services of these segments are as follows: Freedom Brands Freedom Foods: A range of products for consumers requiring a solution to specific dietary or medical conditions including gluten free, wheat free, nut free, low sugar or salt or highly fortified. The product range covers breakfast cereals, cookies, snack bars, soy, almond and rice beverages and other complimentary products. These products are produced and sold in Australia and overseas. Seafood: A range of canned seafood covering sardines, salmon and specialty seafood. These products are produced overseas and sold in Australia and overseas. Pactum Australia: A range of long life beverages including soy, rice, almond and dairy milk beverages, chicken, beef and vegetable stocks. Thorpedo Foods: Thorpedo range of low GI beverages. These products are produced and sold in Australia and overseas. Operating segments are identified on the basis of internal reports about components of the Group that are regularly reviewed by the Board of Directors in order to allocate resources to the segments and assess their performance. Information regarding these segments is presented below. The following is an analysis of the Group’s revenue and results by reportable operating segment for the periods under review: Segment revenue Continuing operations Seafood Freedom Foods Pactum Thorpedo Foods Other Total revenue of the consolidated group External sales 2012 $’000 2011 $’000 Other revenue 2012 $’000 2011 $’000 Total 2012 $’000 17,958 31,085 9,030 59 - 18,914 26,256 - 85 - - - - - - - - - 72 - 17,958 31,085 9,030 59 473 58,605 2011 $’000 18,914 26,256 - 157 429 45,756 Revenue generated by equity accounted associates from external sales is not consolidated, instead under the equity method of accounting, the carrying amounts of interest in joint venture entities are increased or decreased to recognise the Group’s share of post acquisition profits or losses and other changes in net assets of the joint venture/minority interest. 95% of total external sales of the consolidated group and equity accounted associates are generated in Australia (2011: 97%) and more than 80% of total external sales are through major Australian retailers. 40 Annual Report 2012 Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 4. Operating Segments (continued...) Segment result Continuing operations Seafood Freedom Foods Pactum Thorpedo Foods Group share of equity accounted associates Shared services Finance costs Depreciation Profit before income tax Profit on sale of A2DP shares Write off of non recurring legal expense and unrecoverable amounts Income tax expense Profit for the year from continuing operations 2012 $’000 2011 $’000 3,953 3,237 1,452 (13) 8,629 1,214 (3,288) (1,813) (1,372) 3,370 - (120) (238) 3,012 3,978 3,249 - (1,748) 5,479 1,136 (3,303) (1,529) (1,092) 691 3,884 (326) 138 4,387 Total profit from equity accounted associates for the period totalled $4,553,000 (2011: $2,422,000). The consolidated entities share of these profits was $1,214,000 (2011: $1,136,000). Segment assets Seafood Freedom Foods Pactum Thorpedo Foods Unallocated (Shared Services) Total assets of the Group Segment liabilities Seafood Freedom Foods Pactum Thorpedo Foods Unallocated (Shared Services) Total liabilities of the Group 2012 $’000 2011 $’000 21,644 44,857 22,284 1,162 89,947 13,934 103,881 10,028 14,068 20,117 5 44,218 12,393 56,611 17,724 43,149 - 1,426 62,299 13,157 75,456 5,418 14,820 - 30 20,268 5,205 25,473 41 Freedom Foods Group LimitedNotes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 4. Operating Segments (continued...) Other segment information Seafood Freedom Foods Pactum Thorpedo Foods Unallocated (Shared Services) Depreciation and Amortisation 2011 $’000 - 1,092 - - 1,092 - 1,092 2012 $’000 - 1,170 280 - 1,450 (78) 1,372 Additions to non-current assets 2011 $’000 - 2733 - - 2,733 - 2,733 2012 $’000 - 1,941 10,939 - 12,880 - 12,880 The add back of depreciation in the unallocated line relates to motor vehicles which were fully depreciated and disposed of during the year. 5. Revenue Segment revenue Continuing operations Sale of goods Interest received • Loans and receivables • Cash and Cash equivalents License fee Other income • Government/State grants - refer below • Gain on disposal of fixed assets • Payroll Tax Refund • Rental income • Management fee received Total Revenue Consolidated $000 2012 2011 58,132 45,256 - 5 - 58,137 120 21 75 - 252 468 58,605 - 25 72 45,353 81 - 70 14 238 403 45,756 The above grants are the Export Market Development Grant received or receivable for 2012 and 2011 (2012: $51,000, 2011: $20,000), State Training Grant (2012: $6,000, 2011: $30,000) and Department of Education, Employment and Workplace Relations Grant (2012: $63,500, 2011: $31,000). 42 Annual Report 2012 Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 6. Profit for the year before tax Profit for the year was arrived at after charging the following expenses: Finance costs • Interest on bank overdrafts and loans • Interest on related party loan • Interest capitalised as addition to the cost of qualifying assets • Interest on obligations under finance leases Total borrowing costs Depreciation on property, motor vehicles, plant and equipment Rental expense on operating leases (equipment) Rental expense on operating leases (property) Research and development costs expensed Impairment of trade receivables Employee benefit expense Post employment benefits - defined contribution plans Share-based payments - equity settled share based payments Other employee benefits Total employee benefit costs Consolidated $000 2012 1,840 261 (360) 72 1,813 1,372 221 159 330 (14) 1,349 106 6,692 8,147 2011 1,730 118 (346) 27 1,529 1,092 145 73 500 (27) 580 87 4,959 5,626 (i) The Group uses derivative financial instruments to hedge its exposure to foreign exchange risks arising from operational, financing and investment activities. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for trading purposes. During the financial year the Group utilised foreign exchange contracts for the purchase of inventory. The foreign exchange contracts were denominated in USD and CAD. As at 30 June 2012 the Group held foreign exchange contracts totalling USD1,502,000 and CAD652,000. The contracts related to highly probable forecasted transactions for the purchase of inventory for the Specialty Seafood business (Salmon and Sardines) and the Freedom Foods business (Spreads and Almond paste) with the purchase consideration being settled in the above currencies. The Group’s objective in entering into foreign exchange contracts is to provide certainty to the income and cash flow implications for the designated foreign currency purchase, relating to purchase of inventory. As the Group does not utilise hedge accounting, derivative financial instruments held by the Group are required under the Australian Accounting Standards to be valued at fair value as at balance date. A valuation at fair value assumes that the Group would settle the contracts at a specific date and recognise a gain or loss depending on the prevailing spot rate at value date, even though the intention of the Group is to settle the contract at contract expiry in relation to the purchase of inventory or an asset required for manufacturing. 43 Freedom Foods Group LimitedNotes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 7. Income Taxes Income tax recognised in profit or loss Tax expense comprises: Current tax expense in respect of the current year Adjustments recognised in the current year in relation to the current tax of prior years Deferred tax expense/(income) relating to the origination and reversal of temporary differences Total expense/(income) tax recognised in the current year relating to continuing operations Consolidated $000 2012 497 (293) 34 238 The prima facie income tax expense on pre-tax accounting profit from operations reconciles to the income tax expense in the financial statements as follows: Profit before tax from continuing operations Income tax expense calculated at 30% Effect of revenue/expenses that are not deductible in determining taxable profit Effect of tax concessions (research and development) Adjustments recognised in the current year in relation to the current tax of prior years Prior year R&D claim Other 3,250 975 (345) (99) (293) - 238 2011 1,342 (1,330) (150) (138) 4,249 1,275 67 (150) (951) (379) (138) 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. There has been no change in the corporate tax rate when compared with the previous reporting period. Income tax recognised directly in equity An amount of $Nil was credited to equity in relation to share issue costs during the year (2011 $81,000). Income tax recognised in other comprehensive income No current or deferred tax amounts were charged/(credited) directly to the other comprehensive income during the year. Current tax assets/(liabilities) Income tax receivable/payable attributable to: • Entities in the tax-consolidated group Consolidated $000 2012 (816) (816) 2011 - - 44 Annual Report 2012Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 7. Income Taxes (continued...) Deferred tax balances Deferred tax assets/(liabilities) arise from the following: Consolidated 2012 Temporary differences: Provisions Doubtful debts Property plant & equipment Other unused tax losses and credits: Tax losses (i) Withholding tax paid Opening Balance $’000 Recognised on acquisition of common controlled entity $’000 Charged to income $’000 Closing balance $’000 329 4 (9) (1,031) (707) 2,503 344 2,847 2,140 7 - (197) 118 (72) - - - (72) 12 (4) (141) 903 770 (497) (306) (803) (34) 348 - (347) (10) (9) 2,006 38 2,044 2,035 (i) Current year earnings together with forecast future earnings support the recognition of carried forward losses as deferred tax assets Consolidated 2011 Temporary differences: Provisions Doubtful debts Property plant & equipment Other unused tax losses and credits: Tax losses Withholding tax paid Opening Balance $’000 Charged to income $’000 Closing balance $’000 337 12 (24) 165 490 1,161 340 1,501 1,991 (8) (8) 15 (1,196) (1,197) 1,342 4 1,346 149 329 4 (9) (1,031) (707) 2,503 344 247 2,140 The company and its wholly-owned Australian subsidiaries have formed a tax-consolidated group and are therefore taxed as a single entity. The head entity within the tax consolidated group is Freedom Foods Group Limited. 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 group’ approach by reference to the carrying amounts in the separate financial statements of each entity and the tax values applying under tax consolidation. Current tax liabilities and assets and deferred tax assets arising from unused tax losses and relevant tax credits of the members of the tax-consolidated group are recognised by the company (as head entity in the tax-consolidated group). 45 Freedom Foods Group LimitedNotes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 7. Income Taxes (continued...) Entities within the tax-consolidated group have entered into a tax funding arrangement and a tax sharing agreement with the head entity. Under the terms of the tax funding arrangement, Freedom Foods Group Limited and each of the entities in the tax-consolidated group has agreed to pay a tax equivalent payment to or from the head entity, based on the current tax liability or current tax asset of the entity. The tax sharing agreement entered into between members of the tax-consolidated group provides for the determination of the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations or if an entity should leave the tax-consolidated group. The effect of the tax sharing agreement is that each member’s liability for tax payable by the tax consolidated group is limited to the amount payable to the head entity under the tax funding arrangement. 8. Auditors remuneration Current year Remunerations of the auditors of the Group for: • audit or review of the financial report • taxation advice and preparation of tax returns • research and development advice and preparation of the return The auditor of the consolidated entity is Deloitte Touche Tohmatsu. 9. Earnings per share Basic earnings per share from continuing operations Diluted earnings per share from continuing operations The earnings and weighted average number of ordinary shares used in the calculation of basic and diluted earnings per share are as follows: (a) Earnings used in the calculation of basic EPS (b) Earnings used in the calculation of diluted EPS (c) Weighted average number of ordinary shares outstanding during the year used in the calculation of basic EPS Shares deemed to be issued for no consideration in respect of: • CRPS • unlisted options (d) Weighted average number of ordinary shares and potential ordinary shares used in the calculation of diluted EPS including CRPS Consolidated $ 2012 209,010 72,937 34,504 316,451 Consolidated Cents per share 2012 3.88 3.03 $000 3,012 3,012 Number ‘000 77,599 19,415 2,504 99,518 2011 171,740 58,952 19,751 250,443 2011 5.67 4.90 4,387 4,387 77,435 12,021 - 89,456 19,414,800 Convertible Redeemable Preference Shares were in issue. At 30 June 2012, 19,222,791 (2011: 19,376,362) ordinary share options and 6,250,000 (2011: Nil) employee share options were outstanding (Exercisable at $0.40 per share) 46 Annual Report 2012Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 10. Trade and other receivables Current Trade receivables Allowance for doubtful debts Other receivables Consolidated $000 2012 16,738 - 16,738 1,008 17,746 2011 9,513 (14) 9,499 598 10,097 The average credit period on sales of goods is 34 days (2011: 34 days). No interest is charged on trade receivables. An allowance has been made for estimated irrecoverable trade receivable amounts arising from past sale of goods, determined by reference to past default experience. During the current financial year, the allowance for doubtful debts decreased by $14,000 (2011: decreased by $28,000) in the Group. There is no allowance for doubtful debts/impaired trade receivables as at 30 June 2012 (2011: $14,000). The Group does not hold any collateral over these balances. Current (i) Past due but not impaired (ii) Consolidated $000 2012 15,779 959 2011 9,218 281 (i) (ii) The current receivables for the Group are with a weighted average of 29 days (2011: 38 days). Management considers that there are no indications as of the reporting date that the debtors will not meet their payment obligations.. (ii) The past due but not impaired receivables for the Group are with a weighted average of 69 days (2011: 61 days). These relate to a number of customers for whom there is no recent history of default and other indicators of impairment. Management considers that no provision is required on these balances. The Group does not have significant risk exposure to any one debtor, however 84% (2011: 83%) of sales and 81% (2011: 82%) of year end receivables are concentrated in major supermarkets throughout Australia. Movement in the allowance for doubtful debts Balance at the beginning of the year Impairment losses recognised on receivables Amounts written off as uncollectable Amounts recovered during the year Impairment losses reversed Balance at the end of the year Consolidated $000 2012 14 - - - (14) - 2011 43 - (1) - (28) 14 Other receivables These amounts generally arise from transactions outside the usual operating activities of the Group. Management has assessed that these are all recoverable and no impairment has been taken. 47 Freedom Foods Group LimitedNotes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 11. Other financial assets / (liabilities) Current Payables to related parties - refer Note 28 Related party transactions Receivables from related parties - refer Note 28 Related party transactions Non-current Investment in joint venture entities - refer note 34 Jointly controlled operations and assets Investment in associates - refer Note 35 Related party transactions 12. Inventories Current Raw materials Finished goods Provision for stock obsolescence Consolidated $000 2012 - 81 - 12,357 12,357 Consolidated $000 2012 4,029 9,191 (76) 13,144 2011 (53) - 1,882 9,558 11,440 2011 1,484 3,985 (119) 5,349 All inventories of the Group are expected to be recovered within a 12 month period. The cost of inventories recognised as an expense during the year in respect of continuing operations was $40,549,000 (2011: $31,262,000). 13. Intangibles 2012 Balance at 1 July 2011 Impairment of Goodwill Balance at 30 June 2012 2011 Balance at 1 July 2010 Impairment of Goodwill Balance at 30 June 2011 Goodwill $’000 Brand Names $’000 Total $’000 5,214 - 5,214 6,992 (1,778) 5,214 16,274 - 16,274 16,274 - 16,274 21,488 - 21,488 23,266 (1,778) 21,488 Goodwill and brands are initially recorded at cost. All brands have been assessed as having indefinite useful lives because there is no expiration date and all brands are profitable. There were no impairment losses in the current year (2011: $1,778,000) Allocation of goodwill to cash-generating units Goodwill has been allocated for impairment testing purposes to the following cash-generating units: Seafood Freedom Foods 48 Annual Report 2012Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 13. Intangibles (continued...) Impairment of cash-generating units including goodwill There was an impairment loss recognised of $1,778,000 during the 2011 financial year for Thorpedo Foods cash generating unit. The consolidated entity carries an amount of $16,274,000 of brand names with indefinite useful lives allocated between the Seafood and Freedom Foods cash generating units. The brand names relate to major brands purchased as part of business combinations that have long establishment and are considered to be market leaders within their market segment. The brand names operate in a stable industry with a strong positioning in the consumer functional foods market. There is no goodwill associated to the Group’s acquisition of Pactum Australia Pty Limited. The carrying amount of goodwill has been allocated to the identified cash-generating units as follows: Seafood Freedom Foods Consolidated $000 2012 1,982 3,232 5,214 2011 1,982 3,232 5,214 The recoverable amounts of the cash generating units are determined based on a value in use calculation which uses cash flow projections based on financial budgets approved by management covering a five-year period, and a discount rate of 10.5% pa (2011: 10.3% pa). Cash flow projections during the budget period for the cash-generating units are also based on the same expected gross margins during the budget period. Key assumptions Cash-generating units Budgeted market share Average market share in the period immediately before the budget period plus a growth of up to 1% of market share per year. Management believes that the planned market share growth per year for the next four years is reasonable. Budgeted gross margin Average gross margins achieved in the period immediately before the budget period is consistent with that used by management. 14. Property, plant and equipment Non-current Freehold land (at fair value) Accumulated depreciation Total Land Buildings (at fair value) Accumulated depreciation Total Buildings Total Land and Buildings Consolidated $000 2012 254 - 254 4,850 (505) 4,345 4,599 2011 160 - 160 4,850 (384) 4,466 4,626 49 Freedom Foods Group Limited Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 14. Property, plant and equipment (continued...) Plant and Equipment (at cost) Accumulated depreciation Capital work in progress at cost Total Owned Plant and Equipment Motor Vehicles (under finance leases) Accumulated depreciation Total Motor Vehicles Total property, plant and equipment Consolidated $000 2012 21,215 (4,326) 16,889 14,122 31,011 30 (21) 9 35,619 2011 16,481 (2,997) 13,484 5,976 19,460 108 (99) 9 24,095 Movements in the carrying amounts of each class of property, plant and equipment between the beginning and the end of the current financial year: Group 2012 Balance at 1 July 2011 Additions Additions through acquisition of subsidiary Disposals Depreciation expense Balance at 30 June 2012 Group 2011 Balance at 1 July 2010 Additions Disposals Depreciation expense Balance at 30 June 2011 Freehold land $000 Buildings $000 Plant & Equipment $000 Motor Vehicles $000 160 94 - - - 254 150 10 - - 160 4,466 - - - (121) 4,345 4,587 - - (121) 4,466 19,460 5,417 7,463 - (1,329) 31,011 17,685 2,723 23 (971) 19,460 9 - (78) 78 9 9 - - - 9 Total $000 24,095 5,511 7,463 (78) (1,372) 35,619 22,431 2,733 23 (1,092) 24,095 Aggregate depreciation allocated, whether recognised as an expense or capitalised as part of the carrying amount of other assets during the year: Consolidated $000 2012 121 1,329 (78) 1,372 2011 121 955 16 1,092 Freehold land and buildings Plant and equipment Motor vehicles 50 Annual Report 2012 Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 15. Trade and other payables Current Trade payables (i) Other payables and accruals (ii) Payables from joint ventures and related parties - refer Note 28 Related party transactions Non-current Other payables and accruals (ii) Consolidated $000 2012 11,330 3,443 423 15,196 73 73 2011 3,079 2,500 - 5,579 504 504 (i) Trade payables are paid on average within 60 days of invoice date. No interest is charged on trade payables. (ii) Included in other payables and accruals is an amount due to the vendor of $562,000 (2011: $1,113,000) for the purchase of the Leeton property. The portion of this payable due to be settled within 12 months is $562,000 (2011: $551,000). 16. Borrowings and loans from related parties Borrowings Secured - at amortised cost Current Bank overdrafts (i) Loan payable (i) Finance leases (ii) (iii) Finance Facility (i) Non-current Loan payable (i) Finance leases (ii) (iii) Disclosed in the financial statements as: Current borrowings Non-current borrowings Consolidated $000 2012 - 5,578 2,761 10,662 7,532 4,863 31,396 19,001 12,395 31,396 2011 - 2,913 1,396 6,048 3,150 4,845 18,352 10,357 7,995 18,352 (i) Secured by assets as detailed in note 36. (ii) Secured by leased assets as detailed in note 24. (iii) Included as part of the finance leases is the Equipment Financing utilised to purchase equipment for Leeton and Taren Point 3rd Line. loans from related parties Loans from Leppington Pastoral Company - refer Note 28 Related party transactions During the year the above loan attracted interest payable at 10% per annum. Consolidated $000 2012 8,064 2011 - 51 Freedom Foods Group Limited Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 17. Provisions Current Employee benefits (i) Non-current Employee benefits Employee benefits movement Balance at 1 July 2011 Additional provision recognised Amounts used Balance at 30 June 2012 Consolidated $000 2012 902 164 1,066 985 671 (590) 1,066 2011 855 130 985 1,122 726 (863) 985 (i) The current Group provision for employee benefits includes $87,000 of annual leave and vested long service leave entitlements accrued but not expected to be taken within 12 months (2011: $107,000). 18. Issued capital Fully paid ordinary shares 77,995,731 (2011: 77,496,602) ordinary shares fully paid Balance at 1 July 2011 Issue of shares (i)(ii) Balance at 30 June 2012 Consolidated $000 2012 33,878 33,655 220 33,875 2011 33,655 33,637 18 33,655 (i) (i) During the year there were a total of 499,129 ordinary shares issued as a result of exercise of options and the dividend reinvestment plan (DRP); 153,571 ordinary shares at $0.40 per share, 300,000 ordinary shares at $0.50 per share and 45,558 at $0.389 per share under the DRP. No costs were incurred. (ii) During the prior year there were 873 ordinary shares issued as a result of exercise of options at $0.40 per share and 60,347 ordinary shares issued under the dividend reinvestment plan (DRP) at $0.30 per share. No costs were incurred. Fully paid ordinary shares carry one vote per share and carry the right to dividends. 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. The Dividend Reinvestment Plan provides shareholders with the opportunity to receive ordinary shares, in lieu of cash dividends, at a discount (set by the directors) from the market price at time of issue. Convertible Redeemable Preference Shares The CRPS are perpetual with no maturity, but redeemable after 3 years at the option of the Company. The CRPS are transferable. The dividend rate is 9.0% p.a. on the issue price of $0.30. It is a preferred, discretionary and non cumulative dividend and CRPS holders have no claim or entitlement in respect of a non payment. 52 Annual Report 2012 Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 18. Issued capital (continued...) Dividends are to be payable half-yearly in arrears. CRPS holders who convert their CRPS prior to a dividend payment date will not be entitled to any dividend for that part period in respect of that CRPS. However upon conversion to ordinary shares a holder who is on the register on the record date for a dividend payable in respect of ordinary shares will be entitled to the full ordinary dividend for that period. Dividends on the CRPS will be payable in April and October each year until converted or redeemed. CRPS holders are entitled to receive dividends in priority to holders of ordinary shares and equally with the holders of other CRPS that may be issued by Company on these terms. CRPS are convertible into fully paid ordinary shares in Company on the basis that each CRPS is convertible at the election of the CRPS holder into one ordinary share, subject to any restrictions imposed by the Corporations Act and ASX Listing Rules. There is no time limit within which CRPS must be converted. No additional consideration is payable on conversion. Notwithstanding the right of holders of CRPS to convert at any time, all CRPS will convert into ordinary shares automatically on the occurrence of certain trigger events including certain transactions involving a change in control of Company, such as a takeover of Company or a scheme or merger between Company and another body. From the date that is 3 years from the date of issue of the CRPS, the Company may redeem the CRPS at its option for the payment per CRPS of the higher of: • • the issue price of $0.30; and an amount determined by the Board of the Company with reference to the value of a CRPS as determined by an independent expert appointed by the Board. 19,414,800 (2011: 19,414,800) convertible redeemable preference shares Balance at 1 July 2011 Issue of shares Balance at 30 June 2012 Consolidated $000 2012 5,633 5,633 - 5,633 2011 5,633 - 5,633 5,633 Share options granted under the employee share option plan For information relating to the Freedom Foods Group Limited Employee Share Option Plan, including details of options issued, exercised and lapsed during the financial year and the options outstanding at year-end, refer note 29. 19. Reserves Equity-settled employee benefits Asset revaluation Other reserves Equity-settled employee benefits Balance at 1 July 2011 Share based payment Balance at 30 June 2012 Consolidated $000 2012 639 473 (5,013) (3,901) 533 106 639 2011 533 473 - 1,006 446 87 533 The equity-settled employee benefits reserve arises on the grant of share options to executives and senior employees under the Employee Share Option Plan. Amounts are transferred out of the reserve and into issued capital when the options are exercised. Further information about share-based payments to employees is made in note 29 to the financial statements. 53 Freedom Foods Group Limited Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 19. Reserves (continued...) Asset revaluation Balance at 1 July 2011 Revaluation increment Balance at 30 June 2012 Consolidated $000 2012 473 - 473 2011 473 - 473 The asset revaluation reserve arises on the revaluation of land and buildings. Where a revalued land or building is sold that portion of the asset revaluation reserve which relates to the asset, and is effectively realised, is transferred directly to retained earnings. Other reserve Balance at 1 July 2011 Acquisition of subsidiary under common control Balance at 30 June 2012 Consolidated $000 2012 - (5,013) (5,013) 2011 - - - As described in Note 3(f ), the acquisition of Pactum by the Company is accounted for as a common control transaction. As a consequence, the difference between the fair value of the consideration paid and the existing book values of assets & liabilities of Pactum has been debited to a common control reserve ($5,013,000). Upon disposal of all interests in Pactum by the Group this reserve would be transferred to retained earnings. 20. Retained earnings Balance at 1 July 2011 Profit attributable to owners of the company Dividends paid Balance at 30 June 2012 21. Dividends Recognised amounts Fully paid ordinary shares Final dividend: fully franked at 30% tax rate Interim dividend: fully franked at 30% tax rate Dividends reinvested: fully franked at 30% tax rate Convertible Redeemable Preference Shares Final dividend: fully franked at 30% tax rate Interim dividend: fully franked at 30% tax rate 54 Consolidated $000 2012 9,689 3,012 (1,038) 11,663 2012 Cents per share 0.50 - 0.39 2.00 1.40 2011 Cents per share - 0.5 - - 1.00 Total $000 370 - 18 388 262 1,038 2011 5,707 4,387 (405) 9,689 Total $000 - 386 - - 19 405 Annual Report 2012 Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 21. Dividends (continued...) On 31 August 2012, the directors declared a fully franked final dividend of $0.01 per share to the holders of fully paid ordinary shares in respect of the financial year ending 30 June 2012 to be paid to shareholders (registered as at 31st October 2012) on 30th November 2012 and dividends for the converting preference shareholders (registered on 2nd October 2012) on 2nd November 2012. The total estimated dividend to be paid is $780,000 for ordinary dividend and $272,000 for the CRPS dividend. Adjusted franking account balance Impact on franking account balance of dividends not recognised 22. Notes to the statement of cash flows (a) Reconciliation of cash and cash equivalents Parent ($000) 2012 27 451 2011 298 334 For the purposes of the statement of Cash Flows, cash and cash equivalents includes cash on hand and funds held in cash management and cheque accounts net of bank overdrafts. Cash at the end of the financial year as shown in the statement of cash flows is reconciled to the related items in the statement of financial position as follows: Cash Consolidated $000 2012 767 767 (b) Reconciliation of profit for the period to net cash flows from operating activities Profit for the year Depreciation of non current assets Movement in provision for employee entitlements Gain on disposal of assets Goodwill write off Profit on Sale of A2DP shares Interest recognised regarding Leeton facility using amortised cost method Share based payments Interest received Interest capitalised Gain in associates Gain in jointly controlled entity Movements in Working Capital Increase in trade and other receivables (Increase)/Decrease in inventory Increase in other assets Increase in deferred tax assets Increase/(Decrease) in trade and other payables Increase in provision for income tax Increase in provision for deferred income tax liability Net cash from operating activities 3,012 1,372 (81) (21) - - 299 106 (5) (360) (650) (564) (830) (3,157) 266 (192) 4,434 57 - 3,686 2011 182 182 4,387 1,092 136 - 1,778 (3,884) 239 87 (25) (346) (406) (730) (651) 1,671 (42) (1,379) (579) 135 1,214 2,697 55 Freedom Foods Group Limited Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 22. Notes to the statement of cash flows (continued...) Details of credit stand-by arrangements available and unused loan facilities are shown in note 23 to the financial statements. (c) Non-cash financing and investing activities Acquisition of common controlled entity, Pactum Consolidated $000 2012 6,000 2011 - During the year the Group acquired 50% of interest in Pactum for $6,000,000 (refer note 37). This was a non cash transaction which resulted in a recognition of a loan payable to the related party (refer note 16). 23. Standby arrangements and unused credit facilities Financing Facility Secured loan facilities - amount used - amount unused Secured finance facilities - amount used - amount unused Unused financing facilities Consolidated $000 2012 13,110 822 13,932 18,286 2,038 20,324 2,860 2011 6,063 987 7,050 12,289 1,452 13,741 2,439 The bank finance facilities are arranged with HSBC Australia with general terms and conditions and certain facility components are subject to annual review. The bank facilities of the Group are secured by a first registered mortgage over all the Group’s property, excluding items specifically discharged under the Freedom Foods equipment finance arrangement, and a first equitable mortgage over the whole of the Group’s assets and undertakings including uncalled capital. The mortgage is held by HSBC Australia. The equipment finance facilities relate to specific equipment operating at the Freedom Foods Leeton facility and Pactum Taren Point facility, arranged with National Australia Bank and Westpac. These facilities are secured over the assets financed under the facility, which have been specifically discharged from the first registered mortgage held over all the Group’s property. Interest rates are variable and subject to adjustment. 24. Capital and leasing commitments Finance leases Leasing arrangements Finance leases relate to motor vehicles and equipment with lease terms of up to 5 years. The Group has options to purchase the equipment for an agreed amount at the conclusion of the lease agreements. The Group’s obligation under finance leases are secured by the lessor’s title to the leased assets. 56 Annual Report 2012 Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 24. Capital and leasing commitments (continued...) Finance lease liabilities Payable: • No later than 1 year • Later than 1 year but not later than 5 years Minimum future lease payments (i) Less future finance charges Present value of minimum lease payments Included in the financial statements as: (note 16) Current borrowings Non-current borrowings Minimum future lease payments Present value of minimum future lease payments Consolidated $000 2012 2,818 5,465 8,283 (659) 7,624 Total $000 2011 1,844 5,207 7,051 (810) 6,241 Consolidated $000 2012 2,761 4,863 7,624 - 7,624 2,761 4,863 7,624 Total $000 2011 1,396 4,845 6,241 - 6,241 1,396 4,845 6,241 (i) Minimum future lease payments includes the aggregate of all lease payments and any guaranteed residual. Operating leases Disclosure for lessees Leasing arrangements Operating leases relate to office equipment with lease terms of between one and two and a half years. The Group does not have an option to purchase the leased asset at the expiry of the lease period. Non-cancellable operating lease commitments - Not longer than 1 year (i) - Longer than 1 year but not longer than 5 years Group’s share of jointly controlled entities capital commitments - Not longer than 1 year Consolidated $000 2012 340 30 370 - 2011 87 18 105 593 (i) Operating leases not longer than 1 year include rental payments to Leppington Pastoral Company (a related party) as a result of the acquisition of Pactum Australia Pty Limited. 25. Personnel note The entity employs casual and full time staff numbering Consolidated $000 2012 143 2011 133 57 Freedom Foods Group Limited Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 26. Financial instruments (a) Capital risk management The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of debt and equity balances. The Group’s overall strategy remains unchanged from 2011. The capital structure of the Group consists of debt, which includes the borrowings disclosed in note 16, cash and cash equivalents and equity attributable to equity holders of the parent comprising issued capital, reserves and retained earnings as disclosed in notes 18, 19 and 20 respectively. Operating cash flows are used to maintain and expand the group’s manufacturing and distribution assets, as well as to make the routine outflows of tax, dividends and repayment of maturing debt. The Group’s policy is to borrow centrally, using a variety of capital market issues and borrowing facilities, to meet anticipated funding requirements. Gearing ratio The Group’s financial management team reviews the capital structure on a regular basis. As a part of this review management considers the cost of capital and the risks associated with each class of capital. Financial liabilities Debt (i) Cash and cash equivalents Net debt Equity (ii) Net debt to equity ratio Consolidated $000 2012 39,460 (767) 38,693 47,270 82% 2011 18,352 (182) 18,170 49,983 36% (i) Debt is defined as long and short-term borrowings, as detailed in note 16. (ii) Equity includes all capital and reserves. (b) Financial risk management objectives The Group’s financial management team provides services to the each of the group businesses, co-ordinates access to domestic and international financial markets, monitors and manages the financial risks relating to the operations of the Group through internal risk reports which analyse exposures by degree magnitude of risks. These risks include market risk (including currency risk and price risk), credit risk and liquidity risk. The Group seeks to minimise the effects of these risks, by using derivative financial instruments to hedge these risk exposures. The use of financial derivatives is governed by the Group’s policies approved by the board of directors, which provide written principles on foreign exchange risk, credit risk and the investment of excess liquidity. The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. (c) Market Risk The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The Group enters into foreign exchange forward contracts to manage exposure to foreign currency risk for its imports. There has been no change to the Group’s exposure to market risks or the manner in which it manages and measures the risk. The Corporate Treasury function reports monthly to the board which monitors risks and policies implemented to mitigate risk exposure. 58 Annual Report 2012 Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 26. Financial instruments (continued...) (d) Significant accounting policies Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in note 3 to the financial statements. (e) Foreign currency risk management The Group undertakes certain transactions denominated in foreign currencies, hence exposures to exchange rate fluctuations arise. Exchange rate exposures are managed within approved policy parameters utilising forward foreign exchange contracts. The carrying amount of the Group’s foreign currency denominated financial assets and financial liabilities at the reporting date is as follows: Consolidated US dollars (USD) Canadian dollars (CAD) Financial assets $000 Financial liabilities $000 2012 7 374 2011 9 310 2012 1,218 835 2011 227 215 There have been no changes to the group’s exposure to foreign currency risks or the manner in which it manages and measures the risks from the previous period. Forward Exchange Contracts The Group enters into forward exchange contracts to buy specified amounts of foreign currencies in the future at stipulated exchange rates. The objective of entering into the forward exchange contracts is to protect the Group against unfavourable exchange rate movements for the contracted purchases undertaken in foreign currencies. The Group had entered into contracts (for terms not exceeding 12 months) to purchase finished goods from suppliers in the United States and Canada. The contracts related to highly probable forecasted transactions for the purchase of inventory for the Specialty Seafood business (Salmon and Sardines) and the Freedom Foods business (Spreads and Almond paste) with the purchase consideration being settled in the above currencies. The Group’s objective in entering into foreign exchange contracts is to provide certainty to the income and cash flow implications for the designated foreign currency purchase, relating to purchase of inventory or other capital assets. The Group had USD1,502,000 and CAD652,000 outstanding foreign exchange contracts as at 30 June 2012. The Group does not adopt hedge accounting. The following table details the forward foreign currency contracts outstanding as at reporting date: Average exchange rate Foreign currency 2012 2011 2012 2011 Contract value 2012 2011 Fair value 2012 2011 FC'000 $’000 $’000 Outstanding contracts Consolidated Buy US Dollars Less than 3 months Consolidated Buy CA Dollars Less than 3 months 0.959 1.036 1,502 590 1,566 569 (89) (18) 0.998 - 652 - 653 - (26) - 59 Freedom Foods Group Limited Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 26. Financial instruments (continued...) Foreign currency sensitivity analysis The following table details the sensitivity to an increase / decrease in the Australian dollar against the relevant currencies in relation to foreign exchange exposures. Sensitivity rates of 10% (USD) and 13% (CAD) have been used as these represent management’s assessment of a likely maximum change in foreign exchange rates. A positive number indicates an increase in profit where the Australia Dollar strengthens against the respective currency. For a weakening of the Australia Dollar against the respective currency there would be an equal and opposite impact on the profit and the balances below would be negative. Consolidated US dollars (USD) impact AUD appreciates by 10% AUD depreciates by 10% Canadian dollars (CAD) impact AUD appreciates by 13% AUD depreciates by 13% Profit or loss $000 2012 112 (138) 105 (137) 2011 (16) 22 (22) 29 This is mainly attributable to the exposure outstanding on foreign currency receivables and payables at year end in the consolidated entity and the parent. Interest rate risk management (f) The Group is exposed to interest rate risk as it borrows funds at both fixed and floating interest rates. The Group manages this risk by maintaining an appropriate mix between fixed and floating rate borrowings. Exposures to interest rate risk, which is the risk that a financial instrument’s value, its borrowing costs and interest income will fluctuate as a result of changes in market interest rates and the effective weighted average interest rates on those financial instruments are set out below: Fixed rate maturing in Financial Instrument Note Weighted average effective interest rate % Variable Rate 2012 $ ‘000 2011 $ ‘000 Financial Assets Cash and cash equivalents Total Financial Assets Financial liabilities Finance leases Other payable Due to related parties Finance facilities Loan payable Total Financial Liabilities 22 16 15 16 16 16 0% 8% 11% 10% 6% 6% 767 767 - - - 10,662 13,110 23,772 182 182 - - - 6,048 6,063 12,111 less than 1 year 2012 $ ‘000 - - 2,761 562 8,064 - - 11,387 2011 $ ‘000 - - 1,396 608 - - - 2,004 1 to 5 years 2012 $ ‘000 2011 $ ‘000 - - 4,863 - - - - 4,863 - - 4,845 504 - - - 5,349 During the financial year there has been no change to the group’s interest rate risk exposure or the manner in which it manages and measures these risks. 60 Annual Report 2012 Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 26. Financial instruments (continued...) Interest rate sensitivity analysis The sensitivity analysis below has been determined based on the impact of 150 basis point increase in interest rates on the exposure to interest rates as detailed in the above table. The impact of a 150 basis point interest rate movement during the year with all other variables being held constant will be: • a decrease on the consolidated entity’s net profit of $173,000 (2011: $89,000) respectively. This is mainly attributable to the consolidated entity’s exposure to interest rates on its variable rate borrowings. A 150 basis point movement represents management’s assessment of the possible change in interest rates. (g) Credit risk management Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted the policy of only dealing with credit worthy counterparties as a means of mitigating the risk of financial loss from defaults. The Group’s exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded are spread amongst approved counterparties. Quality of Trade and Other Receivables and Other Financial Assets have been disclosed in notes 10 and 11 respectively. Credit risk from balances with banks and financial institutions is managed by Group Treasury in accordance with a Board approved policy. Investments of surplus funds are made only with approved counterparties and within credit limits assigned to each counterparty. Counterparty credit limits are reviewed by the Board on an annual basis and may be updated throughout the year subject to approval of the Board. The limits are set to minimise the concentration of risks and therefore mitigate financial loss through potential counterparty failure. The credit risk on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies. The maximum exposure to credit risk, excluding the value of any collateral or other security, at statement of financial position date, to recognised financial assets of the Group which have been recognised on the statement of financial position is the carrying amount, net of any allowance for doubtful debts. (h) Liquidity risk management Liquidity risk arises from the possibility that the Group may be unable to settle a transaction on the due date. The ultimate responsibility for liquidity risk management rests with the Board of Directors, who has built an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group manages risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously monitoring forecasts and actual cash flows and matching the maturity profiles of financial assets and liabilities. The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously monitoring forecast and actual cash flows and matching profiles of financial assets and liabilities. Included in Note 23 is a listing of additional undrawn facilities that the company and the consolidated entity has at their disposal to further reduce liquidity risk. Liquidity risk tables The following table details the consolidated entity’s remaining contractual maturity for its financial liabilities. The table has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the consolidated entity can be required to pay. The table includes both interest and principal cash flows. 61 Freedom Foods Group Limited Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 26. Financial instruments (continued...) Consolidated Financial liabilities Trade payables Other payables and accruals Other payables Due to related parties Finance leases Finance facilities Loan payable Total Financial liabilities Weighted average effective interest rate % less than 1 year 2012 $ ‘000 2011 $ ‘000 1 to 5 years 2012 $ ‘000 2011 $ ‘000 More than 5 years 2012 $ ‘000 2011 $ ‘000 - - 11% 10% 8% 6% 6% 11,330 2,881 928 8,605 2,818 11,334 5,935 43,831 3,079 1,892 944 - 1,844 6,493 3,220 17,472 - - - - 5,465 - 8,014 13,479 - - 944 - 5,207 - 3,626 9,777 - - - - - - - - - - - - - - - - (i) Fair value of financial instruments The carrying amount of financial assets and financial liabilities recorded in the financial statements approximates their fair values. The fair values of financial assets and financial liabilities are determined as follows: • • • the fair value of financial assets and financial liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices; and the fair value of other financial assets and financial liabilities (excluding derivative instruments) are determined in accordance with generally accepted pricing models based on discounted cash flow analysis; and the fair value of derivative instruments are calculated using quoted prices. Where such prices are not available use is made of discounted cash flow analysis using the applicable yield curve for the duration of the instruments for non-optional derivatives, and option pricing models for optional derivatives. 27. Key management personnel compensation This report details the nature and amount of remuneration for each Director and the executives receiving the highest remuneration. Remuneration policy Remuneration arrangements for Directors and executives of the Parent and Group (“the Directors and executives”) are set competitively to attract and retain appropriately qualified and experienced Directors and executives. As part of its agreed mandate, the Remuneration and Nomination Committee obtains independent advice when required on the appropriateness of remuneration packages given trends in comparable companies and the objectives of the consolidated entity’s remuneration strategy. The remuneration structures explained below are designed to attract suitably qualified candidates. The remuneration structures take into account: • • • The capability and experience of the Directors and executives; The Directors and executives ability to control the relevant operational performance; and The amount of incentives within each Director and executive’s remuneration. Managing Director and Executives Fixed remuneration consists of base remuneration (which is calculated on a total cost basis and includes any FBT charges related to employee benefits including motor vehicles), as well as employer contributions to superannuation funds. The Managing Director and Executives remuneration levels are reviewed annually by the Remuneration and Nomination Committee through a process that considers the overall performance of the Group. 62 Annual Report 2012Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 27. Key management personnel compensation (continued...) Performance based remuneration Performance based remuneration is at the discretion of the Remuneration and Nomination Committee. These can take the form of share options or cash bonuses. During the year, cash bonuses were paid to A Haddad (Pactum Australia) and M Gauci (Pactum Australia) and 6,250,000 options were granted to RJF Macleod, M Bracka and A Haddad under the Company’s Employee Share Option Plan (ESOP). The ESOP allows the Company to grant options over shares to all directors (excluding Ron and Tony Perich) and permanent full time or part time employees, or their respective nominees, of a company in the group (Group Companies), which includes related bodies corporate of the Company and a body corporate in which the Company has voting power of 20% or more, whom the Board determines to be eligible to participate. The Board believes that Options granted are appropriate to aligning key executive performance with long term performance and growth of the Company. Options are valued using the binomial method. Non-Executive Directors The maximum aggregate amount of fees that can be paid to Non-Executive Directors is subject to approval by shareholders at the Annual General Meeting. Total fees for all Non-Executive Directors, last voted upon by shareholders was in October 2006, was not to exceed $300,000 in total. Total fees paid to Non-Executive Directors for 2012 was $181,033 (2011: $158,800). To align director interests with shareholder interests, the Directors are encouraged to hold shares in the Company. The Chairman receives twice the base fee of Non-Executive Directors. Non-Executive Directors do not receive performance related remuneration. Directors’ fees cover all main Board activities. Non-Executive Directors who sit on the Remuneration and Nomination Committee and the Audit, Risk and Compliance Committee receive an additional payment of $1,000 and the Chairman of each receives $2,000. There are no termination or retirement benefits for Non-Executive Directors. Service agreements All senior executive management are employed under contract. The agreements outline the components of the remuneration paid to executives including annual review. The agreements do not obligate the business to increase fixed remuneration, pay a short term incentive, make termination benefits or offer a long term incentive in any given year. The Company may terminate the contract at any time without notice if serious misconduct has occurred. Where termination with cause occurs, the executive is only entitled to that portion of remuneration that is fixed, and only up to the date of termination. The agreements may be terminated by written notice from either party or by the employing entity within the Group making a payment in lieu of notice. The notice periods are 9 months for the Managing Director and 6 months for CEO Freedom Brands and CEO Pactum Australia. Other notice periods for other executives is between 1 and 2 months. Parent performance, shareholder wealth and directors and senior management remuneration The remuneration policy of the company and group through short term (cash bonuses) and long term incentive structures (employee share options) aligns the remuneration of the Managing Director and senior Executives to long term performance and growth of the Company and development of shareholder wealth. The following table shows the revenue, profits and dividends for the past five years for the Group. Sales Revenue ($000's) Net Profit After Tax ($000s) Ordinary Dividends per share paid - Interim (cents) CRPS Dividends per share paid ( cents) Basic Earnings per Share (cents) 2012 58,132 3,012 0.50 1.40 3.88 2011 45,256 4,387 0.50 1.00 5.67 2010 44,071 3,357 - - 5.0 2009 48,596 1,320 1.0 - 2.4 2008 54,082 956 2.0 - 2.0 63 Freedom Foods Group LimitedNotes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 27. Key management personnel compensation (continued...) The Remuneration and Nomination Committee considers that the Parent’s remuneration structure is appropriate to building shareholder value in the medium term. The aggregate compensation made to Directors and other members of key management personnel of the Parent and the Group is set out below: Short-term employee benefits Post-employment benefits Share-based payment Bonus payment (paid in FY 13) Termination payment Consolidated $000 2012 1,167,142 82,562 190,219 93,200 - 1,533,123 2011 1,314,492 77,748 87,360 - 75,425 1,555,025 Details of key management personnel Key management personnel (incorporating the Group and Company Executive who receive the highest remuneration for the year) include: P.R. Gunner - Chairman and Non-Executive Director R.J.F. Macleod - Managing Director G.H. Babidge - Non Executive Director A.M. Perich - Non-Executive Director. R. Perich - Non-Executive Director M. Miles - Non-Executive Director M. Bracka - CEO Freedom Brands A. Haddad - CEO Pactum Australia P. Brown - Executive General Manager Sales, Freedom Brands P. Bartier - National Supply Chain Manager, Freedom Brands M. Gauci - Operations Manager, Pactum Australia Determination of remuneration of specified directors Remuneration of Non-Executive Directors comprise fees determined having regard to industry practice and the need to obtain appropriately qualified independent persons. Fees do not contain any non-monetary elements. Remuneration of the Executive Director is determined by the Remuneration & Nomination Committee. In this respect, consideration is given to normal commercial rates of remuneration for similar levels of responsibility. Options have been granted to the Managing Director to acquire ordinary shares in Freedom Foods Group Limited. 64 Annual Report 2012 Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 27. Key management personnel compensation (continued...) The compensation of each member of the key management personnel of the Group is set out below: 2012 Short term benefits Salaries and fees Bonus Non monetary Other Post employment benefits Superannuation Equity compensation Options Total Short term benefits Salaries and Fees Bonus Non-monetary Other Post employment benefits Superannuation Equity compensation Options Total P. R. Gunner $ R.J.F. Macleod $ G.h. Babidge $ A. M. Perich $ R. Perich $ M. Miles $ 63,000 - - - 259,800 - - - 21,333 - - - 32,700 - - - 32,000 - - - 32,000 - - - 5,670 15,775 2,880 - 2,880 2,880 - 68,670 76,088 351,663 - 24,213 - 32,700 - 34,880 M. Bracka $ A. haddad (i) $ P. Brown $ P. Bartier $ M. Gauci (ii) $ 309,800 - - - 59,150 62,000 - - 164,220 - - - 159,204 - - - 33,935 31,200 - - - 34,880 Total $ 1,167,142 93,200 - - 15,775 5,066 14,780 13,056 3,800 82,562 60,870 386,445 53,261 179,477 - 179,000 - 172,260 - 68,935 190,219 1,533,123 (i) Salary is for the period from 1 April 2012 to 30 June 2012 during which Pactum was a subsidiary of the Group. (ii) Salary is for the period from 1 April 2012 to 30 June 2012 during which Pactum was a subsidiary of the Group. 2011 Short term benefits Salaries and fees Bonus Non monetary Other Post employment benefits Superannuation Equity compensation Options Total P. R. Gunner $ R.J.F. Macleod G.h. Babidge (i) $ $ A. M. Perich $ R. Perich $ M. Miles $ 63,000 - - - 259,800 - - - 64,133 - - 75,425 31,800 - - - 32,000 - - - 32,000 - - - 5,670 15,199 2,533 1,125 2,880 2,880 - 68,670 43,680 318,679 43,680 185,771 - 32,925 - 34,880 - 34,880 65 Freedom Foods Group LimitedNotes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 27. Key management personnel compensation (continued...) M. Bracka (ii) $ P. Wilson (iii) $ P. Bartier $ P. Brown $ C. Pensini (iv) $ Short term benefits Salaries and Fees Bonus Non monetary Other Post employment benefits Superannuation Equity compensation Options Total 232,351 - - - 11,399 - 243,750 Total $ 1,314,492 - - 75,425 151,000 - - - 148,409 - - - 162,385 - - - 137,614 - - - - 11,890 12,444 11,728 77,748 - 151,000 - 160,299 - 174,829 - 149,342 87,360 1,555,025 (i) Other is payment for leave and other statutory entitlements relating to change in role from executive to non executive director in September 2010 (ii) M. Bracka commenced 17 October 2010 (iii) P. Wilson resigned April 2011 (iv) Resigned 30 June 2012 28. Related party transactions (a) Equity interests in related parties (i) Equity interests in subsidiaries Details of the percentage of ordinary shares held in subsidiaries are disclosed in note 31 to the financial statements. (ii) Equity interest in joint ventures and associates Details of interests in joint ventures are disclosed in note 34 and associates note 35 to the financial statements. (b) Transactions with key management personnel (i) Key management personnel compensation Details of key management personnel compensation are disclosed in note 27 to the financial statements. (ii) Key management personnel equity holdings Fully paid ordinary shares of the Group 66 Annual Report 2012 Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 28. Related party transactions (continued...) 2012 P. R. Gunner R.J.F Macleod G.H Babidge A. M. Perich (1) R. Perich (1) M. Miles M.Perich (1) M Bracka (2) A. Haddad (3) M. Gauci (3) P. Bartier P. Brown 2011 P. R. Gunner R.J.F Macleod G.H Babidge A. M. Perich (1) R. Perich (1) M. Miles M.Perich (1) M Bracka (2) P. Bartier P. Brown C. Pensini Balance at 1 July 2011 No. 510,732 182,775 98,057 51,465,265 51,465,265 210,110 51,465,265 220,436 - - - - Balance at 1 July 2010 No. 510,732 182,775 98,057 51,164,454 51,164,454 206,667 51,164,454 - - - - Granted as compensation No. Received on exercise of options No. Net other change (4) No. Balance at 30 June 2012 No. - - - - - - - - - - - Granted as compensation No. - - - - - - - - - - - - Received on exercise of options No. - - - - - - - - - - - - - - - - - - - - - - - - - 154,829 154,829 2,702 154,829 107,166 80,384 - - - Net other change (4) No. 510,732 182,775 98,057 51,620,094 51,620,094 212,812 51,620,094 327,602 80,384 - - - Balance at 30 June 2011 No. - - - 300,811 300,811 3,443 300,811 220,436 - - - 510,732 182,775 98,057 51,465,265 51,465,265 210,110 51,465,265 220,436 - - - (1) Mr A.M. Perich Mr R. Perich and Mr M. Perich (as their alternate) are Joint Managing Directors of Arrovest Pty Limited, the entity holding a direct interest in the Group. (2) Mr M. Bracka commenced employment with Group in October 2011. (3) Mr A. Haddad and Mr M. Gauci commenced employment with Pactum (Formerly Contract Beverage Packers of Australia) in August 2008 and October 2007 respectively. (4) Subscribed to during the year. 67 Freedom Foods Group LimitedNotes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 28. Related party transactions (continued...) Convertible Redeemable Preference shares of the Group (Issued in FY 2011) 2012 P. R. Gunner R.J.F. Macleod G.H. Babidge A. M. Perich (1) R. Perich (1) M. Miles M. Perich (1) M. Bracka (2) A. Haddad (3) P. Bartier P. Brown M. Gauci (3) Balance at 1 July 2011 No. Granted as compensation No. Received on exercise of options No. Net other change No. Balance at 30 June 2012 No. 159,604 6,666 30,643 15,995,142 15,995,142 64,584 15,995,142 50,391 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 159,604 6,666 30,643 15,995,142 15,995,142 64,584 15,995,142 50,391 - - - - (1) Mr A.M. Perich Mr R. Perich and Mr M. Perich (as their alternate) are Joint Managing Directors of Arrovest Pty Limited, the entity holding a direct interest in the Group. (2) Mr M. Bracka commenced employment with Group in October 2011. (3) Mr A. Haddad and Mr M. Gauci commenced employment in August 2008 and October 2007 respectively. Option over ordinary shares of the Group (exercisable at $0.40 cents ) (Issued in FY 2011) Balance at 1 July 2011 No. Granted as compensation No. Received on exercise of options No. Net other change No. Balance at 30 June 2012 No. 2012 P. R. Gunner R.J.F. Macleod G.H. Babidge A. M. Perich (1) R. Perich (1) M. Miles M. Perich (1) M. Bracka (2) A. Haddad (3) P. Bartier P. Brown M. Gauci (3) 159,604 6,666 30,643 15,995,142 15,995,142 64,584 15,995,142 50,391 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 159,604 6,666 30,643 15,995,142 15,995,142 64,584 15,995,142 50,391 - - - - (1) Mr A.M Perich Mr R. Perich and Mr M. Perich (as their alternate) are Joint Managing Directors of Arrovest Pty Limited, the entity holding a direct interest in the Group. (2) Mr M. Bracka commenced employment with Group in October 2011. (3) Mr A. Haddad and Mr M. Gauci commenced employment in August 2008 and October 2007 respectively. 68 Annual Report 2012Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 28. Related party transactions (continued...) Employee Share Options in the Group Balance at 1 July No. lapsed No. 1,700,000 1,700,000 - - 300,000 (1,700,000) (1,700,000) - - - Granted as compen- sation No. 2,500,000 - 1,750,000 2,000,000 - - - - - 300,000 2,000,000 2,400,000 300,000 (300,000) (700,000) - - - - - - - 2012 R. J. F. Macleod G.H. Babidge A Haddad M Bracka P. Nathan 2011 R. J. F. Macleod G.H. Babidge P. Nathan Exercised No. Net other change No. Balance at 30 June No. Balance vested at 30 June No. Vested but not exercisable No. Vested and exercisable No. Options vested during year No. - - - - - - - - - - 1,700,000 1,700,000 300,000 425,000 425,000 - - - - - - - - - 2,500,000 - 1,750,000 2,000,000 - - - - - - 1,700,000 1,700,000 300,000 1,700,000 1,700,000 300,000 - - - - - - - - (i) As at 27 July 2010 700,000 vested options relating to G.H. Babidge and 300,000 vested options relating to R.J.F. Macleod expired in accordance with the provisions of the Employee Share Option Plan. All share options issued to key management personnel were made in accordance with the provisions of the Employee Share Option Plan. Further details of the Employee Share Option Plan are contained in note 29 to the financial statements. For further transactions with key personnel of the Group, refer to transactions between Group Company and its related parties below. (c) Transactions with other related parties Other related parties include: • • • • entities with joint control or significant influence over the Group joint ventures in which the entity was a venturer subsidiaries other related parties (i) Transactions between the Group and its related parties During the financial year, the following transactions occurred between the Group and its other related parties: • • Pactum Australia Pty Limited is now a 100% owned subsidiary and as such has no related party transactions with the Group. In the 9 months to 31 March 2012 goods totalling $6,461,000 (2011: $5,523,000) were sold to the Group at cost. The Group entered into unsecured loan agreements with Arrovest Pty Limited and Leppington Pastoral Company (a subsidiary of Arrovest Pty Limited) for $8,064,000 (includes $6,000,000 related to the acquisition of Pactum Australia Pty Limited with a 12 month term and interest at 10% per annum; refer to note 37). Interest payments of $264,000 (2011: $118,000) were made to Leppington Pastoral Company. The weighted average interest rate on the loans is 10.5%. 69 Freedom Foods Group Limited Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 28. Related party transactions (continued...) • • The Group entered into a lease commitment with Leppington Pastoral Company on 1 April 2012. The Group made payments of $85,000 in the last 3 months of the current financial year. The Group was reimbursed by A2DP $43,000 (2011: $440,000) for labour and other administrative services provided. These services are provided under normal terms and conditions. The following balances arising from transactions between the Group and its other related parties are outstanding at reporting date: All amounts advanced to or payable to related parties are unsecured and are subordinated to other liabilities. The amounts outstanding will be settled in cash. No guarantees have been given or received. No expense has been recognised during the financial year for bad or doubtful debts in respect of the amounts owed by related parties. (ii) Transactions between joint ventures in which the entity is a venturer and other related parties of the Group During the financial year, the following transactions occurred between joint ventures in which the entity is a venturer and other related parties of the Group: • Leppington Pastoral Company sold goods and services totalling $931,000 in the 3 months to 30 June 2012 (2011: $Nil) to Pactum at cost. These services are provided under normal terms and conditions. (d) Parent entities The Parent entity of the Group is Freedom Foods Group Limited and the ultimate parent entity is Arrovest Pty Ltd which is incorporated in Australia. 29. Share based payments - Employee Share Option Plan Senior employees are eligible to participate in the share scheme under which executives are issued options to acquire shares in the Parent. Each employee share option converts into one ordinary share of the Parent on exercise. No amounts are paid or payable by the recipient on receipt of the option. 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 their expiry. There are no vesting conditions attached to these options other than continuing employment within the Group. The options granted expire within five years of their issue, or one year of the resignation of the senior employee, whichever is the earlier. In relation to options issued during the financial year ended 30 June 2012, the options vest in three equal tranches over a period of 3 years. The following share-based payment arrangements were in existence during the current and comparative reporting periods: Option series Senior Executive Grant Number Grant date Expiry date 6,250,000 1/02/12 1/02/17 Exercise price $ 0.40 Fair value at grant $ 0.12 The weighted average fair value of the share options granted during the financial year is $0.12 (2011: $nil). Options were priced using a binomial option pricing model. Where relevant, the expected life used in the model has been adjusted on management’s best estimate for the effects of non-transferability, exercise restrictions and behavioural considerations. 70 Annual Report 2012 Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 29. Share based payments - Employee Share Option Plan (continued...) Expected volatility is based on historical share price volatility over the past 2 years. It is expected that options will be exercised only in the event of market price exceeding exercise price. Inputs into the model Grant date share price Exercise price Expected volatility Option life Dividend yield Risk-free interest rate Executive Options 0.46 0.40 20% 5 years 2.5% 5% The following reconciles the outstanding share options granted under the employee share option plan at the beginning and end of the financial year: Balance at beginning of the financial year Granted during financial year Lapsed during financial year Cancelled during financial year Exercisable at end of financial year 2012 Number of options 3,700,000 6,250,000 (3,700,000) - 6,250,000 3,750,000 Weighted average exercise price $ 0.50 0.40 0.50 - 0.40 2011 Number of options 4,700,000 - (1,000,000) - 3,700,000 Weighted average exercise price $ 0.50 - 0.50 - 0.50 0.40 3,700,000 0.50 Balance at end of the financial year The share options outstanding at the end of the financial year had an average exercise price of $0.40 (2011: $0.50), and a weighted average remaining contractual life of 1,648 days (2011: 170 days). No options were exercised during the financial year. 30. Contingent liabilities Bank guarantee arising from rental of office premises. No liability is expected to accrue. Consolidated $000 2012 14 31. Controlled entities Controlled Entity Paramount Seafoods Pty Limited (i) Nutrition Ventures Pty Limited (i) Nutrition Ventures Financing Pty Limited (i) Freedom Foods Pty Limited (i) Pactum Australia Pty Limited Australian Natural Foods Holdings Pty Limited (i) Thorpedo Foods Group Pty Limited (i) Thorpedo Foods Pty Limited Thorpedo Seafoods Pty Limited Country of Incorporation Ownership interest Australia Australia Australia Australia Australia Australia Australia Australia Australia 2012 100% 100% 100% 100% 100% 100% 100% 75% 75% 2011 14 2011 100% 100% 100% 100% 50% 100% 100% 75% 75% 71 Freedom Foods Group LimitedNotes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 31. Controlled entities (continued...) The consolidated statement of comprehensive income and statement of financial position of the entities party to the deed of cross guarantee is the consolidated statement of comprehensive income and statement of financial position included in the 2012 financial report. (i) These companies are members of the tax consolidated group. 32. Companies party to deed of cross guarantee The following have entered into a deed of cross guarantee as a condition to obtaining relief under ASIC Class Order 98/1418 from the Corporations Act 2001 requirements to prepare and lodge an audited financial report and a directors’ report. Members of the closed group are: • • • • Freedom Foods Group Limited Paramount Seafoods Pty Limited Nutrition Ventures Pty Limited Nutrition Ventures Financing Pty Limited • • • Freedom Foods Pty Limited Australian Natural Foods Holdings Pty Limited Thorpedo Foods Group Pty Limited Each party to the deed of cross guarantee, guarantees to each creditor in the group payment in full of any debt upon winding up under the provisions of the Corporations Act 2001 or, in any other case, if six months after a resolution or order for winding up, any debt of a creditor that has not been paid in full. The consolidated financial report of the closed group would not be materially different from the report of the group as a whole. 33. Parent entity disclosures (a) Financial position Parent $000 2012 2,117 59,657 61,774 8,507 1,309 9,816 51,958 39,508 638 11,812 51,958 $000 2011 129 53,575 53,704 442 1,321 1,763 51,941 39,288 532 12,121 51,941 Assets Current assets Non-current assets Total assets liabilities Current liabilities Non-current liabilities Total liabilities Net Assets Equity Issued capital Reserves Retained earnings Total equity 72 Annual Report 2012Notes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 33. Parent entity disclosures (continued...) (b) Financial performance Profit for the year Other comprehensive income Total comprehensive income (c) Contingent liabilities of the parent entity Bank guarantee Parent $000 2012 729 - 729 $000 2012 14 (d) Commitments for the acquisition of property, plant and equipment by the parent entity Plant and equipment, PV of minimum future lease payments Not longer than 1 year Longer than 1 year and not longer than 5 years Longer than 5 years 34. Jointly controlled operations and assets The Group is a venturer in the following jointly controlled operations and assets: $000 2012 8 27 - Output interest (%) $000 2011 9,176 - 9,176 $000 2011 14 $000 2011 8 39 - Name of venture Pactum Australia Pty Limited Country of incorporation Australia Principal activity Contract beverage packing services 2012 100 2011 50 On 1st April 2012, Pactum Australia Pty Limited became a wholly owned subsidiary of the group. The acquisition of Pactum Australia Pty Limited (“Pactum”) has been accounted for as a common control transaction as at the time of this transaction both Freedom Foods Group and Pactum Australia Pty Limited were controlled by the same shareholder. As a common control transaction, the acquisition does not reflect the fair value of assets and liabilities acquired or any recording of additional goodwill at the time of the acquisition of Pactum. The acquisition balance sheet of Pactum reflects the values for assets and liabilities acquired from Pactum’s accounting records. The difference of $5,013,000 between the fair value of the consideration given and the carrying value of the assets and liabilities acquired is recognised as a common control reserve in the consolidated financial statements. 73 Freedom Foods Group LimitedNotes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 34. Jointly controlled operations and assets (continued...) Reconciliation of movement in investments accounted for using the equity method: Balance at 1 July Share of profits for the year Acquisition of Pactum Australia Pty Limited Balance at 30 June $’000 2012 1,882 564 (2,446) - 2011 1,152 730 - 1,882 Summarised financial information in respect of Freedom Foods Group Limited’s share in the joint venture is set out below: Current assets Non current assets Total assets Current liabilities Non current liabilities Total Liabilities Net assets Shareholder funds Revenue Profit after income tax 35. Share in associate entity $’000 2012 - - - - - - - - 12,379 564 2011 5,302 4,453 9,755 4,052 4,294 8,346 1,409 1,409 16,551 730 Output interest (fully diluted) (%) Name of associate A2C Country of incorporation New Zealand Principal activity Sale of a2 milk in Australia 2012 25.8 2011 24.0 At the end of July 2010, the group sold its shareholding of 50% ownership in A2DP to A2C in consideration for 120,376,950 fully paid ordinary shares in A2C. The group holds 149,877,219 ordinary shares and 6,158,910 partly paid shares in A2C at 30 June 2012. Reconciliation of movement in investment accounted for using the equity method: Balance at 1 July Share of profits/(losses) for the year (i) Dividends Equity investment Costs associated with investment Balance at 30 June (i) An extra $245,000 was booked to the investment in A2C post year end 74 A2C $’000 2012 9,558 650 10,208 - 2,064 85 12,357 2011 - 295 295 - 9,256 7 9,558 Annual Report 2012Directors’ Declaration (For the financial year ended 30 June 2012) 35. Share in associate entity (continued...) Summarised financial information in respect of Freedom Foods Group Limited’s share in the associate is set out below: Current assets Non current assets Total assets Current liabilities Non current liabilities Total Liabilities Net assets Shareholder funds Revenue Profit / (loss) after income tax A2C $’000 2012 5,064 5,032 10,096 2,497 7 2,503 7,593 7,593 12,694 895 2011 3,732 2,365 6,097 1,395 10 1,405 4,692 4,692 7,936 295 36. Assets pledged as security In accordance with the security arrangements of liabilities, as disclosed in note 16 to the financial statements, all non- current assets of the Group, have been pledged as security. The holder of the security does not have the right to sell or repledge the assets. The Group does not hold title to the equipment under finance lease pledged as security. During 2009, Freedom Foods Pty Limited entered into an equipment lease with National Australia Bank to assist in financing equipment requirements for the Freedom manufacturing site at Leeton. The maximum facility limit is for financing amounts of up to $8 million with a lease term of 5 years with a 20% residual. The facility is secured by the financed equipment and Freedom Foods obligations under the lease are guaranteed by Freedom Foods Group Limited. The Group now also holds equipment leases with Westpac relating to it’s acquisition of Pactum Australia Pty Limited. These leases have a maximum lease term of 5 years with residual payments of between 20% and 50%. The facility is secured by the financed equipment at our Taren Point site and Pactums obligations under the leases are guaranteed by Leppington Pastoral Company, a related party. 37. Acquisition of common controlled entities On 1st April 2012, Pactum Australia Pty Limited became a wholly owned subsidiary of the group. The acquisition of Pactum Australia Pty Limited (“Pactum”) has been accounted for as a common control transaction as at the time of this transaction both Freedom Foods Group Limited and Pactum Australia Pty Limited were controlled by the same shareholder. As a common control transaction, the acquisition does not reflect the fair value of assets and liabilities acquired or any recording of additional goodwill at the time of the acquisition of Pactum. The acquisition balance sheet of Pactum reflects the values for assets and liabilities acquired from Pactum’s accounting records. The difference of $5,013,000 between the fair value of the consideration given and the carrying value of the assets and liabilities acquired is recognised as a common control reserve in the consolidated financial statements. 75 Freedom Foods Group LimitedNotes to the Financial Statements (For the financial year ended 30 June 2012) (continued...) 37. Acquisition of common controlled entities (continued...) Net assets Cash and cash equivalents Trade and other receivables Inventories Prepayments Property, plant and equipment Trade and other payables Borrowings Current tax liabilities Deferred tax liabilities Total net assets Common control reserve Book value of net assets Consideration Derecognition of equity accounted investment in the joint venture Common control reserve Cash flows Net cash acquired within subsidiary Consolidated $000 2012 288 7,133 3,389 207 7,462 (6,209) (8,171) (594) (72) 3,433 3,433 (6,000) (2,446) (5,013) 288 Acquisition costs During the year, the Group incurred acquisition related costs of $120,000 relating to external legal fees, independent exports report and shareholder communications. These costs have been written off against the Group’s consolidated income. 76 Annual Report 2012Directors’ Declaration (For the financial year ended 30 June 2012) n Directors’ Declaration FREEDOM FOODS GROUP LIMITED DIRECTORS’ DECLARATION FOR THE YEAR ENDED 30 JUNE 2012 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) the attached financial statements are in compliance with International Financial Reporting Standards, as stated in note 3 to the financial statements. (c) 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 consolidated entity; and (d) the directors have been given the declarations required by s.295A of the Corporations Act 2001. At the date of this declaration, the company is within the class of companies affected by ASIC Class Order 98/1418. The nature of the deed of cross guarantee is such that each company which is party to the deed guarantees to each creditor payment in full of any debt in accordance with the deed of cross guarantee. In the directors’ opinion, there are reasonable grounds to believe that the company and the companies to which the ASIC Class Order applies, as detailed in note 32 to the financial statements will, as a group, be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the deed of cross guarantee. 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 P R Gunner Chairman Rory J F Macleod Managing Director Sydney, 28 September 2012 77 Freedom Foods Group Limited Independent Audit Report n Independent Audit Report Deloitte Touche Tohmatsu ABN 74 490 121 060 The Barrington Level 10 10 Smith Street Parramatta NSW 2150 PO Box 38 Parramatta NSW 2124 Australia DX 28485 Tel: +61 (0) 2 9840 7000 Fax: +61 (0) 2 9840 7001 www.deloitte.com.au Independent Auditor’s Report to the Members of Freedom Foods Group Limited Report on the Financial Report We have audited the accompanying financial report of Freedom Foods Group Limited, which comprises the statement of financial position as at 30 June 2012, the statement of comprehensive income, the statement of cash flows and the statement of changes in equity for the year ended on that date, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration of the consolidated entity comprising the company and the entities it controlled at the year’s end or from time to time during the financial year as set out on pages 30 to 77. Directors’ Responsibility for the Financial Report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 3a, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that compliance with the Australian equivalents to International Financial Reporting Standards ensures that the financial report, comprising the financial statements and notes, complies with International Financial Reporting Standards. Auditor’s Responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited 78 Annual Report 2012Independent Audit Report (continued...) Auditor’s Independence Declaration In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. We confirm that the independence declaration required by the Corporations Act 2001, provided to the directors of Freedom Foods Group Limited on 28 September 2012 would be in the same terms if provided to the directors as at the date of this auditor’s report. Opinion In our opinion: (a) the financial report of Freedom Foods Group Limited is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2012 and of their performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and (b) the financial report also complies with International Financial Reporting Standards as disclosed in Note 3a. Report on the Remuneration Report We have audited the Remuneration Report included in pages 11 to 16 of the directors’ report for the year ended 30 June 2012. The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Auditor’s Opinion In our opinion the Remuneration Report of Freedom Foods Group Limited for the year ended 30 June 2012, complies with section 300A of the Corporations Act 2001. DELOITTE TOUCHE TOHMATSU Catherine Hill Partner Chartered Accountants Parramatta, 28 September 2012 79 Freedom Foods Group Limited Shareholder Statistics n Shareholding Class of shares and voting rights At 31 August 2012, there were: Substantial shareholders 77,995,731 ordinary shares of the Parent on issue. 19,414,800 convertible redeemable preference shares of the Parent on issue. The number of shares held substantial shareholders as listed in the Parent’s register as at 31 August 2012 are: Ordinary Shares Arrovest Pty Limited Telunapa Pty Ltd Convertible Redeemable Preference Shares Arrovest Pty Limited Mr Stephen Francis Higgs & Mrs Rosemary Jean Higgs Number 51,620,094 12,729,144 15,995,142 1,599,999 The Parent’s listed ordinary shares are of one class with equal voting rights and all are quoted on a Member Exchange of the Australian Stock Exchange Limited (the home exchange being the Australian Stock Exchange (Sydney) Limited). Distribution of ordinary shareholders as at 31 August 2012 1-1,000 1,001-5,000 5,001-10,000 10,001-100,000 100,001 and over Ordinary 300 253 84 130 35 802 Non marketable securities which are holdings of less than 1,666 ordinary shares are held by 362 shareholders. This statistic is based on the share register as at 31 August 2012. 80 Annual Report 2012 Substantial shareholders (continued...) 20 largest ordinary shareholders as at 31 August 2012 Name 1 Arrovest Pty Ltd 2 Telunapa Pty Ltd 3 National Nominees Limited 4 East Coast Rural Holdings Pty Limited 5 Mr Perry Richard Gunner & Mrs Felicity Jane Gunner 6 Mr Stephen Francis Higgs & Mrs Rosemary Jean Higgs 7 Mr Michael Andris Bracka & Mrs Janine Elizabeth Bracka 8 J P Morgan Nominees Australia Limited 9 Mr Lawrence Lip & Mrs Sabina Lip 10 Mr Terence Edward Morris C/- Ord Minnett Ltd -Pars Dept 11 Mr Clifford Andrew Smith & Mrs Susan Lee Smith 12 Mr Lawrence Rose & Mrs Jennifer Rose 13 Bond Street Custodians Limited 14 Mr Melvyn Miles & Mrs Joanna Miles 15 Australian Food Holdings Pty Limited 16 Mr Legh Davis & Mrs Helen Davis 17 Mr Kenneth Francis Smith & Mrs Margaret Lorraine Smith 18 Mr John Wien-Smith C/- RBS Morgans Wealthplus 19 Economic Consultancy Services Pty Limited 20 Moorebank Property Management Pty Limited Shareholder Statistics (continued...) Number of Ordinary Shares held 51,620,094 12,729,144 999,904 648,729 510,732 434,615 327,602 322,670 317,506 274,910 266,273 259,184 230,000 212,812 210,426 200,000 200,000 200,000 192,308 187,747 70,344,656 % held of Ordinary Capital 66.18% 16.32% 1.28% 0.83% 0.65% 0.56% 0.42% 0.41% 0.41% 0.35% 0.34% 0.33% 0.29% 0.27% 0.27% 0.26% 0.26% 0.26% 0.25% 0.24% 90.19% The proportion of ordinary shares held by the 20 largest shareholders is 90.19% Stock exchanges that have granted quotation to the securities of the Parent quoted in Australia: All Member Exchanges. Distribution of convertible redeemable preference shareholders as at 31 August 2012 1-1,000 1,001-5,000 5,001-10,000 10,001-100,000 100,001 and over Ordinary 24 23 15 35 5 102 81 Freedom Foods Group LimitedShareholder Statistics (continued...) Substantial shareholders (continued...) 20 largest convertible redeemable preference shareholders as at 31 August 2012 Name 1 Arrovest Pty Ltd 2 Mr Stephen Francis Higgs & Mrs Rosemary Jean Higgs 3 Mr Perry Richard Gunner & Mrs Felicity Jane Gunner 4 Mr Lawrence Lip & Mrs Sabina Lip 5 Mr Alexander MacDonald 6 Dr John Warwick Cox 7 Mr Lawrence Rose & Mrs Jennifer Rose 8 Mr Melvyn Miles & Mrs Joanna Miles 9 Australian Food Holdings Pty Limited 10 Mr Robert John Perry & Mrs Jennifer Joy Perry 11 Connaught Consultants (Finance) Pty Limited 12 Mr Michael Andris Bracka & Mrs Janine Elizabeth Bracka 13 Mr Legh Davis & Mrs Helen Davis 14 Mr Richard James Wishart & Mrs Jillian Rosemary Wishart 15 Mr Steven Kalyk & Mrs Mirjana Kalyk 16 Mr Ralph Stuart Bruce & Mrs Christine Ann Bruce 17 Mr Mathew John 18 Mrs Kathleen Alice O'Shea 19 Mr Robert William Owen & Mrs Yvonne Owen 20 Mr John Wien-Smith C/- RBS Morgans Wealthplus Number of Ordinary Shares held 15,995,142 1,599,999 159,604 150,000 133,333 100,000 80,995 64,584 63,860 62,500 57,929 50,391 40,869 40,625 36,835 35,920 34,720 33,300 31,559 31,250 18,803,415 % held of Ordinary Capital 82.39% 8.24% 0.82% 0.77% 0.69% 0.52% 0.42% 0.33% 0.33% 0.32% 0.30% 0.26% 0.21% 0.21% 0.19% 0.19% 0.18% 0.17% 0.16% 0.16% 96.85% The proportion of convertible redeemable preference shares held by the 20 largest shareholders is 96.85% 82 Annual Report 2012n Corporate Directory Company Secretary Rory J F Macleod Assistant Company Secretary Sharon Maguire Principal Registered Office 80 Box Road Taren Point NSW 2229 Tel: (02) 9526 2555 Fax: (02) 9525 5406 Share Registry Link Market Services Limited Level 12, 680 George Street Sydney NSW 2000 Tel: (02) 8280 7111 Fax: (02) 9287 0303 Insurance Brokers InterRisk Australia Pty Limited Level 1, 7 Macquarie Place Sydney NSW 2000 Tel: (02) 9346 8050 Fax: (02) 9346 8051 Solicitors Gilbert & Tobin 2 Park Street Sydney NSW 2000 Tel: (02) 9263 4000 Fax: (02) 9263 4111 Addisons Level 12, 60 Carrington Street Sydney NSW 2000 Tel: (02) 8915 1000 Fax: (02) 8916 2000 Bankers HSBC Australia Limited Level 32, 580 George Street Sydney NSW 2000 Tel: 1300 308 188 (toll free) Fax: (02) 9255 2647 National Australia Bank Ltd. Level 3, 255 George Street Sydney NSW 2000 Tel: (02) 9237 1171 Fax: (02) 9237 1400 Westpac Banking Corporation Level 20, 275 Kent Street Sydney NSW 2000 Tel: (02) 6760 0000 Fax: (02) 6766 7215 Auditor Deloitte Touche Tohmatsu Chartered Accountants The Barrington, 10 Smith Street Parramatta NSW 2150 Tel: (02) 9840 7000 Fax: 02) 9840 7001 Management Rory J F Macleod Michael Bracka Amine Haddad Peter Brown Peter Bartier Mark Gauci - Managing Director - CEO Freedom Brands - CEO Pactum Australia - Executive General Manager Sales, Freedom Brands - National Supply Chain Manager, Freedom Brands - Operations Manager, Pactum Australia Corporate Directory 83 Freedom Foods Group Limited Freedom Foods Group Limited ABN 41 002 814 235 | Ph: 02 9526 2555 | Fax: 02 9525 5406 80 Box Road Taren Point NSW 2229 | PO Box 2531 Taren Point NSW 2229

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