GALE Pacific
Annual Report 2006

Plain-text annual report

“The restructuring that has occurred has put the Company in a much better position to implement its business growth strategy” “We are well positioned to expand the range of Gale products carried by our growing international customer base” Annual Report 2006 “The new senior management team will be more focused on growing our core business, delivering organic sales growth and operational efficiencies” CORPORATE INFORMATION GALE PACIFIC LIMITED ABN 80 082 263 778 DIRECTORS Mr. Harry Boon (Chairman) Mr. Peter McDonald (Managing Director and Chief Executive Officer) Mr. Gary Gale (Non-Executive Director) Mr. Daryl Reilly (Non-Executive Director) Mr. George Richards (Non-Executive Director) COMPANY SECRETARY Ms. Sophie Karzis REGISTERED OFFICE 145 Woodlands Drive, Braeside, Victoria, 3195 T + 613 9518 3333 SOLICITORS Norton Gledhill Level 23, 459 Collins Street, Melbourne, Victoria, 3000 T + 613 9614 8933 SHARE REGISTER Computershare Yarra Falls, 452 Johnston Street, Abbotsford, Victoria, 3067 Local call 1300 850 505 International call + 613 9415 4000 AUDITOR Pitcher Partners Level 19, 15 William Street, Melbourne, Victoria, 3000 T + 613 8610 5000 WEBSITE ADDRESS www.galepacific.com 2 “We are committed and determined to better match future results with the Company’s true potential Table of Contents and our shareholders’ expectations” Corporate Information Chairman’s Report Page 2 4 Managing Director and Chief Executive Officer’s Report 6 Corporate Governance Statement Directors’ Report Auditor’s Independence Declaration Independent Audit Report Directors’ Declaration Income Statement Balance Sheet Statement of Changes in Equity Statement of Cash Flows Notes to the Financial Statements Additional Stock Exchange Information 10 16 23 23 23 24 25 26 27 28 57 3 Chairman’s Report Dear Shareholders The Year in Review In last year's Annual Report, your Directors indicated that many challenges were expected in 2005/06 as your Company progressed its northern hemisphere strategy to balance the seasonality inherent in the southern hemisphere business. These challenges included growing our presence in Europe and the USA, completion of a world class manufacturing operation in China, improvements in management of working capital and inventory control, reduction of debt, recapitalisation of the balance sheet and strengthening of our management team. It is pleasing to report solid progress on all these fronts. Firstly, the expansion of our business in the northern hemisphere has progressed well with Gale’s shade products now sold through approximately 1270 retail outlets in Europe, with sales revenue up by more than 56% in the Middle East and by over 45% in the USA. Overall sales revenue grew by 12% compared with last year. Removing the effect of Jung garden products, revenue grew by 19%. Secondly, the restructure of manufacturing gathered momentum, with the completion of a purpose built manufacturing facility in China, the relocation of a significant portion of the Australian plant and equipment, and the installation of substantial new capacity for future growth. This is a significant achievement and one which we believe will be the cornerstone of the Company’s ability to be more competitive through reduced lead times and lower costs. Performance improvements were slower to reach the bottom line than originally anticipated due to delays in the commissioning of equipment and additional costs of extending Australian manufacturing operations through the transition period. Another important element of our strategy was to improve working capital management and to reduce debt. In July 2006 the Company successfully completed a capital raising of $20 million via a combination of a private placement and a share purchase plan. In addition, $15.5 million of debt represented by unsecured convertible notes was converted to ordinary shares. This has significantly reduced debt and strengthened the balance sheet, delivering a stable platform to fund the future operation of the business. Capital expenditure of $19.4 million was invested in the business to complete the investment stage of our current plan. This level of capital expenditure will reduce significantly in coming years as the focus shifts to maximising the return from these investments. After careful review, the Directors authorised the sale of our German garden product distribution business, Jung, which will contribute cash proceeds of approximately $14 million to further reduce debt. Jung had been the Company’s vehicle for accelerated entry into the European retail market, and having achieved this goal, was no longer considered to be a core part of the Company’s future strategy. Directors and management also undertook a comprehensive review of the Company’s major business units, research and development activities, organisational structure and accounting controls and processes. This review was led by the Company’s new senior management team, (Peter McDonald, Managing Director and Chief Executive Officer appointed in April 2006 and Jeff Cox, Chief Financial Officer appointed in March 2006) and resulted in substantially improved processes throughout the supply chain, a new clarity in research and development priorities, as well as writing off equipment and raw material remaining from the transfer of the knitting plant to China, writing down the carrying value of certain research and development activities, and taking up additional provisions for slow moving inventories. The culture that has brought the Company to the current stage in its development needs to develop in maturity, and management is dedicated to ensuring our people feel appreciated and rewarded for the work they do and equally to continue to foster accountability and commitment. In many instances employee effort and commitment has been much greater than is reflected in the year’s operating result, and represents an investment in the foundations of the business which will be rewarded with improved future results. Results The Company reported a loss after tax of $11.9 million, which is predominantly a reflection of the previously mentioned write downs and provisions and the loss on sale of the Jung business. Despite the disappointing result, Directors believe that the restructuring that has occurred in the past twelve months has put the Company in a much better position for growth in Australia and New Zealand, China, the United States of America, the Middle East and Europe. The benefits of these initiatives should become increasingly evident during 2006/07 and the next few years. 4 Tax Adoption of Australian Equivalents to IFRS The effective tax rate on earnings was 25.3% (income tax benefit) compared with 15.4% (income tax expense) for the year ended 30 June 2005. This was due to losses in offshore operations with higher effective tax rates. From 1 July 2005, the Company is required to comply with the Australian equivalents to International Financial Reporting Standards (AIFRS) issued by the Australian Accounting Standards Board. Dividends The Company paid a fully franked interim dividend of 1.5 cents on 18 April 2006. In light of the disappointing result, Directors have decided not to pay a final dividend this financial year. Directors expect that the Company’s overall dividend policy of paying out 50-55% of profit will be resumed on 2006/07’s anticipated improved result. Annual General Meeting A notice of the Company’s Annual General Meeting to be held on 21 November 2006 and a proxy form for voting is enclosed with this report. Entities complying with AIFRS for the first time are required to restate their comparative financial statements to amounts reflecting the application of AIFRS to that comparative period. Notes explaining the impact of the application of AIFRS on the statements of financial performance and position are set out in the financial statements of the Annual Report. The new AIFRS standards should not materially impact the Company’s operating results in the future. Outlook The Company’s strategy is to develop and grow both retail and commercial product ranges across a diversified customer base. This will be achieved through innovative “Despite the disappointing result, the restructuring that has occurred has put the Company in a much better position to implement its business growth strategy” new products and low cost supply from China. Continued improvements in working capital management are anticipated from greater flexibility in managing inventory in response to customer demand changes. The new senior management team will be focused on delivering organic sales growth and operational efficiencies. Mr. Harry Boon Chairman 29 September 2006 Re-election of Directors One of the items of business at the Company’s Annual General Meeting is the re-election of Mr. Daryl Reilly and Mr. Gary Gale who retire as Directors by rotation in accordance with the constitution of the Company and, being eligible, offer themselves for re-election. The Board endorses Mr. Reilly’s and Mr. Gale’s re-election. Corporate Governance The Company is committed to the principles of good corporate governance. A full discussion on the Company’s progress in creating strong and transparent corporate governance and in meeting all of the ‘Principles and Best Practice Recommendations’ published by the Corporate Governance Council of the Australian Stock Exchange is contained in the Directors’ Report section of this Annual Report. As part of this commentary, the Directors' Report contains the Remuneration Report. This report shows how the Company aligns employee remuneration with Company performance, putting a significant portion of executive remuneration at risk. It details both variable short term cash incentives and longer term performance hurdles. The Board believes such short and long term incentive programs are vital to improving organisational performance. At this year's Annual General Meeting shareholders will be asked to provide a non-binding vote on the Remuneration Report. Retirement of Managing Director and Chief Executive Officer Following the retirement of Mr. Gary Gale, the Board appointed Mr. Peter McDonald, the former Chief Operating Officer, to the role of Managing Director and Chief Executive Officer, effective 26 April 2006. Mr. Gale will continue his involvement with the Company as a Non-Executive Director. 5 Managing Director and Chief Executive Officer’s Report The Year in Review Asia / Pacific Fiscal year 2006 has been an enormously challenging year Australia for the Company. Whilst we have delivered a revenue increase of 12% to $167 million, we have recorded a net loss after tax of $11.9 million, largely attributable to the sale of the Jung business in Germany of approximately $6.5 million and asset write downs at year end of approximately $6.4 million. During the year we absorbed considerable costs associated with the relocation of knitted fabric production to China and the shut down of the Australian knitting operations. Significant expenses were incurred in Europe for market entry costs and start up expenses. The result does not reflect our strategic progress or our medium term potential as we continue to expand internationally with our Coolaroo (retail) and Synthesis (commercial) products and restructure our manufacturing to give us increased capacity, reduced costs and shortened supply lead times. Management is now very focussed on continuing to grow organic sales, improving our research and product development processes, plant productivity and efficiency levels, and reducing inventory levels through improved supply chain processes. The Company has a sound underlying strategy, unique technologies and innovative products with which to drive future growth. Despite challenging conditions, we have maintained a strong market position in Australia, our most mature market. Overall sales were down approximately 4% on the previous year, with sales to retailers down approximately 12% as they reduced inventories to drive efficiencies within their own organisations in tough retail conditions. Despite this, sales of Coolaroo products to consumers through these retail outlets were up on the previous year, a positive sign for our future sales activities. With retailers’ inventories now at lower levels and new products coming through for the next season, we anticipate sales growth returning to our Australian operation. Sales of Synthesis commercial fabrics remained stable and our direct to market distribution strategy strengthened ties with customers and aligned us more closely with the market. New Zealand New Zealand completed its first full year of operations since the purchase of selected assets of Donaghys Industries in December 2004. The year was very much focused on continuing the integration of the business fully within Gale. “The Company has a sound underlying strategy, unique technologies and innovative products with which to drive future growth” Stephen Carroll Managing Director (Australia) “One of the most exciting areas for growth lies in our ability to manage innovation and product development to give us a defensible competitive advantage and enable us to be first to market” Craig McCallum Managing Director (New Zealand) “The business is now well placed to supply high end specialist products from its Christchurch manufacturing facility and when necessary, have the advantage of being able to draw on our manufacturing facility in China for a range of value added lines” 6 The implementation of a new sales and distribution structure Europe / Middle East established the Company as a major direct supplier in each of the three market segments, retail, commercial, and Europe agricultural. The key objective for 2006/07 is to continue to Since the acquisition of Jung in Germany in February 2004, grow sales in these market channels and derive the benefits we have established a good base for Gale’s shade of this new structure implemented during 2005/06. China products which are now sold through approximately 1270 retail outlets in Europe. With this objective having been achieved, it was decided to sell the Jung business and to Delays in the realisation of operating efficiencies from the concentrate on the core Gale shade products. new and relocated knitting plant in our China manufacturing facility resulted in additional costs being absorbed in 2005/06. The resultant lower output levels necessitated keeping the Australian knitting plant open longer than planned. While these factors had a significant impact on the past year’s result, they are largely behind us, and we are now focusing on delivering the efficiencies and improved profitability from the investment in China manufacturing. The appointment of Paul Ducray as Head of Manufacturing has strengthened our manufacturing resources in China. Paul has over 18 years of manufacturing experience including the position of Manufacturing Manager of our New Zealand plant for the past 18 months. In addition to the retail business, we have commenced selling the Gale range of Synthesis commercial fabrics into the European market. Management is enthusiastic about the opportunities to establish a strong sales network for these products, and to expand the market distribution for our retail products. With the experience of the past two years since we entered the European market, we have now reached a customer base with coverage of the most attractive countries for sun protection products in Europe. The plan for future growth is to concentrate on fast moving products and the combined offering of local supply and direct container load shipments from China to provide competitive advantage and flexibility Additional full time resources in technical knitting and which will attract new customers and distribution channels. polymer engineering have also been added to support the team in China and ensure the required efficiency levels, costs, output and quality are achieved as early as possible. Emma Xu Managing Director (China) “The investment and commissioning phases are now complete. We have the appropriate plans and personnel in place to generate the increased efficiencies and improved returns we need to achieve from the Company’s manufacturing investment in China” 7 Managing Director and Chief Executive Officer’s Report (cont’d) Middle East Sales revenue in the Middle East increased by more than 56% from the previous period, representing the third consecutive year of double-digit growth in this region. Whilst the UAE is still our largest market in the Middle East, we have expanded strongly into Saudi Arabia, Kuwait, Importantly, we also increased our commercial/architectural fabric market penetration with sales almost doubling on the prior year. This is a market we expect to continue to grow as the use of high end commercial grade fabrics expands in the USA with an increased number of fabricators now servicing this emerging market segment. Qatar and Bahrain as demand for our commercial fabrics in The Company recently appointed a new Managing Director the region increases. With a management team now in place, our Regional Manager, Zafar Fakroddin, will spend more time focusing on establishing a market presence for the commercial range of Synthesis fabrics in the European market. USA Sales revenue for the year increased by over 46% on the previous year, with an increase in the number of stores in which our products are sold and strong sell-through with our major retail customers. Our Coolaroo products are now sold through many of the major retail chains including The Home Depot, Lowe’s, Costco, Wal-Mart and Sam’s. With this increased market penetration our focus is to expand the product range with these retail customers and develop new products to suit consumer demand and tastes. to head up the USA operations. Martin Denney, who will relocate from Australia to the USA with his family, brings to the Company a broad range of strategic, business development and operational experience across a range of industries including consumer goods, manufacturing and building products. Investing for the future Significant effort has been directed towards restructuring our operations recently to refocus the business and to improve controls and systems within the organisation to increase accountability, reduce costs and improve our profitability. We continue to invest in our business, to make it more efficient and responsive to the needs of the markets we serve. This investment in both physical and human capital will set the base for future organic growth. “The new management team is committed to delivering a solid profit result for 2007 and beyond.” Frank Albertsmeier Managing Director (Europe) “Since launching two years ago we have achieved a broad customer base with coverage of the most attractive European countries needing sun protection products” 8 Jeff Cox Chief Financial Officer “The financial restructuring during recent months has provided a strong foundation for the business to deliver growth and operational improvements. The focus includes significant generation of cash through sharpened working capital management and improved profitability from organic growth and cost reductions.” In March 2006, Jeff Cox joined Gale as Chief Financial The new management team is committed to delivering Officer and Frank Albertsmeier joined our Gale Europe a solid profit result for 2006/07 and beyond. With more business as Managing Director Europe. The increased size focused operations, improved efficiencies, significantly of the Group has placed demands on the senior executives reduced debt and a stronger balance sheet, 2006/07 is and these appointments have strengthened the Gale team expected to see the Company return to profitability to help grow and consolidate the businesses. The recent and generate positive cash flows. I would like to thank the appointment of Martin Denney as Managing Director of our team for their efforts, commitment and acceptance of USA operation adds further strength. these changes as we deliver a more focused and 2007 Priorities profitable business. Management priorities for the 2007 financial year will be to focus on organic growth, operational efficiencies and to capitalise on the low cost manufacturing base which has been implemented in this past year. Measures have been taken to ensure improved plant productivity, process controls and efficiency levels. Supply chain processes are being streamlined to better align sales and production demands and to better manage inventory levels. The Company is well positioned to maximise opportunities to further expand the range of Gale products carried by our growing international customer base and to continue to develop the commercial and industrial fabric sales and distribution channels. Product development will benefit from a more robust system and better control of expenditures to deliver clear and measurable outcomes from the Company’s significant research and development investment. New processes are being implemented to ensure that there is wider commitment and acceptance within the group of these priorities to ensure we focus our activities on our core fabric development areas and execute these plans well through the whole business. Mr. Peter McDonald Managing Director and Chief Executive Officer 29 September 2006 9 Corporate Governance Statement This statement sets out the corporate governance practices that were in operation throughout the financial year for Gale Pacific Limited and its controlled entities (“the Company”). Gale Pacific’s Directors and management are committed to conducting the Company’s business in an ethical manner and in accordance with the highest standards of corporate governance. The Board believes that Gale Pacific complies with the Corporate Governance Council’s Principles of Good Corporate Governance and Best Practice Recommendation. A summary of how the Company complies with the ASX Corporate Governance Council’s Principles of Good Corporate Governance and Best Practice Recommendations is included below. The various charters and policies are all available on the Gale Pacific web site: www.galepacific.com ASX Principle Status Reference/Comment Principle 1 Lay solid foundation for management oversight 1.1 Formalise and disclose the functions reserved Complying The Board has adopted a charter which establishes to the board and those delegated to management. the role of the Board and its relationship with management. The primary role of the Board is the protection and enhancement of long-term shareholder value. Its responsibilities include the overall strategic direction of the Company, establishing goals for management and monitoring the achievement of these goals. The functions and responsibilities of the Board and management are consistent with ASX Principle 1. A copy of the Board Charter is posted on the Company’s website. 2.1 A majority of the board members should be Complying The Board comprises five directors, three of whom Principle 2 Structure the Board to add value independent. are non-executive and independent. The Directors considered by the Board to constitute independent directors are: H. Boon, D. Reilly and G. Richards. The test to determine independence which is used by the Company is whether a Director is independent of management and any business or other relationship with the Group that could materially interfere with – or could reasonably be perceived to materially interfere with – the exercise of their unfettered and independent judgement. 2.2 The chairman should be an independent Complying The Chairman, Mr. H. Boon has been Chairman of director. the Company since August 2005 and was, at the date of his appointment and continues to be, independent. The Chairman leads the Board and is responsible for the efficient organisation and conduct of the Board’s functions. 2.3 The roles of the chairman and the chief Complying The positions of Chairman and Chief Executive executive officer should not be exercised by Officer are held by separate persons. the same individual. 10 ASX Principle Status Reference/Comment Principle 2 Structure the Board to add value 2.4 The board should establish a nomination Complying The Board has a formal Nomination Committee committee. comprising of the non-executive independent Directors. The Nomination Committee’s functions and powers are formalised in a Charter. 2.5 Provide the information indicated in the Complying The following information is set out in the Guide to reporting on Principle 2. Company’s annual report: • • The skills and experience of Directors. The Directors considered by the Board to constitute independent Directors and the Company’s materiality thresholds. • A statement regarding Directors’ ability to take independent professional advice at the expense of the Company. • • The term of office held by each Director in office at the date of the report. The names of members of the Company’s committees and their attendance at committee meetings. Principle 3 Promote ethical and responsible decision-making 3.1 Establish a code of conduct to guide the Complying The Company has formulated a Code Of Conduct directors, the chief executive officer, the chief financial officer and any other key executives as to the practices necessary to maintain confidence in the company’s integrity and the responsibility and accountability of individuals for reporting and investigating reports of unethical practices. which can be viewed on the Company’s website. 3.2 Disclose the policy concerning trading in Complying The Company has adopted a Securities Trading company securities by directors, officers and Policy which can be viewed on its website. employees. 3.3 Provide the information indicated the Guide Complying The Company’s policy documents are posted on its to Reporting on Principle 3. website. Principle 4 Safeguard integrity in financial reporting 4.1 Require the chief executive officer and the Complying The Directors are committed to the preparation of chief financial officer to state in writing to the board that the company’s financial reports present a true and fair view, in all material respects, of the company’s financial condition and operational results and are in accordance with relevant accounting standards. financial statements that present a balanced and clear assessment of the Group’s financial position and prospects. The Audit & Risk Committee reviews the Company’s half yearly and annual financial statements and makes recommendations to the Board. The Board requires the Managing Direcor and Chief Executive Officer and the Chief Financial Officer to state in writing to the Board that the Company’s financial reports present a true and fair view, in all material respects, of the Company’s financial condition and operational results and are in accordance with relevant accounting standards. 4.2 The board should establish an audit Complying The Company has an Audit & Risk Committee. The committee. primary role of the Audit & Risk Committee is to assist the Board in fulfilling its responsibilities relating to the accounting, internal control and reporting practices of the Company and its subsidiaries. 11 Corporate Governance Statement (cont’d) ASX Principle Status Reference/Comment Principle 4 Safeguard integrity in financial reporting (cont’d) 4.3 The audit committee should be structured so Complying The Audit & Risk Committee consists of only that it consists of only non-executive directors; a majority of independent directors, and have an independent non-executive, independent Directors and it has an independent Chairman who is not the Chairman of the Board. Mr D. Reilly is the Chairman of the Audit chairperson who is not chairman of the board & Risk Committee. and have at least three members. 4.4 The audit committee should have a formal Complying The Audit & Risk Committee has a formal charter charter. which sets out the Audit Committee’s role and responsibilities, composition, structure and membership requirements. The Audit Committee is given the necessary power and resources to meet its charter. 4.5 Provide the information indicated in Guide to Complying Details of the names and qualifications of the Reporting on Principle 4. members of the Audit & Risk Committee and the number of meetings held and attended by each member are contained in the Directors’ Report of the Annual Report. Principle 5 Make timely and balanced disclosure 5.1 Establish written policies and procedures Complying The Company has a documented policy which has designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior management level for that compliance. established procedures designed to ensure compliance with Australian Stock Exchange Listing Rule disclosure requirements and to ensure accountability at a senior management level for that compliance. The Managing Director and Chief Executive Officer, the Chief Financial Officer and the Company Secretary are responsible for interpreting the Company’s policy and where necessary informing the Board. The Company Secretary is responsible for all communications with the Australian Stock Exchange. The purpose of the procedures for identifying information for disclosure is to ensure timely and accurate information is provided equally to all shareholders and market participants. 5.2 Provide the information indicated in Guide to Complying A copy of the Company’s Disclosure Policy is Reporting on Principle 5. posted on the Company’s website. 12 ASX Principle Status Reference/Comment Principle 6 Respect the rights of shareholders 6.1 Design and disclose a communications Complying strategy to promote effective communication with shareholders and encourage effective participation at general meetings. The Board informs shareholders of all major developments affecting the Company’s state of affairs as follows: 1. The annual report is distributed to all shareholders, including relevant information about the operations of the consolidated entity during the year and changes in the state of affairs. 2. The half-yearly report to the Australian Stock Exchange contains summarised financial information and a review of the operations of the consolidated entity during the period. 3. All major announcements to the Australian Stock Exchange are distributed to shareholders, and posted on the Company’s website. 4. Proposed major changes in the consolidated entity which may impact on share ownership rights are submitted to a vote of shareholders. 5. The Board encourages full participation of shareholders at the Annual General Meeting to ensure a high level of accountability and identification with the consolidated entity’s strategy and goals. 6.2 Request the external auditor to attend the Complying The Company’s auditor attends the Annual General Annual General Meeting and be available to Meeting. answer shareholder questions about the conduct of the audit and the preparation and content of the Auditor’s Report. Principle 7 Recognise and manage risk 7.1 The board or appropriate board committee Complying The Board has responsibility for monitoring risk should establish policies on risk oversight and oversight and ensures that the Managing Director management. and Chief Executive Officer and the Chief Financial Officer report on the status of business risks through risk management programs aimed at ensuring risks are identified, assessed and appropriately managed. In addition to its financial reporting obligations, the Audit & Risk Committee is responsible for reviewing the risk management framework and policies of the Company. The structure of the Audit & Risk Committee and its responsibilities reflect the requirements of ASX Principle 7. In performing this function, the Committee receives periodic reports from the auditor, senior management and, in some instances, external consultants. 7.2 The chief executive officer and the chief Complying The Managing Director and Chief Executive Officer financial officer should state to the Board in and the Chief Financial Officer are required to state writing that the statement given regarding the to the Board in writing that the integrity of the integrity of financial statements is founded on financial statements is founded on a sound system of a sound system of risk management and internal compliance and control. risk management and internal compliance and control and that the Company’s risk management and internal compliance and control system is operating efficiently and effectively in all material respects. 13 Corporate Governance Statement (cont’d) ASX Principle Status Reference/Comment Principle 7 Recognise and manage risk (cont’d) 7.3 Provide the information indicated in Guide to Part Management has completed a review of the Reporting on Principle 7. Complying Company’s major business units, organisational structure and accounting controls and processes. As a result of this review a number of risk management recommendations have been made and will be implemented. A description of the Company’s risk management policy and internal compliance and control systems is currently being documented and will be posted on the Company’s web site as soon as it is available. Principle 8 Encourage enhanced performance 8.1 Disclose the process for performance Complying The Company has in place systems designed to evaluation of the board, its committees and fairly review and actively encourage enhanced individual directors, and key executives. Board and management effectiveness. The Nomination Committee takes responsibility for evaluating the Board’s performance and the Company’s key executives. 8.2 Provide the information indicated in Guide Complying A performance evaluation for the Board and its to Reporting on Principle 8. members has recently been completed. No material internal deficiencies or issues were identified through this process although some areas have been identified for further improvement or enhancement which the Board will focus on over the coming period. Principle 9 Remunerate fairly and responsibly 9.1 Provide disclosure in relation to the Complying Details of the Directors and key senior executives company’s remuneration policies to enable remuneration are set out in the Remuneration investors to understand (i) the costs and benefits of those policies and (ii) the link between remuneration paid to directors and key executives and corporate performance. Report of the Annual Report. 14 ASX Principle Status Reference/Comment Principle 9 Remunerate fairly and responsibly (cont’d) 9.2 The board should establish a remuneration Complying committee. The Board has in place a Remuneration Committee. The structure of this Committee and its responsibilities reflect the requirements of ASX Principle 9. All three members of the Committee are independent Directors. In addition to the members, the Managing Director and Chief Executive Officer is invited to the meetings at the discretion of the Committee. This Committee is responsible for ensuring that the recruitment and remuneration policies and practices of the Company are consistent with its strategic goals and are designed to enhance corporate and individual performance as well as meet the appropriate recruitment and succession planning needs. 9.3 Clearly distinguish the structure of Complying The structure of non-executive Directors’ non-executive directors’ remuneration from remuneration is distinct from that of executives and that of executives. is further detailed in the Remuneration Report of the Annual Report. 9.4 Ensure that payment of equity-based Complying The Remuneration Committee is responsible for executive remuneration is made in accordance with thresholds set in plans approved by shareholders. reviewing and monitoring executive performance, remuneration and incentive policies and the manner in which they should operate, the introduction and operation of share plans, executive succession planning and development programs to ensure that they are appropriate to the Company’s needs and the remuneration framework for Directors (as approved by shareholders). The Committee may consult with remuneration advisors to assist in its role. 9.5 Provide the information indicated in Guide to Complying The charter setting out the responsibilities of the reporting on Principle 9. Remuneration Committee has been adopted and a copy of this charter is posted on the Company’s website. Principle 10 Recognise the legitimate interests of stakeholders 10.1 Establish and disclose a code of conduct to Complying The Company has in place a Code of Conduct guide compliance with legal and other obligations to legitimate stakeholders. which sets standards for the Board and employees in dealing with the Company’s customers, suppliers, shareholders and other stakeholders. A copy of this Code of Conduct has been posted on the Company’s website. 15 Directors’ Report The Directors of Gale Pacific Limited present their annual financial report of the Company for the financial year ended 30 June 2006. The Directors in office at any time during or since the end of the year to the date of this report are: GARY STEPHEN GALE Non-Executive Director since 2006 HARRY BOON, LLB (HONS), B. Com Chairman and Non-Executive Director appointed on 25 August 2005 Mr. Gale studied textile engineering in Germany, and is the son of the founder of the Gale business. Mr. Gale was responsible for the restructuring of the Gale Group both in Australia and the USA in 1996/97 and was appointed as Mr. Boon joined the Company in August 2005 and brings Managing Director of the Company in 1998. He was to the role his experience as a senior executive in one of responsible for the Company entering the advanced Australia’s leading listed companies, Ansell Limited. Mr. polymer fabric industry as a manufacturer in 1977, taking Boon’s executive career culminated with the position of the former Gale family business public in late 2000, Chief Executive Officer of Ansell Limited from April 2002 to expansion into world markets, and the establishment of a June 2004, having previously been President, Chief world-class manufacturing facility in China. Mr. Gale Executive Officer and Managing Director of Ansell resigned as Managing Director in April 2006 but has Healthcare since February 1989. remained on the Board as a Non-Executive Director. During the last three years, Mr. Boon has also served as a No other directorships of listed companies were held by Director of the following other listed companies: Mr. Gale at any time during the three years prior to 30 • Tattersall’s Limited • Funtastic Limited • Hastie Group Limited. Mr. Boon is Chairman of the Company’s Remuneration Committee and is also a member of the Audit & Risk and Nomination Committees. PETER RONALD MCDONALD, Bachelor of Business (Marketing) Managing Director and Chief Executive Officer since 2006 and Executive Director since 1998 Mr. McDonald was appointed Managing Director and Chief Executive Officer of Gale in April 2006. Mr. McDonald joined Gale in 1988 and was appointed as an Executive Director of the Company in 1998. Mr. McDonald has held the positions of Product Manager, National Marketing Manager, National Sales and Marketing Manager and most recently the Company’s Chief Operating Officer and Managing Director of the Company’s U.S. Operations. No other directorships of listed companies were held by Mr. McDonald at any time during the three years prior to 30 June 2006. June 2006. DARYL EDWARD JAMES REILLY, Graduate Diploma of Business (Accounting), CPA, ACIS, FTMA, AICD Non-Executive Director since 1998 Mr. Reilly was previously an Executive Director and principal of Advent Management Group Limited (“AMG”) and was AMG’s Chief Financial Officer and Company Secretary between 1984 and 2004. During his twenty year career in private equity, he has been a Director on the Boards of numerous companies involved in a diverse range of areas including manufacturing, business to business, information technology, tourism, leisure and hospitality and communications, in addition to his funds management role within AMG. He remains a significant shareholder of AMG, which has recently changed its name to Advent Private Capital Pty Ltd. He is a Director of 8T8 Corporation Pty Ltd, the holding company of Sleepmaster Pty Ltd and is a Director of its Chinese subsidiary. No other directorships of listed companies were held by Mr. Reilly at any time during the three years prior to 30 June 2006. Mr. Reilly is Chairman of the Company’s Audit & Risk Committee and is also a member of the Remuneration and Nomination Committees. 16 GEORGE HENRY RICHARDS, CPA, ACIS Non-Executive Director since 2004 Mr. Richards was the Chief Executive of Mitre 10 South West Ltd from 1990 to 2000 and was previously the Managing Director of Cooper Tools, a market leader in hand tools manufacture and distribution. Mr. Richards has had over 45 years experience in retail, marketing, manufacturing and distribution. He is a Board member of The Alfred Foundation, a Director of Magnet Mart Pty Ltd, Bowen & Pomeroy Pty Ltd, Chairman of Carpet Court Australia Limited, Associate Member of the Australian Institute of Company Directors and Australian Institute of Management. No other directorships of listed companies were held by Mr. Richards at any time during the three years prior to 30 June 2006. Mr. Richards is Chairman of the Company’s Nomination Committee and is also a member of the Audit & Risk and Remuneration Committees. THEO EVERSTEYN, FCA, Graduate Diploma Industrial Accounting and Bus. Admin. Former Chairman and Non-Executive Director, retired on 25 August 2005 Mr. Eversteyn retired as the Company’s Chairman on 25 August 2005. Mr. Eversteyn was a partner of the chartered accounting firm Bentleys MRI since 1973 and was appointed Chairman of the Melbourne partnership on 1 July 2004 and retired on 30 June 2006. During his career he has focused on manufacturing and distribution businesses. No other directorships of listed companies were held by Mr. Eversteyn during the three years prior to 30 June 2005. Company Secretary Ms Sophie Karzis. B.Juris LLB Ms. Karzis was appointed as Company Secretary on 11 June 2004. Ms Karzis is a practising lawyer who has previously held roles at Touchcorp Limited and Australian Central Finance Pty Ltd. 17 Directors’ Report (cont’d) Nature of Operations and Principal Activities Likely Developments The consolidated entity’s principal activities in the course Disclosure of information regarding likely developments in of the financial year were the manufacture and exporting of the operations of the consolidated entity in future financial advanced polymer fabrics and related products. years has been made in part in the Chairman’s Report and Review & Results of Operations The consolidated loss of the economic entity for the financial year attributable to the members of Gale Pacific Limited was $11.9 million. Refer to the Chairman’s Report for further details on the Company’s result. State of Affairs In the opinion of the Directors there were no significant changes in the state of affairs of the Company and its controlled entities that occurred during the financial year under review not otherwise disclosed in this report or the accompanying financial report. Events Subsequent to Balance Date In July 2006, the Company completed a $20 million capital raising via a combination of a share purchase plan and a private placement resulting in the Company issuing 23,529,412 ordinary fully paid shares at a price of 85 cents. In addition, the Company negotiated with holders of convertible notes issued by the Company in December 2004 and September 2005 to convert the notes into ordinary fully paid shares at a conversion price of 85 cents. 18,235,289 shares were issued in conversion of 6,864,864 the Managing Director and Chief Executive Officer’s Report of this Annual Report. Any further such disclosure and the expected results of those operations is likely to result in unreasonable prejudice to the consolidated entity and has accordingly not been disclosed in this report. Environmental Regulation and Performance The economic entity’s operations are not subject to any significant environmental regulations under the Commonwealth or State legislation. However, the Directors believe that the economic entity has adequate systems in place for the management of its environmental requirements and is not aware of any breach of those environmental requirements as they apply to the economic entity. Dividends In respect of the financial year ended 30 June 2005, a final dividend of 1.5 cents per share franked to 100% at the 30% corporate income tax rate was paid to the holders of fully paid ordinary shares on 17 October 2005. In respect of the financial year ended 30 June 2006, the Company paid a fully franked interim dividend of 1.5 cents on 18 April 2006. notes. The Company’s shareholders approved the above The Directors have determined not to pay a final dividend share issues at the Company’s Extraordinary General this financial year. Meeting held on 30 June 2006. Share Options On 5 September 2006, the Company announced that it had sold its German garden products distribution business, Jung Garten, and that it had received cash for the sale of approximately $12.5 million and a further $1.5 million receivable in October 2006. The Company maintains an option scheme for certain staff and executives, including Executive Directors, as approved by shareholders at an Annual General Meeting. The number of unissued ordinary shares under option as at the date of this report is 870,000. The issue price of each option is zero. Each Other than the matters discussed above, there has not option entitles the option holder to one (1) ordinary share in arisen in the interval between the end of the financial year Gale Pacific Limited in the event that the option is exercised. and the date of this report any item, transaction or event of a material and unusual nature likely, in the opinion of the Directors of the Company, to affect significantly, the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity in future financial years. Of the 870,000 options on issue, 50,000 options were issued on 30 December 2004, 240,000 options were issued under the Company’s executive share plan to the Managing Director and Chief Executive Officer, Mr. Peter McDonald, as approved by the Company’s shareholders at the Company’s Annual General Meeting held on 15 November 18 2004 and 580,000 options were issued on 16 November Indemnification of Officers and Auditors 2005. The exercise price of the 50,000 options is $1.50, the exercise price of the 240,000 issued options is $3.00, and the exercise price of the 580,000 issued options is $1.52. The vesting of options is determined in accordance with specific share price and/or performance hurdles. In the case of the 50,000 options, their vesting is determined by the performance of the Company’s share price over time; the vesting of the 240,000 options is determined in accordance with the achievement of certain levels of adjusted weighted During the financial year, the Company paid a premium in respect of a contract insuring the Directors of the Company, the Company Secretary and all executive officers of the Company and of any related body corporate against a liability incurred as a Director, Secretary or executive officer to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. average earnings per share of the Company’s share price over The Company has not otherwise, during or since the time and the vesting of the 580,000 options is determined in financial year, indemnified or agreed to indemnify an officer accordance with the achievement of certain levels of adjusted or auditor of the Company or of any related body corporate weighted average earnings per share of the Company’s share against a liability incurred as an officer or auditor. price over time. The 50,000 options are not exercisable after 1 December 2006, the 240,000 options and the 580,000 options are not exercisable after 1 December 2008. Options carry no rights to dividends and no voting rights. Directors’ Meetings The following table sets out the number of Directors’ meetings (including meetings of committees of Directors) Directors’ meetings Audit & Risk Remuneration Committee meetings Committee meetings Nomination Committee Directors H Boon P R McDonald G S Gale D E J Reilly G H Richards No of meetings eligible to attend 20 21 21 21 21 Attended 19 19 20 20 21 No of meetings eligible to attend No of meetings eligible to attend Attended Attended No of meetings eligible to attend Attended 4 - - 5 5 4 - - 5 5 1 - - 1 1 1 - - 1 1 1 - - 1 1 1 - - 1 1 held during the financial year and the number of meetings attended by each Director while they were a Director or committee member. Directors’ Shareholdings The following table sets out each Director’s relevant interest in shares and options in shares of the Company as at the date of this report. Name H Boon G S Gale P R McDonald D E J Reilly G H Richards Fully paid ordinary shares Share options 73,000 15,399,709 334,714 423,141 78,851 - - 240,000 - - During the financial year no options vested. As set out in the accounting standard AASB 2 and the revised ASIC guidelines, the Company has valued the issued options. The Binomial option pricing model was used and this model takes into account the following inputs: • Current price of the underlying shares as at the grant date. • Exercise price. • Expected volatility of the share price over the expected life of the options. • First exercisable date. • Expected life. • Expected dividend yield. • Risk free interest rate for the expected life of the options. The Company has utilised the Black-Scholes methodology as a comparison to the values using the Binomial methodology and there was a plus or minus 5% correlation between the values achieved under the two methodologies which is not unreasonable. Further details of the option plan are disclosed in note 17(b) to the Financial Statements. 19 Directors’ Report (cont’d) Remuneration Report This report contains the remuneration arrangements in divided between the directors as agreed. The last determination was at the Annual General Meeting held on place for Directors and executives of the Company. 14 December 2000 when shareholders’ approved the The Remuneration Committee reviews the remuneration packages of all Directors and executive officers on an annual basis and makes recommendations to the Board. Remuneration packages are reviewed with due regard to performance and other relevant factors, and advice is sought from external advisors in relation to their structure. The Company’s remuneration policy is based on the following principles: • Provide competitive rewards to attract high quality executives; Company’s constitution which provides for an aggregate remuneration of $300,000 per annum. The amount of the aggregate remuneration and the manner in which it is apportioned is reviewed periodically. The Board considers fees paid to Non-Executive Directors of comparable companies when undertaking this review process. Each Non-Executive Director receives a fee for being a Director of the Company and does not participate in performance based remuneration. Non-Executive Directors are encouraged to hold shares in the Company (purchased by the Director on-market). It is considered good • Provide an equity incentive for senior executives governance for Directors to have a stake in the Company. that will provide an incentive to executives to align their interests with those of the Company and its shareholders; and The remuneration of Non-Executive Directors for the period ended 30 June 2006 is detailed below. • Ensure that rewards are referenced to relevant Senior Manager & Executive Director Remuneration employment market conditions. Objective Remuneration packages contain the following key elements: • Primary benefits – salary/fees; The Company aims to reward executives with a level and mix of remuneration commensurate with their position and responsibilities within the Company. The objective of the • Benefits, including the provision of motor remuneration policy is: vehicles and superannuation; and • Incentive schemes, including share options under the executive share option plan as disclosed in Note 17 and Note 23 to the financial statements. Remuneration Structure In accordance with best practice corporate governance, the structure of Non-Executive Directors and senior manager remuneration is separate and distinct. Non-Executive Director Remuneration Objective The Board seeks to set remuneration at a level which provides the Company with the ability to attract and retain • Reward executives for Company and individual performance; • Align the interests of the executives with those of the shareholders; and • Ensure that total remuneration is competitive by market standards. Structure In determining the level and make-up of executive remuneration, the Remuneration Committee reviews reports detailing market levels of remuneration for comparable roles. Remuneration consists of fixed and variable elements. directors of relevant experience and skill, whilst incurring Options issued to executives as a form of compensation costs which are acceptable to shareholders. are dependant upon the performance conditions outlined Structure in note 17(b) of the financial statements. The Company’s Constitution and the Australian Stock Cash bonuses granted to executives are based on the Exchange Listing Rules specify that the aggregate remuneration of Non-Executive Directors shall be respective performance of their regional business unit. Bonuses are paid out at various times during the year and determined from time to time by a general meeting. An are determined at the discretion of the Remuneration amount not exceeding the amount determined is then Committee. 20 The following table discloses the remuneration of the Directors of the Company: Short-term benefits Post employment Share based payments Termination benefits Total Performance related Superannuation Options Total Options $ $ $ $ % % 2006 Directors Salary & fees $ Non- monetary $ Executive Directors G S Gale (i) P R McDonald 371,635 359,942 61,964 62,401 Non-Executive Directors H Boon T J Eversteyn D E J Reilly G H Richards 95,833 14,166 75,000 65,000 - - - - 12,139 5,171 41,667 - - - 51,658 72,580 - - - - 102,849 - - - - - 600,245 500,094 8.6 14.5 8.6 14.5 137,500 14,166 75,000 65,000 - - - - - - - - - - TOTAL 981,576 124,365 58,977 124,238 102,849 1,392,005 (i) Mr. Gale resigned from his role as an Executive Director on 26 April 2006, and therefore the details of his remuneration for the reporting period are to that date. Mr. Gale has not received any remuneration in his role as Non-Executive Director. Short-term benefits Post employment Share based payments Total Performance related 2005 Directors Salary & fees $ Non- monetary $ $ $ $ Superannuation Options Total Options Executive Directors G S Gale P R McDonald 396,951 269,414 Non-Executive Directors T J Eversteyn D E J Reilly G H Richards TOTAL 144,992 119,124 68,000 998,481 66,500 39,037 11,549 11,549 33,922 25,442 - - - - - - - - - 508,922 345,442 144,992 119,124 68,000 105,537 23,098 59,364 1,186,480 % 6.7 7.4 - - - - % 6.7 7.4 - - - - The following table discloses the remuneration of the 5 highest remunerated executives of the Company and the consolidated entity. Short-term benefits Post employment Share based payments Total Performance related 2006 Salary & fees $ E Jung (ii) 255,940 Z Fakroddin (iii) 148,610 S Carroll 208,900 C McCallum (iv) 198,825 150,013 Bonus $ 38,538 67,549 - 36,357 24,318 Non- monetary $ 15,784 60,031 27,070 15,558 18,919 Superannuation Options Total Options $ 4,171 - 20,527 - - $ $ - 3,950 3,950 4,938 48,600 314,433 280,140 260,447 255,678 241,850 % 12.3 25.5 1.5 16.2 30.2 - % - 1.4 1.5 1.9 20.1 - 962,288 166,762 137,362 24,698 61,438 1,352,548 Short-term benefits Post employment Share based payments Total Performance related Superannuation Options Total Options E Xu (v) TOTAL 2005 D Whyte (vi) E Jung (ii) E Xu (v) S Carroll TOTAL Salary & fees $ 261,815 222,603 128,958 175,100 Bonus $ 31,915 51,370 27,813 31,919 - Non- monetary $ 34,000 31,906 20,850 61,621 24,677 Z Fakroddin (ii) 147,200 $ - 6,545 50,850 15,759 73,154 $ $ - - - - 327,730 312,424 246,713 255,779 215,536 % 9.7 16.4 11.3 25.5 - - % - - - 13.0 - - - 33,281 935,676 143,017 173,054 33,281 1,358,182 (ii) (iii) (iv) (v) (vi) Mr. Jung was based in Germany and remunerated in Euro converted to Australian dollars in the table above. Mr. Fakroddin was based in the Middle East and remunerated in US dollars converted to Australian dollars in the table above. Mr. McCallum is based in New Zealand and remunerated in New Zealand dollars converted to Australian dollars in the table above. Ms. Xu is based in China and remunerated in RMB and US dollars converted to Australian dollars in the table above. Mr. Whyte was based in the USA and remunerated in US dollars converted to Australian dollars in the table above. 21 Directors’ Report (cont’d) Auditor Independence and Non-Audit Services A copy of the auditor’s independence declaration in relation to the audit for the financial year is provided with this report. Non-Audit Services The following non-audit services were provided by the Company’s auditor, Pitcher Partners. The Directors are satisfied that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act. The nature and scope of each non-audit service provided means that auditor independence was not compromised. Amounts paid or payable to an auditor for non-audit services provided during the year by the auditors to any entity that is part of the consolidated entity for: Taxation services General review & assistance Due diligence Consolidated Company 2005/06 $’000 99 - - 2004/05 $’000 53 45 17 2005/06 $’000 74 - - 2004/05 $’000 31 16 17 Total 99 115 74 64 Proceedings on Behalf of the Company No person has applied for leave of a 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 or any part of those proceedings. The Company was not a party to any such proceedings during the year. Rounding Off of Amounts The Company is a Company of the kind referred to in ASIC Class Order 98/0100, dated 10 July 1998, and in accordance with that Class Order amounts in the financial report are rounded off to the nearest thousand dollars. Signed in accordance with a resolution of Directors made pursuant to s.298(2) of the Corporations Act 2001. On behalf of the Directors Harry Boon Chairman 29 September 2006 Peter McDonald Managing Director and Chief Executive Officer 22 Auditor’s Independence Declaration To the Directors of Gale Pacific Limited In relation the Independent audit for the year ended 30 June 2006, to the best of my knowledge and belief there have been: (i) No contraventions of the auditor independence requirements of the Corporations Act 2001; (ii) No contraventions of any applicable code of professional conduct. Audit Opinion In our opinion, the financial report of Gale Pacific Limited and its controlled entities is in accordance with: (a) the Corporations Act 2001, including: (i) giving a true and fair view of the Company's and its controlled entities financial position as at 30 June 2006 and of its performance for the financial year ended on that date; and (ii) complying with Accounting Standards in Australia and the Corporations Regulations 2001; and (b) other mandatory professional requirements in Australia. PITCHER PARTNERS PITCHER PARTNERS M W PRINGLE Partner Melbourne 29 September 2006 M W PRINGLE Partner Melbourne 29 September 2006 Independent Audit Report Directors’ Declaration Scope The Directors of the Company declare that: We have audited the financial report of Gale Pacific The financial statements and notes, as set out on pages Limited and its controlled entities for the financial year 24 to 56 are in accordance with the Corporations Act 2001 ended 30 June 2006 comprising the Directors' Declaration, including: Income Statement, Balance Sheet, Statement of Changes in Equity, Statement of Cash Flows and notes to the financial statements. The Company's Directors are responsible for the financial report. We have conducted an independent audit of this financial report in order to express an opinion on it to the members of the Company. Our audit has been conducted in accordance with Australian Auditing Standards to provide reasonable assurance whether the financial report is free of material misstatement. Our procedures included examination, on a test basis, of evidence supporting the amounts and other disclosures in the financial report, and the evaluation of accounting policies and significant accounting estimates. These procedures have been undertaken to form an opinion whether, in all material respects, the financial report is presented fairly in accordance with Accounting Standards and other mandatory professional reporting requirements in Australia and the Corporations Act 2001 so as to present a view which is consistent with our understanding of the Company's and its controlled entities financial position and performance as represented by the results of their operations and their cash flows. The audit opinion expressed in this report has been formed on the above basis. • compliance with Accounting Standards in Australia and the Corporations Regulations 2001; • providing a true and fair view of the financial position as at 30 June 2006 and of the performance, as represented by the results of the operations and the cash flows, of the Company and economic entity for the year ended on that date; and • that the Directors have been given the declaration required under section 295A of the Corporations Act 2001. 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. This declaration is made in accordance with a resolution of the Board of Directors. Harry Boon Chairman Peter McDonald Managing Director and 29 September 2006 Chief Executive Officer 23 Income Statement for the year ended 30 June 2006 Revenue Expenses Changes in inventories of finished goods and work in progress Raw materials and consumables used Employee benefits expense Depreciation and amortisation expenses Impairment of goodwill and assets Operating overheads Other expenses Finance costs expense Profit/(loss) before income tax expense Income tax (expense)/benefit Profit/(loss) after income tax Loss attributable to minority interests Net profit/(loss) attributable to the members of the parent entity Basic earnings per share (cents per share) Diluted earnings per share (cents per share) Note 3 4 5 20 29 29 C O N S O L I D A T E D C O M P A N Y 2005/06 $’000 167,169 2004/05 $’000 149,010 2005/06 $’000 62,212 2004/05 $’000 69,829 (2,978) (16,484) (7,985) 2,356 (23,150) (9,684) (5,287) (6,478) (14,439) (3,043) (4,349) (12,203) 3,196 (9,007) - (9,007) (35,785) (12,946) (3,776) - (12,738) (1,693) (3,350) 1,897 (631) 1,266 - 1,266 (85,807) (27,823) (9,472) (4,462) (41,821) (4,630) (6,157) (15,981) 4,037 (11,944) 2 (11,942) (22.57) (22.03) (58,114) (21,824) (5,572) - (33,567) (2,280) (4,926) 6,243 (960) 5,283 2 5,285 10.32 10.31 T h e a c c o m p a n y i n g n o t e s f o r m p a r t o f t h e s e f i n a n c i a l s t a t e m e n t s 24 Balance Sheet as at 30 June 2006 CURRENT ASSETS Cash and cash equivalents Receivables Inventories Current tax assets Other current assets TOTAL CURRENT ASSETS NON-CURRENT ASSETS Receivables Other financial assets Plant and equipment Intangible assets Deferred tax assets TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Payables Income received in advance Short term borrowings Current tax liabilities Provisions TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Long term borrowings Deferred tax liabilities Provisions TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Contributed equity Reserves Retained profits PARENT ENTITY INTEREST Minority interests TOTAL EQUITY C O N S O L I D A T E D C O M P A N Y Note 2005/06 $’000 2004/05 $’000 2005/06 $’000 2004/05 $’000 6 7 8 5 9 7 10 11 12 5 13 14 5 15 14 5 15 17 18 19 20 10,552 36,702 47,599 1,047 1,497 97,397 - - 70,220 12,486 2,054 84,760 182,157 22,654 - 97,672 344 872 121,542 12,070 1,185 427 13,682 135,224 46,933 47,124 (2,096) 1,916 46,944 (11) 46,933 3,965 32,753 50,577 1,239 1,449 89,983 - - 57,765 16,210 294 74,269 164,252 19,790 - 62,247 165 1,226 83,428 20,650 5,093 547 26,290 109,718 54,534 42,071 (2,989) 15,461 54,543 (9) 54,534 6,055 6,414 11,257 591 365 24,682 55,072 25,909 19,407 5,913 - 106,301 130,983 3,768 1,026 73,030 - 768 78,592 7,237 1,185 73 8,495 87,087 43,896 47,124 178 (3,406) 43,896 - 43,896 2 7,118 19,242 1,034 377 27,773 39,731 24,816 23,802 6,490 - 94,839 122,612 5,155 - 41,116 - 1,152 47,423 20,650 5,093 73 25,816 73,239 49,373 42,071 98 7,204 49,373 - 49,373 T h e a c c o m p a n y i n g n o t e s f o r m p a r t o f t h e s e f i n a n c i a l s t a t e m e n t s 25 Statement of Changes in Equity for the Year Ended 30 June 2006 Note TOTAL EQUITY AT THE BEGINNING OF THE PERIOD Exchange differences on translation of foreign operations Employee share options 18(a) 18(b) Net income recognised directly in equity Profit/loss for the year Total recognised income and expense for the period Attributable to: Member of the parent Minority interest Transactions with equity holders in their capacity as equity holders: Contributions Dividends provided for or paid 20 17 24 C O N S O L I D A T E D C O M P A N Y 2005/06 $’000 54,534 813 80 893 (11,944) (11,051) 43,485 (2) 43,483 5,053 (1,603) 3,450 2004/05 $’000 52,753 2005/06 $’000 49,373 2004/05 $’000 48,795 (2,814) 93 (2,721) 5,283 2,562 55,317 (2) 55,315 3,044 (3,825) (781) - 80 80 (9,007) (8,927) 40,446 - 40,446 5,053 (1,603) 3,450 - 93 93 1,266 1,359 50,154 - 50,154 3,044 (3,825) (781) TOTAL EQUITY AT THE END OF THE PERIOD 46,933 54,534 43,896 49,373 T h e a c c o m p a n y i n g n o t e s f o r m p a r t o f t h e s e f i n a n c i a l s t a t e m e n t s 26 Statement of Cash Flows for the year ended 30 June 2006 C O N S O L I D A T E D C O M P A N Y Note 2005/06 $’000 2004/05 $’000 2005/06 $’000 2004/05 $’000 CASH FLOW FROM OPERATING ACTIVITIES Receipts from customers Payments to suppliers and employees 181,639 (176,266) 155,693 (153,127) Interest received Borrowing costs paid Income tax paid Net cash provided by operating activities 21(b) CASH FLOW USED IN INVESTING ACTIVITIES Proceeds from sale of plant and equipment Payment for plant and equipment Payment for acquisition of business 21(c) Investment in controlled entity Payment for intangible assets Amounts advanced to related parties Net cash used in investing activities CASH FLOW FROM FINANCING ACTIVITIES Net proceeds from borrowings Proceeds from issue of convertible notes Proceeds from issue of equity securities Repayment of principal on finance leases Proceeds from/(repayment of principal on) hire purchases Dividends paid Net cash provided by financing activities Net increase in cash held Cash at beginning of year Effects of exchange rate changes on items denominated in foreign currencies Cash at end of year 114 (6,157) (1,260) (1,930) 134 (19,443) - - (1,921) - 1,231 (4,926) (1,588) (2,717) 167 (25,051) (11,646) - (2,747) - (21,230) (39,277) 8,849 9,000 4,681 (219) (1,646) (1,232) 19,433 (3,727) (2,348) (339) 34,560 6,500 277 (188) (1,839) (2,866) 36,444 (5,550) 5,430 (2,228) 67,492 (56,648) 1,560 (4,349) (721) 7,334 4,483 (3,208) - (6,843) (1,941) (15,341) (22,850) 2,891 9,000 4,681 (220) (1,819) (1,232) 13,301 (2,215) (1,021) - 70,704 (60,532) 1,231 (3,350) (641) 7,412 157 (2,034) (11,646) - (2,761) (17,383) (33,667) 22,125 6,500 277 (186) (1,839) (2,866) 24,011 (2,244) 1,223 - 21(a) (6,414) (2,348) (3,236) (1,021) T h e a c c o m p a n y i n g n o t e s f o r m p a r t o f t h e s e f i n a n c i a l s t a t e m e n t s 27 Notes to the Financial Statements NOTE 1: BASIS OF PREPARATION This financial report is a general purpose financial report that has been prepared in accordance with Australian Accounting Standards, Urgent Issues Group Interpretations Views and other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001. The financial report covers Gale Pacific Limited as an individual parent entity and Gale Pacific Limited and controlled entities as a consolidated entity. Gale Pacific Limited is a company limited by shares, incorporated and domiciled in Australia. The following is a summary of material accounting policies adopted by the consolidated entity in the preparation and presentation of the financial report. The accounting policies have been consistently applied, unless otherwise stated. (a) Basis of Preparation of the Financial Report The financial report of Gale Pacific Limited and controlled entities, and Gale Pacific Limited as an individual parent entity comply with Australian equivalents to International Financial Reporting Standards (AIFRS). This is the first annual financial report of Gale Pacific Limited prepared in accordance with Australian Equivalents of International Financial Reporting Standards (AIFRS). The financial reports of Gale Pacific Limited were prepared in accordance with the previous Australian Generally Accepted Accounting Principles (AGAAP) until 30 June 2005. There are certain differences between accounting policies under AIFRS and AGAAP and where applicable the comparative figures have been restated to reflect these adjustments. A summary of the significant accounting policies under AIFRS is provided below. Reconciliations of equity and operating profit/loss between AGAAP and AIFRS are provided in Notes 32 and 33. The financial report has been prepared under the historical cost convention, as modified by revaluations to fair value for certain classes of assets as described in the accounting policies. (b) Principles of Consolidation The consolidated financial statements are those of the consolidated entity, comprising the financial statements of the parent entity and of all entities, which Gale Pacific Limited controlled from time to time during the year and at balance date. Details of the controlled entities are contained in Note 27. The financial statements of subsidiaries are prepared for the same reporting period as the parent entity, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies, which may exist. All inter-company balances and transactions, including any unrealised profits or losses have been eliminated on consolidation. Minority interests in the equity and results of the entities that are controlled are shown separately in the consolidated financial report. (c) Revenue Recognition Revenue from the sale of goods is recognised upon the delivery of goods to customers. Where a Government grant (including SIP income) is received or receivable relating to research and development costs that have been expensed, the grant is recognised as revenue. Where a grant is received or receivable relating to research and development costs that have been deferred, the grant is deducted from the carrying amount of the deferred costs. Other revenue is recognised when the right to receive the revenue has been established. All revenue is stated net of the amount of goods and services tax (GST). (d) Cash and Cash Equivalents For the purposes of the statement of cash flows, cash includes cash on hand and at call, deposits with banks or financial institutions, investments in money market instruments maturing within less than two months and net of bank overdrafts. (e) Inventories Inventories are measured at the lower of cost and net realisable value. Net realisable value is determined on the basis of each inventory line’s normal selling pattern. Costs are assigned on a first-in first-out basis and include direct materials, direct labour and an appropriate proportion of variable and fixed overhead expenses. (f) Plant and Equipment Each class of plant and equipment is carried at cost less, where applicable, any accumulated depreciation. Plant and Equipment Plant and equipment is measured on the cost basis. The carrying value of plant and equipment is reviewed annually to ensure it is not in excess of the recoverable amount from those assets. The recoverable amount is assessed on the basis of the expected discounted net cash flows that will be received from the asset’s employment and subsequent disposal. Refer to Note 1(i). The cost of fixed assets constructed within the economic entity includes the cost of materials, direct labour and an appropriate proportion of fixed and variable overheads. Depreciation The depreciable amounts of all fixed assets including capitalised leased assets are depreciated on a straight line basis over their estimated useful lives to the entity commencing from the time the asset is held ready for use. Leasehold improvements are depreciated over the shorter of either the unexpired period of the lease or the estimated useful lives of the improvements. Depreciation and amortisation rates are reviewed annually for appropriateness. When changes are made, adjustments are reflected in current and future periods only. The depreciation rates used for each class of assets are: Class of fixed asset Leasehold improvements Plant and equipment Leased plant and equipment Motor vehicles Office equipment Depreciation rates Determined by lease term 6.7% - 20.0% 6.7% - 20.0% Depreciation basis Straight line Straight line Straight line 20.0% 14.3% - 50.0% Straight line Straight line 28 NOTE 1: BASIS OF PREPARATION (cont’d) (g) Leases Finance Leases Leases of fixed assets, where substantially all the risks and benefits incidental to the ownership of the asset, but not the legal ownership, are transferred to the entities within the economic entity are classified as finance leases. Finance leases are capitalised, recording at the inception of the lease an asset and a liability equal to the present value of the minimum lease payments, including any guaranteed residual values. Leased assets are amortised on a straight line basis over their estimated useful lives where it is likely that the economic entity will obtain ownership of the asset or over the term of the lease. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for the period. Operating Leases Lease payments for operating leases, where substantially all the risks and benefits remain with the lessor, are charged as expenses in the periods in which they are incurred. Lease incentives received under operating leases are recognised as a liability and are brought into account as a reduction of rental expense over the lease term. (h) Intangibles Goodwill Goodwill on consolidation represents the excess of the cost of an acquisition over the fair value of the Group’s share of net identifiable assets of the acquired entities at the date of acquisition. Goodwill is not amortised but is tested annually for impairment or more frequently if events or changes in circumstances indicate that it might be impaired. Goodwill is carried at cost less accumulated impairment losses. (Refer also to notes 32 and 33 regarding first-time adoption of AIFRS). Patents and Trademarks Patents and trademarks are valued in the accounts at cost of acquisition and are amortised over the period in which the benefits are expected to be realised, but not exceeding 20 years. Research and Development Research and development costs are charged to profit before income tax as incurred or deferred where it is expected beyond any reasonable doubt that sufficient future benefits will be derived so as to recover those deferred costs. Deferred research and development expenditure is amortised on a straight-line basis over the period during which the related benefits are expected to be realised, once commercial production is commenced but not exceeding three years. (i) Impairment of Assets Assets with an indefinite useful life are not amortised but are tested annually for impairment in accordance with AASB 136. Assets subject to annual depreciation or amortisation are reviewed for impairment whenever events or circumstances arise that indicate that the carrying amount of the asset may be impaired. An impairment loss is recognised where the carrying amount of the asset exceeds its recoverable amount. The recoverable amount of an asset is defined as the higher of its fair value less costs to sell and value in use. (j) Taxes Current income tax expense or revenue is the tax payable on the current period’s taxable income based on the applicable income tax rate adjusted by changes in deferred tax assets and liabilities. A balance sheet approach is adopted under which deferred tax assets and liabilities are recognised for temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements. No deferred tax asset or liability is recognised in relation to temporary differences arising from the initial recognition of an asset or a liability if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profit or taxable profit or loss. Deferred tax assets are recognised for temporary differences and unused tax losses only when it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. (k) Employee Benefits Provision is made for the economic entity’s liability for employee entitlements arising from services rendered by employees to balance date. Employee entitlements expected to be settled within one year together with entitlements arising from wages and salaries, annual leave and sick leave which will be settled after one year, have been measured at their nominal amount. Other employee entitlements payable later than one year have been measured at the present value of the estimated future cash outflows to be made for those entitlements. Contributions are made by the economic entity to an employee superannuation fund and are charged as expenses when incurred. Share Based Payments The total amount to be expensed over the vesting period is determined by reference to the fair value of the options at grant date. Under the transitional arrangements for first- time adoption of AIFRS, no expense has been recognised for options granted before 7 November 2002 and/or vested before 1 January 2005. For options granted after 7 November 2002 and vesting after 1 January 2005 the fair value of options at grant date is determined using a Black-Scholes option pricing model, and is recognised as an employee expense over the period during which the employees become entitled to the option. The market value of shares issued to employees for no cash consideration under the employee share scheme is recognised as an expense when the employees become entitled to the shares. (l) Classification The group classifies its financial instruments in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, and available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and re-evaluates the designation at each reporting date. Loans and Receivables Loans and receivables are measured at fair value at inception and subsequently at amortised cost using the effective interest rate method. Financial Liabilities Financial liabilities include trade payables, other creditors and loans from third parties including inter-company balances and loans from or other amounts due to director-related entities. Non-derivative financial liabilities are recognised at amortised cost, comprising original debt less principal payments and amortisation. 29 NOTE 2: CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS Estimates and judgements are based on past performance and management’s expectation for the future. Critical Accounting Estimates and Assumptions The group makes certain estimates and assumptions concerning the future, which, by definition will seldom represent actual results. The estimates and assumptions that have a significant inherent risk in respect of estimates based on future events which could have a material impact on the assets and liabilities in the next financial year are discussed below: (a) Estimated Impairment of Goodwill Goodwill is allocated to cash generating units (CGU’s) according to applicable business operations. The recoverable amount of a CGU is based on value-in-use calculations. These calculations are based on projected cash flows approved by management covering a period not exceeding five (5) years. Management’s determination of cash flow projections and gross margins are based on past performance and its expectation for the future and is based on reasonable growth rates. The present value of future cash flows has been calculated using a discount rate of 12.5% to determine value-in-use. Any business risk has been limited to that which would be commonly anticipated in the current environment. (b) Income Taxes Income tax benefits are based on the assumption that no adverse change will occur in the income tax legislation and the anticipation that the Company will derive sufficient future assessable income to enable the benefit to be realised and comply with the conditions of deductibility imposed by the law. NOTE 1: BASIS OF PREPARATION (cont’d) (m) Foreign Currencies Functional and Presentation Currency The financial statements of each group entity are measured using its functional currency, which is the currency of the primary economic environment in which that entity operates. The consolidated financial statements are presented in Australian dollars, as this is the parent entity’s functional and presentation currency. Transactions and Balances Transactions in foreign currencies of entities within the consolidated entity are translated into functional currency at the rate of exchange ruling at the date of the transaction. Foreign currency monetary items that are outstanding at the reporting date (other than monetary items arising under foreign currency contracts where the exchange rate for that monetary item is fixed in the contract) are translated using the spot rate at the end of the financial year. Resulting exchange differences arising on settlement or re- statement are recognised as revenues and expenses for the financial year. A monetary item arising under a foreign currency contract outstanding at the reporting date where the exchange rate for the monetary item is fixed in the contract is translated at the exchange rate fixed in the contract. Except for certain specific hedges, all resulting exchange differences arising on settlement or re-statement are recognised as revenues and expenses for the financial year. Group Companies The financial statements of foreign operations whose functional currency is different from the group’s presentation currency are translated as follows: • Assets and liabilities are translated at year-end exchange rates prevailing at that reporting date; • Income and expenses are translated at average exchange rates for the period; and • All resulting exchange differences are recognised as a separate component of equity. Exchange differences arising on translation of foreign operations are transferred directly to the group’s foreign currency translation reserve as a separate component of equity in the balance sheet. (n) Comparatives In accordance with the first-time adoption of AIFRS, comparative information has been reclassified where appropriate through retrospective application of AIFRS to the previous years results so as to achieve consistency with current year disclosures. (o) Rounding Amounts The Company is of a kind referred to in ASIC Class Order CO 98/0100 and in accordance with that Class Order, amounts in the financial statements have been rounded off to the nearest thousand dollars, or in certain cases, to the nearest dollar. 30 NOTE 3: REVENUE Operating activities - Sale of goods - SIP income - - Interest income – other parties Interest income – related parties - Other revenue Total revenue NOTE 4: PROFIT Profit before income tax expense has been determined after charging/(crediting): Cost of sales Finance costs: - Other persons Depreciation of non-current assets - Leasehold improvements - Plant and equipment - Motor vehicles - Office equipment Amortisation of non-current assets - - Leased plant and equipment Leased motor vehicles - Patents and trademarks Research and development expenditure - Capitalised and amortised - Expensed as incurred Impairment of non current assets - Plant and equipment - Goodwill Impairment of investment in subsidiary Increase/(decrease) in provision for obsolete inventory Bad and doubtful debts - Bad debts written off - trade debtors - Movement in provisions for doubtful debts - trade debtors Remuneration of the auditors of parent entity for - Auditing the financial report - Taxation services - General review and assistance - Due diligence Remuneration of other auditors of controlled entities – audit services - Auditing the financial report - Taxation services - General review and assistance Total remuneration of auditors Foreign currency translation losses/(gains) Net loss on disposal of non-current assets - Plant and equipment Operating lease rental expense C O N S O L I D A T E D C O M P A N Y 2005/06 $’000 2004/05 $’000 2005/06 $’000 2004/05 $’000 165,885 146,850 59,784 748 114 - 422 718 1,231 - 211 167,169 149,010 748 114 1,446 120 62,212 67,880 718 1,231 - - 69,829 108,439 87,771 45,146 49,517 6,157 4,926 4,349 3,350 44 5,690 295 720 162 40 76 2,445 - 1,464 2,998 - 3,855 36 (179) 117 74 - - 193 25 - 409 (984) 5 3,713 31 3,691 220 613 289 5 125 598 308 - - - (84) - (123) 102 31 16 17 115 22 29 332 (398) 32 3,294 21 2,158 148 240 162 40 73 2,445 - 728 - 5,750 632 2 25 117 74 - - - - - 191 (984) 5 2,311 19 2,401 209 150 289 5 105 598 308 - - - 47 - (2) 102 31 16 17 - - - 166 (398) 32 2,462 31 NOTE 5: TAX (a) The Components of Tax Expense: Current tax Deferred tax Total income tax expense/(benefit) (b) The Prima Facie Income Tax Payable on Profit is Reconciled to the Income Tax Expense as Follows: Prima facie tax payable on profit before income tax at 30% Add tax effect of: Tax rate differentials in foreign countries Impairment of goodwill Tax losses not recognised Attributed CFC income Other non-allowable/non-assessable items Movements in SIP income Less tax effect of: (Under)/over provision for income tax in prior year Income tax expense/(benefit) attributable to profit from ordinary activities (c) Current Tax Current tax asset Current tax liability (d) Deferred Tax Relates to the Following: Deferred tax liabilities Accelerated depreciation for tax purposes Foreign exchange Income not derived Leases Research and development Total deferred tax liabilities Deferred tax assets Provisions Employee benefits Other Capitalised costs Losses available for offset against future taxable income Total deferred tax assets Net deferred tax Represented by: Deferred tax asset Deferred tax liability C O N S O L I D A T E D C O M P A N Y 2005/06 $’000 2004/05 $’000 2005/06 $’000 2004/05 $’000 1,631 (5,668) (4,037) 314 646 960 712 (3,908) (3,196) 149 482 631 (4,794) 1,872 (3,661) 569 (271) 899 1,151 303 (12) (70) (2,794) (1,243) (4,037) (523) - - 262 (443) (200) 968 (8) 960 1,047 1,239 344 165 (2,788) - (524) (55) (698) (3,550) (2,032) (754) (50) (974) - - 1,725 303 (250) (70) (1,953) (1,243) (3,196) 591 - (1,526) - (524) (55) (698) - - - 262 8 (200) 639 (8) 631 1,034 - (2,014) (2,032) (754) (50) (974) (4,065) (7,360) (2,803) (5,824) 324 790 314 519 2,987 4,934 160 993 50 200 1,158 2,561 240 263 22 263 830 1,618 51 368 112 200 - 731 869 (4,799) (1,185) (5,093) 2,054 (1,185) 869 294 (5,093) (4,799) - (1,185) (1,185) - (5,093) (5,093) 32 NOTE 5: TAX (cont’d) The entity has partially offset deferred tax assets and deferred tax liabilities where; (i) the entity has a legally enforceable right to set off current tax assets and current tax liabilities; and, (ii) the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority on either: (a) the same taxable entity; or (b) different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered C O N S O L I D A T E D C O M P A N Y Note 2005/06 $’000 2004/05 $’000 2005/06 $’000 2004/05 $’000 (e) Deferred Income Tax Assets Related to Items Charged or Credited Directly to Equity Equity raising costs (f) Deferred Tax Assets not Brought to Account, as it is not Probable that Future Taxable Income will be Available to Utilise these Losses Tax losses – income Tax losses – capital (g) Tax Losses The Group has recognised, as a deferred tax asset, income tax losses of $2,987,000 (2005: $1,158,000) in the tax jurisdictions where it is probable that future taxable income will be available to utilise these losses NOTE 6: CASH AND CASH EQUIVALENTS Cash on hand Cash at bank NOTE 7: RECEIVABLES CURRENT Trade debtors Less provision for doubtful debts Other debtors NON-CURRENT Amounts receivable from Controlled entities NOTE 8: INVENTORIES CURRENT Raw materials at cost Work in progress at cost Finished goods at cost Less provision for obsolescence NOTE 9: OTHER ASSETS CURRENT Prepayments 128 132 128 132 1,151 1,725 2,876 - - - - 1,725 1,725 2 10,550 10,552 32,243 (135) 32,108 4,594 36,702 2 3,963 3,965 29,110 (314) 28,796 3,957 32,753 2 6,053 6,055 4,633 (28) 4,605 1,809 6,414 - - - 2 - 2 4,442 (3) 4,439 2,679 7,118 - - 55,072 39,731 4,891 4,608 42,334 (4,234) 47,599 4,121 4,794 42,041 (379) 50,577 452 2,249 9,327 (771) 11,257 841 3,347 15,193 (139) 19,242 1,497 1,449 365 377 NOTE 10: OTHER FINANCIAL ASSETS NON-CURRENT Shares in controlled entities at cost - - 25,909 24,816 33 NOTE 11: PLANT AND EQUIPMENT Plant and equipment At cost Less accumulated depreciation Plant and equipment under lease At cost Less accumulated amortisation Leasehold improvements At cost Less accumulated depreciation Motor vehicles At cost Less accumulated depreciation Motor vehicles under lease At cost Less accumulated amortisation Office equipment At cost Less accumulated depreciation C O N S O L I D A T E D C O M P A N Y Note 2005/06 $’000 2004/05 $’000 2005/06 $’000 2004/05 $’000 85,807 (19,773) 66,034 67,950 (14,088) 53,862 29,034 (11,687) 17,347 33,290 (11,819) 21,471 1,376 (661) 715 409 (177) 232 2,174 (1,338) 836 240 (43) 197 5,430 (3,224) 2,206 1,376 (499) 877 391 (132) 259 1,687 (687) 1,000 32 (3) 29 1,376 (661) 715 318 (122) 196 899 (535) 364 240 (43) 197 1,376 (499) 877 318 (101) 217 912 (387) 525 32 (3) 29 3,767 (2,029) 1,738 2,082 (1,494) 588 1,937 (1,254) 683 Total plant and equipment 70,220 57,765 19,407 23,802 Movements in Carrying Amounts Movement in the carrying amounts for each class of plant and equipment between the beginning and the end of the year Leasehold Improvements Balance at the beginning of the year Additions Disposals Depreciation expense Impairment loss Net foreign currency movements arising from foreign operations Carrying amount at the end of the year Plant & Equipment Balance at the beginning of the year Additions Disposals Depreciation expense Impairment loss Net foreign currency movements arising from foreign operations Carrying amount at the end of the year 11(a) 259 7 - (44) - 10 232 53,862 18,492 (99) (5,690) (1,464) 933 208 82 - (31) - - 259 27,330 30,223 - (3,691) - - 217 - - (21) - - 196 21,471 3,230 (4,468) (2,158) (728) - 192 44 - (19) - - 217 21,999 1,873 - (2,401) - - 66,034 53,862 17,347 21,471 34 NOTE 11: PLANT AND EQUIPMENT (cont’d) Movements in Carrying Amounts Movement in the carrying amounts for each class of plant and equipment between the beginning and the end of the year Leased Plant and Equipment Balance at the beginning of the year Additions/(transfers) Disposals Depreciation expense Net foreign currency movements arising from foreign operations Carrying amount at the end of the year Motor Vehicles Balance at the beginning of the year Additions/(transfers) Disposals Depreciation expense Net foreign currency movements arising from foreign operations Carrying amount at the end of the year Office Equipment Balance at the beginning of the year Additions/(transfers) Disposals Depreciation expense Net foreign currency movements arising from foreign operations Carrying amount at the end of the year Leased Motor Vehicles Balance at the beginning of the year Additions/(transfers) Disposals Depreciation expense Net foreign currency movements arising from foreign operations Carrying amount at the end of the year (a) Impairment C O N S O L I D A T E D C O M P A N Y Note 2005/06 $’000 2004/05 $’000 2005/06 $’000 2004/05 $’000 877 1,291 877 1,291 - - (162) - 715 1,000 65 (28) (295) 94 836 1,738 879 (12) (720) 321 2,206 29 208 - (40) - 197 (125) - (289) - 877 1,021 398 (199) (220) - 1,000 2,272 79 - (613) - 1,738 46 (12) - (5) - 29 - - (162) - 715 525 - (13) (148) - 364 683 153 (8) (240) - 588 29 208 - (40) - 197 (125) - (289) - 877 792 133 (191) (209) - 525 716 117 - (150) - 683 46 (12) - (5) - 29 The impairment charge in the parent entity of $728,000 arose from the closure of the knitting plant in Braeside, Australia (allocated to the Asia/Pacific reportable segment) and transfer of plant and equipment to the China manufacturing facility. This process identified assets (that were not transferred) to be held below their recoverable amount based on the Directors’ assessment of the fair value. The impairment charge represents a write down to fair value less costs to sell. The consolidated impairment charge represents a further $736,000 (Total $1,464,000) charge to plant and equipment. This arose from the post balance date decision to sell the Jung Garten business, an identified Cash Generating Unit (CGU) in Europe (and allocated to the Europe/Middle East/Africa segment). The post balance date sale of the business identified that the CGU was fully impaired at balance date and required a full write down of the goodwill allocated to that CGU. The calculated impairment loss exceeded the goodwill write down, and consequently required a further write down of assets within the CGU. 35 C O N S O L I D A T E D C O M P A N Y Note 2005/06 $’000 2004/05 $’000 2005/06 $’000 2004/05 $’000 NOTE 12: INTANGIBLE ASSETS Goodwill at cost Less accumulated impairment Patents, trademarks and licenses at cost Less accumulated amortisation Research and development Reconciliation of Intangible Assets Goodwill Balance at the beginning of the year Net foreign currency movements arising from foreign operations Impairment of goodwill 12(a) Additions Carrying amount at the end of the year Patents, Trademarks & Licences Balance at the beginning of the year Net foreign currency movements arising from foreign operations Additions Amortisation expense Carrying amount at the end of the year Research & Development Balance at the beginning of the year Additions Amortisation expense Carrying amount at the end of the year 13,928 (4,437) 9,491 1,169 (500) 669 2,326 13,754 (1,439) 12,315 1,072 (424) 648 3,247 12,486 16,210 4,127 (1,054) 3,073 937 (423) 514 2,326 5,913 3,836 (1,054) 2,782 811 (350) 461 3,247 6,490 12,315 (120) (2,998) 294 9,491 648 (6) 103 (76) 669 3,247 1,524 (2,445) 2,326 9,006 2,782 2,776 - - 3,309 12,315 635 - 138 (125) 648 1,382 2,463 (598) 3,247 - - 291 3,073 461 - 126 (73) 514 3,247 1,524 (2,445) 2,326 - - 6 2,782 414 - 152 (105) 461 1,382 2,463 (598) 3,247 (a) Impairment The goodwill impairment charge of $2,998,000 arose from the post balance date decision to sell the Jung Garten business, an identified Cash Generating Unit (CGU) in Europe (and allocated to the Europe/Middle East/Africa segment). The post balance date sale of the business identified that the CGU was fully impaired at balance date and required a full write down of the goodwill allocated to that CGU. The calculated impairment loss exceeded the goodwill write down, and consequently required a further write down of assets within the CGU, as detailed in Note 11(a) NOTE 13: PAYABLES CURRENT Unsecured liabilities Trade creditors Sundry creditors and accruals NOTE 14: BORROWINGS CURRENT Secured liabilities Bank overdrafts Bank loans Commercial bills Finance lease liability Hire purchase liability Convertible notes Convertible notes 36 16,702 5,952 22,654 16,966 53,587 9,700 239 1,680 6,500 9,000 14,398 5,392 19,790 6,313 51,885 1,600 334 2,115 - - 1,602 2,166 3,768 9,291 36,620 9,700 239 1,680 6,500 9,000 3,704 1,451 5,155 1,023 36,044 1,600 334 2,115 - - 97,672 62,247 73,030 41,116 21(d) 21(d) 21(d) 25(a) 25(b) 30(d) 30(d) NOTE 14: BORROWINGS (cont’d) NON-CURRENT Secured liabilities Bank loans Commercial bills Convertible notes Finance lease liability Hire purchase liability NOTE 15: PROVISIONS CURRENT Employee entitlements NON-CURRENT Employee entitlements (a) Aggregate employee entitlements liability (b) Number of employees at year end C O N S O L I D A T E D C O M P A N Y Note 2005/06 $’000 2004/05 $’000 2005/06 $’000 2004/05 $’000 21(d) 21(d) 30(d) 25(a) 25(b) 8,848 - - 488 2,734 12,070 - 9,800 6,500 405 3,945 20,650 872 1,226 427 1,299 1,218 547 1,773 1,197 4,015 - - 488 2,734 7,237 768 73 841 109 - 9,800 6,500 405 3,945 20,650 1,152 73 1,225 196 NOTE 16: NON-HEDGED FOREIGN CURRENCY BALANCES The Australian dollar equivalents of foreign currency balances included in the financial statements that are not effectively hedged are as follows: US Dollars, Euro & NZD 30,288 - 30(e) 30,288 71,902 2,013 73,915 30(e) 24,537 - 24,537 52,140 2,382 54,522 Receivables Current Non-current Payables Current Non-current NOTE 17: CONTRIBUTED EQUITY Paid up capital 55,069,815 fully paid ordinary shares (2005: 51,905,861) Movement in Share Capital Shares issued at the beginning of the financial year GST on IPO costs Costs of capital raising (net of tax) 717,671 shares issued as part of the consideration for acquisition of a business – 15 December 2004 224,490 shares issued under Dividend Reinvestment Plan – 18 October 2004 427,942 shares issued under the Company option scheme – 29 November 2004 177,333 shares issued under Dividend Reinvestment Plan – 15 April 2005 99,969 shares issued under Dividend Reinvestment plan – 17 October 2005 2,936,000 shares issued as part of a share placement offer – 9 March 2006 127,985 shares issued under Dividend Reinvestment plan – 18 April 2006 3,553 55,017 58,570 36,501 - 36,501 233 39,677 39,910 37,799 - 37,799 47,124 42,071 42,071 39,027 - (162) - - - - 160 4,844 211 (147) 1,804 591 428 368 - - - 47,124 42,071 Fully paid ordinary shares carry one vote per share and carry the right to dividends. A dividend reinvestment plan was established on 5 September 2001, and is available to all shareholders. Following this year’s result, Directors considered it prudent not to pay a final dividend this financial year. 37 NOTE 17: CONTRIBUTED EQUITY (cont’d) (a) Movement in Share Capital During the financial year, the Company undertook a capital raising via a private placement on 9 March 2006 where 2,936,000 shares were issued at $1.65 per share (raising $4,844,400). On 18 April 2006, the Company issued 127,985 shares to shareholders under its Dividend Reinvestment Plan at $1.65 per share. Subsequent to the financial year, (3 July 2006) the Company raised $20 million through a combination of a private placement and a Share Purchase Plan where 23,529,412 shares were issued at 85 cents On 5 July 2006, the Company issued 10,941,177 ordinary shares in conversion of 4,270,271 convertible notes. in addition to any other Options the holder has previously become entitled to exercise, provided that at any time before the day on which Options are exercised by the holder, the Market Price on each day for a consecutive period of 30 days on which there was a sale of the Company’s shares on the stock market of ASX was equal to or exceeded $3.60; and 3. a further 25% of the total number of Options (rounded to the nearest whole number) issued to the holder, subject to any adjustments made under clause 5 of these terms, in addition to any other Options the holder has previously become entitled to exercise, provided that at any time before the day on which Options are exercised by the holder, the Market Price on each day for a consecutive period of 30 days on which there was a sale of the Company’s shares on the stock market of ASX was equal to or exceeded $3.95. The principal terms of the issue of the 240,000 options issued to Mr. Peter McDonald are as follows: On 1 August 2006, the Company issued 7,294,112 ordinary shares in conversion of 2,594,593 convertible notes. 1. The expiry date of the options is 31 December 2008. (b) Options The Company maintains an option scheme for certain staff and executives, including executive Directors, as approved by shareholders at an annual general meeting. The number of unissued ordinary shares under option as at the date of this report is 870,000. The issue price of each option is zero. Each option entitles the option holder to one (1) ordinary share in Gale Pacific Limited in the event that the option is exercised. Of the 870,000 options on issue, 50,000 options were issued on 5 May 2004, 240,000 options were issued under the Company’s executive share plan to the Managing Director and Chief Executive Officer, Mr. Peter McDonald on 30 December 2004, as approved by the Company’s shareholders at the Company’s Annual General Meeting held on 15 November 2004 and 580,000 options were issued on 16 November 2005. The exercise price of the 50,000 options is $1.50, the exercise price of the 240,000 options is $3.00, and the exercise price of the 580,000 options is $1.52. The vesting of options is determined in accordance with specific share price and/or performance hurdles. In the case of the 50,000 options, their vesting is determined by the performance of the Company’s share price over time; the vesting of the 240,000 options is determined in accordance with the achievement of certain levels of adjusted weighted average earnings per share of the Company’s share price over time and the vesting of the 580,000 options is determined in accordance with the achievement of certain levels of adjusted weighted average earnings per share of the Company’s share price over time. The 50,000 options are not exercisable after 1 December 2006, the 240,000 options and the 580,000 options are not exercisable after 1 December 2008. Options carry no rights to dividends and no voting rights. The principal terms of the issue of the 50,000 options issued to a senior executive of the Company on 5 May 2004 are as follows: The holder of Options may only exercise the following number of Options on or after 1 September 2005 and no later than 11.59 p.m. on 1 December 2006 on the following conditions: 1. 45% of the total number of Options (rounded to the nearest whole number) issued to the holder, subject to any adjustments made under clause 5 of these terms provided that at any time before the day on which Options are exercised by the holder, the Market Price on each day for a consecutive period of 30 days on which there was a sale of the Company’s shares on the stock market of ASX was equal to or exceeded $3.20; 2. a further 30% of the total number of Options (rounded to the nearest whole number) issued to the holder, subject to any adjustments made under clause 5 of these terms, 2. The holder may, on and from the later of: (A) 1 November 2005; and (B) the date on which the Company lodges its audited financial report (as defined in the Corporations Act 2001 (Commonwealth)) for the year ended 30 June 2005 with ASIC and, if the Company is listed, with ASX, exercise: (i) 25% of the total number of Options (rounded to the nearest whole number) issued to the holder, subject to any adjustments made under clause 5 of these terms, provided that the Adjusted Weighted Average Earnings Per Share (see below) for the year ended 30 June 2005 increased by 15% or more over the Adjusted Weighted Average Earnings Per Share for the year ended 30 June 2004; and (ii) a further 25% of the total number of Options (rounded to the nearest whole number) issued to the holder, subject to any adjustments made under clause 5 of these terms, provided that the Adjusted Weighted Average Earnings Per Share for the year ended 30 June 2005 increased by 25% or more over the Adjusted Weighted Average Earnings Per Share for the year ended 30 June 2004; 3. The holder may, on and from the later of: (A) 1 November 2006; and (B) the date on which the Company lodges its audited financial report (as defined in the Corporations Act 2001 (Commonwealth)) for the year ended 30 June 2006 with the ASIC and, if the Company is listed, with ASX, in addition to any other Options the holder has previously become entitled to exercise: (i) 25% of the total number of Options (rounded to the nearest whole number) issued to the holder, subject to any adjustments made under clause 5 of these terms, provided that the Adjusted Weighted Average Earnings Per Share for the year ended 30 June 2006 increased by 15% or more over the Adjusted Weighted Average Earnings Per Share for the year ended 30 June 2005; and (ii) a further 25% of the total number of Options (rounded to the nearest whole number) issued to the holder, subject to any adjustments made under clause 5 of these terms, provided that the Adjusted Weighted Average Earnings Per Share for the year ended 30 June 2006 increased by 25% or more over the Adjusted Weighted Average Earnings Per Share for the year ended 30 June 2005; 38 4. The holder may, on and from the later of: (B) that change results in the earnings specified in the (A) 1 November 2007; and (B) the date on which the Company lodges its audited financial report (as defined in the Corporations Act 2001 (Commonwealth)) for the year ended 30 June 2007 with the ASIC and, if the Company is listed, with ASX,in addition to any other Options the holder has previously become entitled to exercise: (i) unless the holder has previously become entitled to exercise all of the holder’s Options, 25% of the total number of Options (rounded to the nearest whole number) issued to the holder, subject to any adjustments made under clause 5 of these terms, provided that the Adjusted Weighted Average Earnings Per Share for the year ended 30 June 2007 increased by 15% or more over the Adjusted Weighted Average Earnings Per Share for the year ended 30 June 2006; and (ii) unless the holder has previously, or as a result of becoming entitled to exercise Options under paragraph (3)(B) (i), become entitled to exercise all of the holder’s Options, a further 25% of the total number of Options (rounded to the nearest whole number) issued to the holder, subject to any adjustments made under clause 5 of these terms, provided that the Adjusted Weighted Average Earnings Per Share for the year ended 30 June 2007 increased by 25% or more over the Adjusted Weighted Average Earnings Per Share for the year ended 30 June 2006; and 5. The holder may, on and from the later of: (A) 1 November 2008; and (B) the date on which the Company lodges its audited financial report (as defined in the Corporations Act 2001 (Commonwealth)) for the year ended 30 June 2008 with the ASIC and, if the Company is listed, with ASX, in addition to any other Options the holder has previously become entitled to exercise: (i) unless the holder has previously become entitled to exercise all of the holder’s Options, 25% of the total number of Options (rounded to the nearest whole number) issued to the holder, subject to any adjustments made under clause 5 of these terms, provided that the Adjusted Weighted Average Earnings Per Share for the year ended 30 June 2008 increased by 15% or more over the Adjusted Weighted Average Earnings Per Share for the year ended 30 June 2007; and (ii) unless the holder has previously, or as a result of becoming entitled to exercise Options under paragraph (4)(B) (i), become entitled to exercise all of the holder’s Options, a further 25% of the total number of Options (rounded to the nearest whole number) issued to the holder, subject to any adjustments made under clause 5 of these terms, provided that the Adjusted Weighted Average Earnings Per Share for the year ended 30 June 2008 increased by 25% or more over the Adjusted Weighted Average Earnings Per Share for the year ended 30 June 2007. For the purpose of the above paragraphs “Adjusted Weighted Average Earnings Per Share” means: 1. for the financial year ended 30 June 2004, 17.85 cents; and 2. for any other financial year (“Relevant Financial Year”), the diluted earnings per share of the Company as disclosed in the Company’s audited financial report (as defined in the Corporations Act 2001 (Commonwealth) for the Relevant Financial Year (“Relevant Report”). However, if: (A) there is any change to the accounting standards (as defined in the Corporations Act 2001 (Commonwealth), including without limitation, as a result of the adoption of International Financial Reporting Standards; and Relevant Report as having been used in the calculation of diluted earnings per share (“Total Earnings”) for the Relevant Financial Year being determined on a basis different from that on which Total Earnings for the financial year immediately preceding the Relevant Financial Year (“Prior Year Total Earnings”) was determined, then, for the purpose of: (C) calculating Adjusted Weighted Average Earnings Per Share for the Relevant Financial Year; or (D) determining whether there has been any increase in Adjusted Weighted Average Earnings Per Share for the Relevant Financial Year over Adjusted Weighted Average Earnings Per Share for the financial year prior to the Relevant Financial Year, Total Earnings for the Relevant Financial Year or Prior Year Total Earnings must be adjusted to the extent necessary to ensure that Total Earnings for the Relevant Financial Year and Prior Year Total Earnings are determined on the same or a comparable basis. The principal terms of the 580,000 options issued to key management on 16 November 2005 are as follows: 1. Provided that the Company meets its NPAT target for the financial year ended June 2006 (as evidenced by the Company’s Audited Financial Report), the holder may from 12 months after the date the Company lodges with the ASIC and ASX its Audited Financial Report, exercise 50% of the total number of Options. 2. Provided that the Adjusted Weighted Average Earnings Per Share of the Company for the year ended 30 June 2007 increases by 15% or more over the Adjusted Weighted Average Earnings Per Share for the year ended 30 June 2006 (as evidenced by the Company’s relevant Audited Financial Reports), the holder may from 12 months after the date the Company lodges with the ASIC and ASX its Audited Financial Report, exercise 50% of the total number of Options. For the purpose of the above paragraphs: “Adjusted Weighted Average Earnings Per Share” means: 1. for any financial year (“Relevant Financial Year”), the diluted earnings per share of the Company as disclosed in the Company’s Audited Financial Report for the Relevant Financial Year (“Relevant Report”). However, if: (A) there is any change to the accounting standards (as defined in the Corporations Act 2001 (Commonwealth), including without limitation, as a result of the adoption of International Financial Reporting Standards; and (B) that change results in the earnings specified in the Relevant Report as having been used in the calculation of diluted earnings per share (“Total Earnings”) for the Relevant Financial Year being determined on a basis different from that on which Total Earnings for the financial year immediately preceding the Relevant Financial Year (“Prior Year Total Earnings”) was determined, then, for the purpose of: (C) calculating Adjusted Weighted Average Earnings Per Share for the Relevant Financial Year; or (D) determining whether there has been any increase in Adjusted Weighted Average Earnings Per Share for the Relevant Financial Year over Adjusted Weighted Average Earnings Per Share for the financial year prior to the Relevant Financial Year, Total Earnings for the Relevant Financial Year or Prior Year Total Earnings must be adjusted to the extent necessary to ensure that Total Earnings for the Relevant Financial Year and Prior Year Total Earnings are determined on the same or a comparable basis. 39 NOTE 17: CONTRIBUTED EQUITY (cont’d) Options Valuation Assumptions Option Series Grant Date Share Price Exercise Price Expected Volatility Option Life Tranche 1 Tranche 2 Tranche 3 Tranche 4 Dividend Yield Risk Free Interest Rate Tranche 1 Tranche 2 Tranche 3 Tranche 4 5 May 2004 $2.64 15 December 2004 $3.00 16 November 2005 $1.60 $1.50 37% 2.02 years 2.05 years 2.08 years - 2.76% 5.39% 5.39% 5.39% - $3.00 35% 2.50 years 3.00 years 3.50 years 4.00 years 2.47% 4.86% 4.87% 4.91% 4.95% $1.52 40% 2.49 years 2.99 years - - 2.96% 5.21% 5.21% - - Balance at the beginning of the financial year Granted during the financial year Options exercised during the financial year Lapsed during the financial year Balance at the end of the financial year As at 30 June 2006, no options on issue were exercisable. Number of options 2006 No. 610,000 1,260,000 - (1,000,000) 870,000 2005 No. 477,942 560,000 (427,942) - 610,000 40 C O N S O L I D A T E D C O M P A N Y Note 2005/06 $’000 2004/05 $’000 2005/06 $’000 2004/05 $’000 NOTE 18: RESERVES Foreign currency reserve Share based payment reserve (a) Foreign Currency Reserve Opening balance Foreign currency movement on consolidation for the year Closing balance (b) Share Based Payment Reserve Opening balance Net movement for the year Closing balance (2,274) 178 (2,096) (3,087) 813 (3,087) 98 (2,989) (273) (2,814) 1(m) (2,274) (3,087) 98 80 178 5 93 98 Total reserve (2,096) (2,989) - 178 178 - - - 98 80 178 178 - 98 98 - - - 5 93 98 98 NOTE 19: RETAINED PROFITS Retained profits at the beginning of the financial year Net profit attributable to members of the entity Dividends paid Retained profits at reporting date NOTE 20: MINORITY INTERESTS Minority interest in controlled entities comprises: Opening balance Net loss attributable to minority interest NOTE 21: CASH FLOW INFORMATION 15,461 14,001 7,204 9,763 (11,942) (1,603) 1,916 5,285 (3,825) 15,461 (9,007) (1,603) (3,406) 1,266 (3,825) 7,204 (9) (2) (11) (7) (2) (9) (a) Reconciliation of Cash 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 on hand 2 2 2 Cash at bank Bank overdrafts 10,550 (16,966) (6,414) 3,963 (6,313) (2,348) 6,053 (9,291) (3,236) 2 - (1,023) (1,021) (b) Reconciliation of Cash Flow from Operations with Profit Profit/loss after income tax (11,942) 5,285 (9,007) 1,266 Non-cash flows in profit Attributable to minority interest Loss on disposal of fixed assets Amortisation of intangible assets Impairment of goodwill Depreciation and amortisation of plant and equipment Impairment of assets Other Changes in assets and liabilities: (Increase)/decrease in receivables Decrease in other assets (Increase) in inventories Increase/(decrease) in payables and accruals Increase/(decrease) in provision for tax Increase/(decrease) in deferred tax balance Net cash inflow/outflow provided by operations (2) 5 2,521 2,998 6,951 1,464 - (3,949) (48) 2,978 2,391 371 (5,668) (1,930) (2) 32 723 - 4,849 - (609) (5,310) 1,704 (12,291) 3,531 (1,798) 1,169 (2,717) - 5 2,720 - 2,567 6,478 80 704 12 7,985 (745) 443 (3,908) 7,334 - 32 703 - 3,073 - (620) 822 1,570 (2,373) 2,954 (742) 727 7,412 41 NOTE 21: CASH FLOW INFORMATION (cont’d) C O N S O L I D A T E D C O M P A N Y Note 2005/06 $’000 2004/05 $’000 2005/06 $’000 2004/05 $’000 (c) Acquisition of Business During the 2005 financial year the Company acquired the assets of Donaghys in New Zealand. Details of the acquisition are as follows: Consideration Cash 11,646 - Ordinary shares Fair value of net assets acquired Inventories Non-current assets Plant and equipment Goodwill Current liabilities Creditors & accruals Net assets acquired Less Ordinary shares issued Net cash outflow on acquisition - - - - - - - - - 1,804 13,450 4,562 6,108 3,309 (529) 13,450 1,804 11,646 - - - - - - - - - 11,646 1,804 13,450 4,562 6,108 3,309 (529) 13,450 1,804 11,646 It is impractical to provide an estimation of revenue and profit/(loss) for the period as though they traded for the whole period. (d) Multi Option Facility and Bills Discount Facility The Company has access to a Multi Option Facility (including an AUD overdraft, USD overdraft, commercial bills, fixed rate trade advances, documentary credit and trade finance), a Bills Discount Facility and a Bank Guarantee facility to a maximum of $81,829,000 as at 30 June 2006 (2005: $72,195,000), leaving an unused facility of $3,278,000 (2005: $2,162,000). This facility is secured by a First Ranking Registered Equitable Mortgage by Gale Pacific Limited over all its assets and undertakings including uncalled capital, and a First Ranking registered Equitable Mortgage by Gale Pacific USA Inc over all its assets and undertakings including uncalled capital and a fixed and floating charge (or equivalent) over all assets of Jung Garten & Freizeit Vertriebsgesellschaft mbH, Gale Europe Vertriebsgesellschaft mbH and Gale Pacific (New Zealand) Limited. (e) Convertible Notes The Company issued convertible notes to the value of $6,500,000 on 9 December 2004, at an interest rate of 8.5% per annum. The Company issued further convertible notes to the value of $9,000,000 on 9 September 2005, at an interest rate of 8.8%. Subsequent to balance date, all notes were converted into ordinary fully paid shares at a conversion price of 85 cents. NOTE 22: COMPANY DETAILS The registered office of the Company is: Gale Pacific Limited 145 Woodlands Drive Braeside Victoria 3195 NOTE 23: DIRECTORS’ AND EXECUTIVES’ COMPENSATION The key management personnel of the economic entity who held office during the year were: Directors H Boon (Chairman, Non-Executive) – Appointed 25 August 2005 T J Eversteyn (Chairman, Non-Executive) – Resigned 25 August 2005 P R McDonald (Managing Director and Chief Executive Officer) – Appointed Managing Director and Chief Executive Officer 26 April 2006 G S Gale (Non-Executive) – Resigned as Managing Director 26 April 2006 and appointed as Non-Executive 26 April 2006 D E J Reilly (Non-Executive) G H Richards (Non-Executive) 42 NOTE 23: DIRECTORS’ AND EXECUTIVES’ COMPENSATION (cont’d) Executives (at date of this report) F Albertsmeier (Managing Director, Gale Europe) S Carroll (Managing Director, Gale Australia) J Cox (Chief Financial Officer) Z Fakroddin (Regional Manager, Gale Middle East) C McCallum (Managing Director, Gale New Zealand) E Xu (Managing Director, Gale China) Key Management Personnel’s Compensation The Remuneration Committee reviews the remuneration packages of all Directors and executive officers on an annual basis and makes recommendations to the Board. Remuneration packages are reviewed with due regard to performance and other relevant factors, and advice is sought from external advisers in relation to their structure. Remuneration packages contain the following key elements: a. Salary/fees; b. Benefits, including the provision of motor vehicles and superannuation; and c. Incentive schemes, including share options under the Executive Share Option Plan as disclosed in note 17 to the Financial Statements. Short-term benefits Post employment Share based payments Termination benefits Total Performance related Superannuation Options Total Options $ $ $ $ % % 2006 Directors Salary & fees $ Non- monetary $ Executive Directors G S Gale (i) 371,635 P R McDonald 359,942 Non-Executive Directors H Boon T J Eversteyn D E J Reilly G H Richards 95,833 14,166 75,000 65,000 61,964 62,401 - - - - 12,139 5,171 41,667 - - - 51,658 72,580 - - - - 102,849 - - - - - 600,245 500,094 8.6 14.5 8.6 14.5 137,500 14,166 75,000 65,000 - - - - - - - - - - TOTAL 981,576 124,365 58,977 124,238 102,849 1,392,005 2005 Directors Short-term benefits Salary & fees $ Non- monetary $ Post employment Superannuation Share based payments Options Termination benefits Total Performance related Total Options $ $ $ $ % % Executive Directors G S Gale (i) 396,951 P R McDonald 269,414 Non-Executive Directors T J Eversteyn D E J Reilly G H Richards 144,992 119,124 68,000 66,500 39,037 11,549 11,549 33,922 25,442 - - - - - - - - - TOTAL 998,481 105,537 23,098 59,364 - - - - - - 508,922 345,442 6.7 7.4 6.7 7.4 144,992 119,124 68,000 1,186,480 - - - - - - - - 43 NOTE 23: DIRECTORS’ AND EXECUTIVES’ COMPENSATION (cont’d) 2006 Short-term benefits Post employment Share based payments Total Performance related Key management personnel Salary & fees $ Bonus $ Non- monetary $ J Cox (ii) A London (iii) F Albertsmeier (iv) E Jung (v) S Carroll Z Fakroddin (vi) C McCallum (vii) E Xu (viii) TOTAL 69,833 157,888 79,888 255,940 208,900 148,610 198,825 150,013 - - - 38,538 - 67,549 36,357 24,318 - 17,007 2,422 15,784 27,070 60,031 15,558 18,919 Superannuation Options Total Options $ 6,285 10,956 4,650 4,171 20,527 - - - $ - 6,406 - - 3,950 3,950 4,938 48,600 67,844 $ 76,118 192,257 86,960 314,433 260,447 280,140 255,678 241,850 1,707,833 % - 3.3 - 12.3 1.5 25.5 16.2 30.2 - % - 3.3 - - 1.5 1.4 1.9 20.1 - 1,269,897 166,762 156,791 46,589 2005 Short-term benefits Post employment Share based payments Total Performance related Key management personnel Salary & fees $ Bonus $ Non- monetary $ A London (ix) L Doddridge (x) E Jung (xi) Z Fakroddin (iv) E Xu (viii) D Whyte (xii) S Carroll TOTAL 11,694 176,458 222,603 147,200 128,958 261,815 175,100 - - 51,370 27,813 31,919 31,915 - 1,700 23,077 31,906 20,850 61,621 34,000 24,677 1,123,828 143,017 197,831 Superannuation Options Total Options $ 1,075 15,881 6,545 50,850 - - 15,759 90,110 $ $ - - - - 33,281 - - 14,469 215,416 312,424 246,713 255,779 327,730 215,536 33,281 1,588,067 % - - 16.4 11.3 25.5 9.7 - - % - - - - 13.0 - - - (i) Mr. Gale resigned from his role as a Managing Director on 26 April 2006, and therefore the details of his remuneration for the reporting period are to that date. Mr. Gale was appointed a non-executive director on 26 April 2006 has not received any remuneration in his role as Non-Executive Director. (ii) Mr. Cox was appointed as Chief Financial Officer on 1 March 2006 and therefore the details of his remuneration for the reporting period are from that date. (iii) Mr. London resigned on 1 March 2006 and therefore the details of his remuneration for the reporting period are to that date. (iv) Mr. Albertsmeier was appointed Managing Director Gale Jung and Europe on 1 April 2006 and therefore the details of his remuneration for the reporting period are from that date. He is based in Germany and remunerated in Euro converted to Australian dollars in the table above. (v) Mr. Jung (resigned 31 March 2006) was based in Germany and therefore the details of his remuneration for the reporting period are to that date. He was remunerated in Euro converted to Australian dollars in the table above. (vi) Mr. Fakroddin was based in the Middle East and is remunerated in US dollars converted to Australian dollars in the table above. (vii) Mr. McCallum is based in New Zealand and is remunerated in New Zealand dollars converted to Australian in the table above. (viii) Ms. Xu is based in China and is remunerated in US dollars converted to Australian dollars in the table above. (ix) Mr. London was appointed as Chief Financial Officer on 2 June 2005 and therefore the details of his remuneration for the reporting period were from that date. (x) Mr. Doddridge resigned from the position of Chief Financial Officer on the 2 June 2005 and therefore the details of his remuneration for the reporting period are to that date. (xi) Mr. Jung was based in Germany and was remunerated in Euro converted to Australian dollars in the table above. (xii) Mr. Whyte (resigned July 2005) was based in the USA and was remunerated in US dollars converted to Australian dollars in the table above. 44 NOTE 23: CASH FLOW INFORMATION (cont’d) Compensation by Category Short-term employment benefits Post employment benefits Termination benefits Share-based payments Directors’ Equity Holdings Fully paid ordinary shares Executive Directors G S Gale P R McDonald Non Executive Directors H Boon D E J Reilly G H Richards 15,329,709 306,295 - 316,065 57,778 Total 16,009,847 C O N S O L I D A T E D 2004/05 2005/06 $’000 $’000 2,569 2,699 106 103 192 3,100 113 - 93 2,775 C O M P A N Y 2005/06 $’000 1,587 97 103 135 1,922 2004/05 $’000 1,517 56 - 59 1,632 Balance 1 July 2005 Received as remuneration Options exercised Net change Balance 30 June 2006 - - - - - - - - - - - - 70,000 28,419 15,399,709 334,714 73,000 107,076 21,073 73,000 423,141 78,851 299,568 16,309,415 Directors’ and Executives’ Equity Holdings Compensation Options: Granted and vested during the year Share options – key management personnel Vested number Granted number Grant date Value per option at grant date Terms and conditions for each grant Exercise price Expiry date First exercise Last exercise date - - - - - - - - - - date - - - - Executive Directors P R McDonald G S Gale - - Non Executive Directors None Executives S Carroll - Z Fakroddin A London C McCallum E Xu Total - - - - - Share options – key management personnel Executive Directors P R Mc Donald G S Gale Non Executive Directors None Executives S Carroll Z Fakroddin A London C McCallum E Xu Total 80,000 80,000 80,000 16/11/2005 16/11/2005 16/11/2005 100,000 16/11/2005 - 340,000 - $0.445 $0.445 $0.445 $0.445 - $1.52 $1.52 $1.52 $1.52 - 1/12/2008 28/9/2007 1/12/2008 1/12/2008 28/9/2007 1/12/2008 1/12/2008 28/9/2007 1/12/2008 1/12/2008 28/9/2007 1/12/2008 - - - Balance 1 July 2005 Received as remuneration Options exercised Options lapsed Balance 30 June 2006 Total vested 30 June 2005 Total exercisable 30 June 2006 240,000 320,000 - - - - - - 50,000 610,000 80,000 80,000 80,000 100,000 - 340,000 - - - - - - - - - 240,000 320,000 - 40,000 40,000 80,000 50,000 - 40,000 40,000 - 50,000 50,000 530,000 420,000 - - - - - - - - - - - - - - - - Directors acquired shares through the Dividend Reinvestment Plan on the same terms and conditions available to other shareholders. 45 NOTE 23: CASH FLOW INFORMATION (cont’d) Remuneration Practices The Company policy for determining the nature and amount of emoluments of Board members and senior executives is as follows. The remuneration structure for executive officers, including Executive Directors, is based on a number of factors including length of service, particular experience of the individual concerned, and overall performance of the Company. The contracts of service between the Company and Executive Directors and executives are on a continuing basis the terms of which are not expected to change in the immediate future. Upon retirement Executive Directors and executives are paid employee benefit entitlements accrued to date of retirement. Payment of bonuses, share options and other incentive payments are made at the discretion of the Remuneration Committee to key executives of the Company based predominantly on an objective review of the Company’s financial performance, the individuals’ achievement of stated financial and non financial targets and any other factors the committee deems relevant. Non-Executive Directors receive a fee for being Directors of the Company and do not participate in performance based remuneration. Options issued to executives as a form of compensation are dependant upon the performance conditions outlined in note 17(b). Cash bonuses granted to exceutives are based on the respective performance of their regional business unit. Bonuses are paid out at various times during the year and are determined at the discretion of the Remuneration Committee. NOTE 24: DIVIDENDS Ordinary shares Interim dividend – fully franked Final dividend – fully franked Adjusted franking account balance 2005/06 2004/05 Cents per share Total $’000 Cents per share 1.5 1.5 779 824 1,603 508 4.0 3.5 Total $’000 2,015 1,810 3,825 723 Since the end of the financial year, Directors have not declared a final dividend. 46 NOTE 25: CAPITAL AND LEASING COMMITMENTS C O N S O L I D A T E D C O M P A N Y Note 2005/06 $’000 2004/05 $’000 2005/06 $’000 2004/05 $’000 (a) Finance Leasing Commitments Payable - not later than one year - years Minimum lease payments later than one year and not later than five Less future finance charges Total lease liability Represented by: Current liability Non-current liability 14 14 444 691 1,135 (408) 727 239 488 727 389 603 992 (253) 739 334 405 739 444 691 1,135 (408) 727 239 488 727 389 603 992 (253) 739 334 405 739 The consolidated entity leases production plant and equipment under finance leases expiring from one to five years. At the end of the lease term the consolidated entity has the option to purchase the equipment deemed to be a bargain purchase option. (b) Hire Purchase Commitments Payable not later than one year later than one year and not later than five years Minimum hire purchase payments Less future finance charges Total hire purchase liability Represented by: Current liability Non-current liability (c) Operating Lease Commitments Non-cancellable operating leases contracted for but not capitalised in the accounts: Payable - not later than one year - - later than one year and not later than five years later than five years 14 14 2,002 2,909 4,911 (497) 4,414 1,680 2,734 4,414 3,156 6,146 3,321 12,623 2,186 4,252 6,438 (378) 6,060 2,115 3,945 6,060 3,860 7,334 4,014 15,208 2,002 2,909 4,911 (497) 4,414 1,680 2,734 4,414 1,818 2,007 171 3,996 2,186 4,252 6,438 (378) 6,060 2,115 3,945 6,060 2,532 2,987 - 5,519 The Company leases property and equipment under operating leases expiring in 1 to 10 years. Leases of property generally provide the Company with a right of renewal at which time all leases are renegotiated. Lease payments comprise a base amount plus an incremental contingent rental. Contingent rentals are based on the consumer price index. 47 NOTE 26: RELATED PARTY TRANSACTIONS Equity Investments in Controlled Entities Details of the percentage of ordinary shares held in controlled entities are disclosed in Note 27 to the financial statements. Directors’ Remuneration Details of Directors’ remuneration are disclosed in Note 23. (a) Directors’ Equity Holdings Transactions with Directors and Director-related entities The following amounts were payable to Directors and their Director-related entities as at the reporting date: Current C O N S O L I D A T E D C O M P A N Y 2005/06 $’000 5 2004/05 $’000 11 2005/06 $’000 5 2004/05 $’000 11 Mr. T Eversteyn was a Partner of the chartered accounting firm Bentleys MRI. In addition to Directors fees received (and disclosed in Note 23) Bentleys MRI provided other business services during the year ended 30 June 2006 to Gale Pacific Limited. The value of services provided was $10,000 (2005: $68,329). During the financial year, key management personnel and their Director-related entities purchased goods, which were domestic or trivial in nature, from the Company on the same terms and conditions available to other employees and customers. Transactions within the Wholly-Owned Group The wholly-owned group includes: - The ultimate parent entity in the wholly-owned group; and - Wholly-owned controlled entities. The ultimate parent entity in the wholly-owned group is Gale Pacific Limited, which is also the parent entity in the economic entity. Amounts receivable from entities in the wholly-owned group are disclosed in Note 7. These amounts are repayable at call, and interest is charged on outstanding balances. Transactions that occurred during the financial year between entities in the wholly owned group were: - Sale and purchase of goods at cost plus mark up of up to 20%. Total value of these purchases were $22,958,000 (2005: $22,837,000) - Reimbursement of certain operating costs including interest charges of $1,446,000 (2005: $1,231,000). - Plant and equipment transferred at written down value $3,274,260. (b) Transactions with Non-Wholly Owned Controlled Entity Transactions that occurred during the financial year with a non-wholly owned controlled entity were: - Net sales of goods at cost of $139,000 (2005: $22,000). 48 NOTE 27: CONTROLLED ENTITIES Parent Entity: Gale Pacific Limited Controlled Entities: Gale Pacific USA Inc. Gale Pacific FZE Aquaspan Pty Ltd Gale Pacific Special Textiles Company Limited Jung Garten & Freizeit Vertriebsgesellschaft mbH Gale Europe Vertriebsgesellschaft mbH Gale Pacific (New Zealand) Limited C O U N T R Y O F I N C O R P O R A T I O N O W N E R S H I P I N T E R E S T ( % ) 2005/06 2004/05 Australia - - USA United Arab Emirates Australia China Germany Germany New Zealand 100 100 50 100 100 100 100 100 100 50 100 100 100 100 49 NOTE 28: SEGMENT REPORTING Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items mainly comprise income-earning assets and revenue, interest-bearing loans, borrowings and expenses, and corporate assets and expenses. Segment capital expenditure is the total cost incurred during the period to acquire segment assets that are expected to be used for more than one period. Inter-segment pricing is predominantly determined on an arm’s length basis. Geographical Segment In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers. Segment assets are based on the geographical location of the assets. The consolidated entity comprises the following main geographical segments, based on the consolidated entity’s management reporting system: Asia/Pacific Manufacturing and distribution facilities are located in Australia, China and New Zealand which supplies products to Australia, New Zealand, Europe, USA and the Middle East. Sales offices are located in all states in Australia and through distribution agreements in New Zealand. Americas Sales offices are located in Florida and custom-awning manufacturing and distribution facilities are located in California which service the North American region. Europe/Middle East/Africa Sales offices and distribution facilities are located in the United Arab Emirates and Germany which service those regional markets. Business Segment The consolidated entity operates predominantly in one business segment, being the advanced polymer fabrics industry. The consolidated entity manufactures and markets advanced durable knitted and woven polymer fabrics and value added structures made from these fabrics. With the 2004 acquisition of “Jung” the Company marketed domestic garden products to the home hardware sector in Europe. Subsequent to balance date, the Jung business has been sold. 50 NOTE 28: SEGMENT REPORTING (cont’d) Primary Reporting – Geographical Segments 30 June 2006 Revenue outside the economic entity Inter-segment revenue Total revenue Segment operating profit/(loss) Income tax (expense)/benefit Operating profit/(loss) after tax Depreciation and amortisation Individually significant items Reimbursement of R&D expenditure Impairment of assets Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Acquisition of non-current assets 30 June 2005 Revenue outside the economic entity Inter-segment revenue Total revenue Segment operating profit Income tax (expense)/benefit Operating profit/(loss) after tax Depreciation and amortisation Individually significant items Reimbursement of R&D expenditure Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Acquisition of non-current assets Asia/ Pacific $’000 80,402 32,703 113,105 (10,954) 2,931 (8,023) 8,198 748 (728) Americas $’000 22,511 - 22,511 340 (145) 195 453 - - Europe/ Middle East/ Africa $’000 64,256 - 64,256 (5,202) 1,278 (3,924) 940 - (3,734) Eliminations Consolidation $’000 $’000 - 167,169 (32,703) (32,703) (165) (27) (192) (119) - - - 167,169 (15,981) 4,037 (11,944) 9,472 748 (4,462) 117,313 14,099 48,622 1,790 181,824 119,958 1,360 13,001 17,749 583 1,319 69,812 32,625 102,437 5,850 (932) 4,918 4,892 718 15,430 - 15,430 (959) 351 (608) 211 - 63,768 - 63,768 1,609 (576) 1,033 181 - - - - (32,625) (32,625) (257) 197 (60) 288 - 333 182,157 134,319 905 135,224 19,651 149,010 - 149,010 6,243 (960) 5,283 5,572 718 109,490 11,722 39,769 3,109 164,090 93,491 878 10,628 27,157 596 2,892 294 164,384 104,997 4,853 109,850 30,645 - - 51 NOTE 29: EARNINGS PER SHARE Earnings used in the calculations of basic and diluted earnings per share Weighted average number of ordinary shares used in the calculation of basic earnings per share Weighted average number of share options on issue during the year Weighted average number of ordinary shares and potential ordinary shares used in the calculation of diluted earnings per share NOTE 30: FINANCIAL INSTRUMENTS (a) Financial Instruments C O M P A N Y 2005/06 2004/05 $11,942,000 $5,285,000 52,910,527 51,189,261 1,305,123 52,516 54,215,650 51,241,777 Derivative financial instruments may be used by the economic entity to limit exposure to exchange rate risk associated with foreign currency borrowings. The derivative financial instruments are recognised in the financial statements. Transactions to reduce foreign currency exposure are undertaken without the use of collateral as the Company only deals with reputable institutions with sound financial positions. (b) Credit Risk The maximum exposure to credit risk, excluding the value of any collateral or other security, at balance date to recognised financial assets is the carrying amount of those assets, net of any provisions for doubtful debts of those assets, as disclosed in the statement of financial position and notes to the financial statements. Credit risk for derivative financial instruments arises from the potential failure by counterparties to the contract to meet their obligations. The credit risk exposure to forward exchange contracts is the net fair value of these contracts. The economic entity does not have any material credit risk exposure to any single debtor or group of debtors under financial instruments entered into by the economic entity. (c) Net Fair Values The net fair value of assets and liabilities approximates their carrying value. No financial assets and financial liabilities are read- ily traded on organised markets in standardised form other than forward exchange contracts. (d) Interest Rate Risk The economic entity’s exposure to interest rate risk, which is the risk that a financial instrument’s value will fluctuate as a result of changes in market interest rates and the effective weighted average interest rates on classes of financial assets and financial liabilities, is as follows: Note Weighted average interest rate Floating interest rate $‘000 Fixed interest rate $‘000 Non interest bearing $‘000 Maturing Total $‘000 1 year or less $‘000 1 to 5 years $‘000 More than 5 years $‘000 6 7 13 14 14 14 14 14 14 14 14 14 14 15 5.5% 10,550 - - - 10,550 - 8.1% 16,966 - - - - - - 4,697 9.1% 6.2% 6.0% 6.2% 6.2% 8.5% 8.8% 7.5% 8.2% - 57,738 - - 6,600 - - - - - - 1,200 1,900 - 6,500 9,000 727 4,414 2 36,702 34,704 22,654 - - - - - - - - - - 10,552 36,702 47,254 22,654 16,966 4,697 57,738 1,200 1,900 6,600 6,500 9,000 727 4,414 1,299 10,552 36,702 47,254 22,654 16,966 682 52,905 1,200 1,900 6,600 6,500 9,000 239 1,680 872 - - - - - 4,015 4,833 - - - - - 488 2,734 427 - 1,299 81,304 28,438 23,953 133,695 121,198 12,497 - - - - - - - - - - - - - - - - 30 June 2006 Financial assets Cash assets Receivables Financial liabilities Payables Bank overdrafts and loans Bank loan Bank loan Commercial bills Commercial bills Commercial bills Convertible notes Convertible notes Lease liabilities Hire purchase liabilities Employee entitlements 52 Maturing 1 to 5 years $‘000 More than 5 years $‘000 NOTE 30: FINANCIAL INSTRUMENTS (cont’d) 30 June 2005 Financial assets Cash assets Receivables Financial liabilities Payables Bank overdrafts and loans Commercial bills Commercial bills Commercial bills Commercial bills Convertible notes Lease liabilities Hire purchase liabilities Employee entitlements Note Weighted average interest rate Floating interest rate $‘000 Fixed interest rate $‘000 Non interest rearing $‘000 6 7 13 14 14 14 14 14 14 14 14 15 5.4% 3,963 - - - 3,963 - 5.5% 6,313 5.5% 6.0% 6.3% 6.0% 8.5% 7.5% 8.2% - 51,885 - - 6,600 - - - - - - - - - - 2,300 2,500 - 6,500 739 6,060 2 32,753 32,755 19,790 - - - - - - - - - 1,773 Total $‘000 3,965 32,753 36,718 19,790 6,313 51,885 2,300 2,500 6,600 6,500 739 6,060 1,773 1 year or less $‘000 3,965 32,753 36,718 19,790 6,313 51,885 1,000 600 - - 334 2,115 1,226 - - - - - - 1,300 1,900 6,600 6,500 405 3,945 547 64,798 18,099 21,563 104,460 83,263 21,197 - - - - - - - - - - - - - - (e) Forward Exchange Contracts The consolidated entity enters into forward exchange contracts to buy and sell specified amounts of foreign currency in the future at stipulated exchange rates. The objective in entering the forward exchange contracts is to protect the consolidated entity against unfavourable exchange rate movements for both the contracted and anticipated future sales and purchases undertaken in foreign currencies. The full amount of the foreign currency the consolidated entity will be required to pay or purchase when settling the brought forward exchange contracts should the counterparty not pay the currency it is committed to deliver to the consolidated entity has been recognised in the Company’s balance sheet. At balance date the net amount payable was $78,169. The accounting policy in regard to forward exchange contracts is detailed in Note 1(m). At balance date, the details of outstanding forward exchange contracts are: Buy United States Dollars Settlement Less than 6 months Buy Euro Settlement Less than 6 months Buy United States Dollars Settlement Less than 6 months NOTE 31: SUBSEQUENT EVENTS 2005/06 $’000 2004/05 $’000 2005/06 2004/05 Sell Australia Average exchange rate 1,620 Sell Australia 74 Sell Euro 955 - - - 0.7405 Average exchange rate 0.6075 Average exchange rate 1.2133 - - - In July 2006, the Company completed a $20 million capital raising via a combination of a share purchase plan and a private placement resulting in the Company issuing 23,529,412 ordinary fully paid shares at a price of 85 cents. In addition, the Company negotiated with holders of convertible notes issued by the Company in December 2004 and September 2005 to convert the notes into ordinary fully paid shares at a conversion price of 85 cents. 18,235,289 shares were issued in conversion of 6,864,864 notes. The Company’s shareholders approved the above share issues at the Company’s Extraordinary General Meeting held on 30 June 2006. On 5 September 2006, the Company announced that it had sold its German garden products distribution business, Jung Garten, and that it had received cash for the sale of approximately $12.5 million and a further $1.5 million receivable in October 2006. Other than the matter discussed above, there has not arisen in the interval between the end of the financial year and the date of this report any item, transaction or event of a material and unusual nature likely, in the opinion of the Directors of the Company, to affect significantly, the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity in future financial years. 53 NOTE 32: IMPACT OF ADOPTING AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS Entities complying with AIFRS for the first time are required to restate their comparative financial statements to reflect the application of AIFRS. The majority of AIFRS transition adjustments will be made retrospectively against opening retained earnings as at 1 July 2004. Set out below are the key areas where accounting policies are expected to change on adoption of IFRS and are managements best estimate at date of preparing 30 June 2006. These figures may change due to ongoing work by management and potential amendments to AIFRS, and emerging practice in respect to interpretation and application of AIFRS. FIRST-ADOPTION OF AIFRS - RECONCILIATION OF EQUITY REPORTED UNDER AGAAP TO EQUITY UNDER AIFRS (a) At the Date of Transition of AIFRS - 1 July 2004 C O N S O L I D A T E D P A R E N T AGAAP Adjustment $’000 $’000 AIFRS $’000 6,710 28,605 34,093 1,058 70,466 32,168 11,023 346 43,537 114,003 15,942 20,783 724 989 2,513 8,932 16,886 512 28,843 25,036 4,571 - 29,607 58,450 6,557 17,386 - 936 38,438 24,879 18,046 4,655 110 22,811 61,249 52,754 39,027 (268) 14,001 52,760 (6) 18,046 3,923 110 22,079 46,958 11,492 38,899 - 10,338 49,237 - 52,754 49,237 AIFRS $’000 2,513 8,932 16,886 512 28,843 25,036 4,571 - 29,607 58,450 6,557 17,386 - 936 24,879 18,046 4,365 110 22,521 47,400 11,050 39,027 5 9,763 48,795 - 48,795 - - - - - - - - - - - - - - - - 442 - 442 442 (442) 128 5 (575) (442) - (442) AGAAP Adjustment $’000 $’000 CURRENT ASSETS Cash and cash equivalents Receivables Inventories Other TOTAL CURRENT ASSETS NON-CURRENT ASSETS Plant and equipment Intangible assets Deferred tax assets TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Payables Short term borrowings Current tax liabilities Provisions TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Long term borrowings Deferred tax liabilities Provisions TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Contributed equity Reserves Retained profits PARENT ENTITY INTEREST Minority interest TOTAL EQUITY 6,710 28,605 34,093 1,058 70,466 32,168 11,023 346 43,537 114,003 15,942 20,783 724 989 38,438 18,046 4,213 110 22,369 60,807 53,196 38,899 (273) 14,576 53,202 (6) 53,196 - - - - - - - - - - - - - - - - 442 - 442 442 (442) 128 5 (575) (442) - (442) 54 NOTE 32: IMPACT OF ADOPTING AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (cont’d) (b) At the End of the Last Annual Reporting Period under AGAAP - 30 June 2005 C O N S O L I D A T E D P A R E N T AGAAP Adjustment $’000 $’000 AGAAP Adjustment $’000 $’000 CURRENT ASSETS Cash & cash equivalents Receivables Inventories Current tax asset Other TOTAL CURRENT ASSETS NON-CURRENT ASSETS Receivables Other financial assets Plant and equipment Intangible assets Deferred tax assets TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Payables Short term borrowings Current tax liabilities Provisions TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Long term borrowings Deferred tax liabilities Provisions TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Contributed equity Reserves Retained profits PARENT ENTITY INTEREST Minority interests TOTAL EQUITY (i) Share Based Options 3,965 32,753 50,577 1,239 1,449 89,983 - - 57,765 15,715 294 73,774 163,757 19,790 62,247 165 1,226 83,428 20,650 4,853 547 26,050 109,478 54,279 41,939 (3,087) 15,436 54,288 (9) 54,279 - - - - - - - - - 495 - 495 495 - - - - - - 240 - 240 240 255 132 98 25 255 - 255 AIFRS $’000 3,965 32,753 50,577 1,239 1,449 89,983 - - 57,765 16,210 294 74,269 164,252 19,790 62,247 165 1,226 83,428 20,650 5,093 547 26,290 109,718 54,534 42,071 (2,989) 15,461 54,543 (9) 2 7,118 19,242 1,034 377 27,773 39,731 24,816 23,802 6,293 - 94,642 122,415 5,155 41,116 - 1,152 47,423 20,650 4,853 73 25,576 72,999 49,416 41,939 - 7,477 49,416 - 54,534 49,416 AIFRS $’000 2 7,118 19,242 1,034 377 27,773 39,731 24,816 23,802 6,490 - 94,839 122,612 5,155 41,116 - 1,152 47,423 20,650 5,093 73 25,816 73,239 49,373 42,071 98 7,204 49,373 - 49,373 - - - - - - - - - 197 - 197 197 - - - - - - 240 - 240 240 (43) 132 98 (273) (43) - (43) Under AASB 2 Share-based payments, the Company is required to expense the fair value of share rights and awards granted to employees as remuneration over the vesting period. This standard applies to all share rights and awards issued after 7 November 2002 which have not vested as at 1 January 2005 with a corresponding increase in a share-based payment reserve. Options are granted to senior executives of Gale Pacific Limited as part of the performance based package. The fair value and other details on share options are disclosed in the Remuneration Report. (ii) Goodwill Under AASB 3 Business Combinations, amortisation of goodwill will no longer be able to be amortised and will be replaced by impairment testing on an annual basis. Impairment testing will focus on the discounted cash flows of the related cash generating units. This will result in a change to the current accounting policy, whereby goodwill was amortised on a straight line basis over the period during which the benefits are expected to arise but not exceeding 20 years. Under the new policy, amortisation will no longer be charged, but goodwill will be written down to the extent it is impaired. 55 NOTE 32: IMPACT OF ADOPTING AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (cont’d) (iii) Impairment of Assets AASB136 Impairment of Assets determines the recoverable amount of cash generating units (CGUs) by assessing the higher of net selling price and value in use. This resulted in a change to the accounting policy, whereby undiscounted expected net cash flows used in determining the recoverable amounts of non-current assets. Gale Pacific Limited describes CGUs as a group of assets working together to generate cash flows. Those CGUs were defined, the impairment testing policy was reassessed and assets tested for impairment as at 30 June 2005. The assessment required no write down in the 2005 financial year. (iv) Foreign Currency Under AASB 121 The Effect of Changes in Foreign Exchange Rates, each entity in the consolidated entity determines its functional currency, being the currency of the primary economic environment in which the entity operates. Each entity maintains its books and records in its functional currency. Foreign operations are translated into the function currency of the consolidated entity based on an average rate for the profit and loss, and the exchange rate at reporting date for the balance sheet. Foreign exchange differences arising on translation are recognised directly in a separate reserve component of equity. There are no expected changes in functional currency for the Company or its overseas entities. (v) Income Taxes Under AIFRS a balance sheet approach has been adopted under which temporary differences are identified for each asset and liability rather than the accounting for the effect of timing and permanent differences between taxable and account profit. A deferred tax asset is recognised for tax losses where their realisation is considered probable. NOTE 33: FIRST-ADOPTION OF AIFRS - RECONCILIATION OF PROFIT REPORTED UNDER AGAAP TO PROFIT UNDER AIFRS (a) Reconciliation of Profit for the Year Ended 30 June 2005 Revenue Sales revenue Other income C O N S O L I D A T E D C O M P A N Y AGAAP Adjustment $’000 $’000 AIFRS $’000 AGAAP Adjustment $’000 $’000 AIFRS $’000 146,850 2,327 149,177 - 146,850 (167) 2,160 67,880 2,106 (167) 149,010 69,986 - (157) (157) 67,880 1,949 69,829 Changes in inventories of finished goods and work in progress Raw materials, consumables and other cost of sale (58,114) (16,484) Employee benefits expense Depreciation and amortisation expenses Finance costs Operating overheads Other expense Profit before income tax Income tax (expense)/income tax benefit Profit for the year Profit attributable to minority interests Profit attributable to the members of the parent (21,731) (6,067) (4,926) (33,734) (2,280) 5,841 (1,158) 4,683 2 4,685 - - (93) 495 - (16,484) 2,356 (58,114) (21,824) (5,572) (4,926) (35,785) (12,853) (3,973) (3,350) - - (93) 197 - 2,356 (35,785) (12,946) (3,776) (3,350) 167 (33,567) (12,895) 157 (12,738) - 402 198 600 - (2,280) 6,243 (960) 5,283 2 600 5,285 (1,693) 1,793 (829) 964 - 964 - 104 198 302 - 302 (1,693) 1,897 (631) 1,266 - 1,266 (b) Restated AIFRS Statement of Cash Flows for the Year Ended 30 June 2005 No material impacts are expected to the cash flows presented under AGAAP on adoption of AIFRS. 56 Additional Stock Exchange Information Number of Holdings of Equity Securities as at 18 September 2006 The fully paid issued capital of the Company consisted of 96,834,516 ordinary fully paid shares held by 1,167 shareholders. Each share entitles the holder to one vote. Thirty-three option holders hold 870,000 options over ordinary shares. Options do not carry a right to vote. Distribution of Holders of Equity Securities Number of shareholders Size of Shareholding 1 – 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over Holdings less than a marketable parcel Substantial Shareholders as at 18 September 2006 Shareholder Gary Stephen Gale (i) Gale Australia Pty Ltd (ii) Barbara Gale (ii) UBS Nominees Pty Ltd Thorney Holdings Pty Ltd (iii) Monterrey Investment Management Limited Regal Funds Management Pty Ltd Equipsuper Pty Ltd Fully Paid Ordinary Shares 167 427 230 300 43 1,167 96 Options Over Ordinary Shares - - - 32 1 33 - No. % 15,399,709 13,927,844 13,927,844 14,031,101 13,316,632 11,147,453 9,651,101 5,572,797 15.90 14.46 14.46 14.19 13.75 11.51 9.97 5.75 (i) The substantial shareholding for Gary Stephen Gale includes the shares held by Gale Australia Pty Ltd and Barbara Gale (see note (ii) below). (ii) The substantial shareholdings for Gale Australia Pty Ltd and Barbara Gale relate to the same shares. (iii) The substantial shareholding of Thorney Holdings Pty Ltd includes holdings of Invia Custodian Pty Ltd, being numbers 2, and 14 on the schedule of Twenty Largest Holders of Quoted Equity Securities and includes a holding that is outside of the top twenty holdings. Twenty Largest Holders of Quoted Equity Securities 1 Gale Australia Pty Ltd 2 3 4 Invia Custodian Pty Limited (Thirty Five A/C) ANZ Nominees Limited (Cash Income A/C) UBS Nominees Pty Ltd 5 National Nominees Limited 6 Citicorp Nominees Pty Limited 7 National Nominees Limited (Equipsuper Account) 8 9 ANZ Nominees Limited (Income Reinvest Plan A/C) Equity Trustees Limited (SGH PI Smaller Co’s Fund) 10 National Australia Trustees Limited 11 Contemplator Pty Ltd (A R G Pension Fund A/C) 12 Ruminator Pty Ltd 13 J P Morgan Nominees Australia Limited 14 Invia Custodian Pty Limited (White A/C) 15 Mrs Anne Lesley Gale 16 Gwynvill Trading Pty Limited 17 Cogent Nominees Pty Limited (SMP Accounts) 18 Atkone Pty Ltd 19 Womby Investments Pty Ltd 20 Citicorp Nominees Pty Limited (CFSIL CWLTH BOFF Super A/C) 13,927,844 12,247,396 8,934,736 8,414,617 7,207,665 6,530,194 5,572,797 5,455,987 3,978,058 1,577,353 1,176,471 982,352 835,857 801,938 773,923 716,213 690,235 588,234 570,957 530,580 14.38 12.65 9.23 8.69 7.44 6.74 5.75 5.63 4.11 1.63 1.21 1.01 0.86 0.83 0.80 0.74 0.71 0.61 0.59 0.55 Top 20 holders of ORDINARY FULLY PAID SHARES as at 18 Sep 2006 81,513,407 84.16 Other information: The name of the Company Secretary is Ms. Sophie Karzis.The address of the principal registered office in Australia, and the principal administrative office, is: 145 Woodlands Drive, Braeside, Victoria 3195, Tel: (03) 9518 3333. The Company is listed on the Australian Stock Exchange. The home exchange is Melbourne. Registers of securities are held by: Computershare Investor Services Pty Ltd. Yarra Falls, 452 Johnston Street, Abbotsford, Victoria 3067 Local call 1300 850 505 International call + 613 9415 4000 57 This page has been left blank intentionally. 58 This page has been left blank intentionally. 59 Melbourne, Australia Christchurch, New Zealand Florida, USA Jebel Ali, Dubai Neunkirchen, Germany Beilun, China Gale Pacific Limited ABN 80 082 263 778 9 3 6 L P G / A C B 

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