GALE Pacific
Annual Report 2007

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ANNUAL REPORT 2007 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 George Richards (Non Executive Director) Mr John Murphy (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 T + 613 9415 4000 Auditor Pitcher Partners Level 19, 15 William Street, Melbourne, Victoria, 3000 T + 613 8610 5000 Website Address www.galepacific.com TABLE OF CONTENTS CORPORATE INFORMATION .................................................................. 2 REPORT FROM THE CHAIRMAN AND THE MANAGING DIRECTOR & CHIEF EXECUTIVE OFFICER .................................................................. 3 BOARD OF DIRECTORS .......................................................................... 7 SENIOR MANAGEMENT .......................................................................... 8 CORPORATE GOVERNANCE.................................................................. 9 DIRECTORS’ REPORT.......................................................................... 15 AUDIT REPORT ...................................................................................... 24 FINANCIAL RESULTS............................................................................. 25 INCOME STATEMENT............................................................................ 26 BALANCE SHEET ................................................................................... 27 STATEMENT OF CHANGES IN EQUITY................................................ 28 STATEMENT OF CASH FLOWS............................................................. 29 NOTES TO THE FINANCIAL STATEMENTS.......................................... 30 ADDITIONAL STOCK EXCHANGE INFORMATION ............................ 66 Gale Pacific Limited 2 Annual Report REPORT FROM THE CHAIRMAN AND THE MANAGING DIRECTOR & CHIEF EXECUTIVE OFFICER Gale Pacific Limited 3 Annual Report REPORT FROM THE CHAIRMAN AND THE MANAGING DIRECTOR & CHIEF EXECUTIVE OFFICER Dear Shareholders, The Year in Review In last year's Annual Report, we reported that the Gale Pacific Group was in the progress of a challenging review of its strategy designed to ensure that the Group had a strengthened and stable platform to fund its future growth plans and operations. It is pleasing to report that this review, and the restructuring that has occurred consequently, is now complete. team and systems, and The restructuring initiatives that have been taken during the year have led to the improvement in our balance sheet, strengthening of our management in many levels have been operational areas within substantially reduced, efficiency levels in our China operation have increased, to working capital management, there is a renewed focus on research and development activities, and our senior management team is now in place worldwide. improvements have been made the business. Debt improvements A concentrated effort was made to streamline the business and to ensure that the Group’s cost structure is better matched to projected revenue generation. This resulted in 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. In addition, the German garden product distribution business, Jung, was sold in September 2006. After a detailed review, it was concluded that the New Zealand manufacturing operations should be transferred to the China manufacturing plant as this would assist the Group to operate more efficiently. The New Zealand plant is expected to be fully integrated into the China plant by early next calendar year. long term revised the Group’s bankers, In July 2006 the Group 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. Despite these initiatives, it became clear in November 2006, following discussions with financing that arrangements needed to be put into place. The Group appointed advisors to assist in identifying and assessing long term refinancing options. After a comprehensive process to identify a sustainable long term capital structure, a recapitalisation proposal combining a $20 million equity placement and renewed Australian banking facilities was announced in June 2007. This proposal was approved by shareholders at an extraordinary general meeting held in August 2007 and resulted in the issue of 30,300,000 shares to our new cornerstone investor, Investec Wentworth Private Equity and its related entities at a price of $0.50 per share, and 9,700,000 shares to our long-standing major investor Thorney Holdings Pty Limited upon the same terms. Net proceeds from the equity placement were used to reduce long- term debt and provide working capital to assist in the growth of the Group. Revenue Sales revenues from continuing activities declined by 1.6% or $1.8 million to $110.4 million due mainly to foreign exchange differences year on year in consolidation of the accounts. Operations Asia / Pacific Australia Sales revenue in our Australian business increased by approximately 5%, or $2.6 million highlighted by a 15% increase in sales to retail channels, double digit growth in all major retail product categories and increased sales with all of our major retail customers. Strong export sales to Japan were achieved resulting from a new product range we developed in conjunction with our Japanese distributor. The ongoing drought resulted in tough market conditions in the agricultural sector, causing a reduction of sales in the commercial and industrial fabrics segment of approximately 15% on the previous year. Most of these sales losses were in the coated fabrics product range and were a direct result of these market conditions. forecasting and production planning which resulted During the year we implemented new supply chain initiatives to improve in inventory reductions year on year. Selective price increases were implemented to offset the impact of global raw material increases which continue to challenge our business. New Zealand Sales in New Zealand remained flat compared with the previous year, with margin pressure continuing as a result of increased import competition, exacerbated by a strong New Zealand dollar. These factors, combined with the need to operate manufacturing plants at maximum efficiency levels all year round, led to the decision announced recently to relocate the New Zealand plant to the Group’s wholly owned facility in Beilun, China. The plant relocation project is now well underway with the first pieces of equipment shipped to China at the end of August 2007. Our plan is to complete the necessary stock build in New Zealand to service the market fully and then have the majority of the extrusion and knitting equipment relocated to China by the end of the 2007 calendar year. Our objective is to have the plant and machinery installed in China early in 2008. The equipment used in the manufacture of the extruded plastics products will be relocated to the Melbourne, Australia plant and will be operational in the New Year. Gale Pacific Limited 4 Annual Report China We have successfully completed the relocation and recommissioning of the Australian extrusion and knitting equipment to China which is now operating at increased output and efficiency levels. During the year we closed the Shanghai sales office and restructured the China production, R&D and engineering departments to reduce staff headcount and provide a leaner operation with a focus on efficient manufacture of high quality product. The clearing of the remaining bottlenecks earlier this year have enabled us to free up more available capacity in the plant enabling us to produce even more efficiently in the future. Improved production planning and inventory management processes have enabled us to significantly reduce the level of inventory held in the China plant. The China operation also achieved ISO9001:2000 quality accreditation. Sourcing of colour master batches, one of our key raw materials has been moved to local Chinese manufacturers. These master batches will continue to be manufactured to our strict formulations and quality levels but at reduced costs and shortened lead times. Resin prices remained high throughout the financial year and, where possible, price increases have been passed on to the market. Europe / Middle East / Africa Europe Gale Europe completed its first season after the sale of the Jung business. As trading in the European market had been done previously through the Jung entity we had to establish all new customer listings and trading terms with all major customers. This process has been completed. During the year we processed, sorted and re-worked the previous season’s returned inventory which resulted in us carrying high levels of inventory in Europe and reducing our ordering on the China plant as a result. With European inventory being at very high levels following the seasonal returns, particularly of products not core to our product range or ongoing strategy, the decision was made in June 2007 to write down our European assets by $4.9 million to allow management to liquidate this inventory and focus on the opportunities for sustainable business growth in Europe. We have now exited the Jung warehouse where all inventory had been held previously and are in the process of consolidating our European warehouse locations as we reduce our inventory holdings. Staffing levels in Europe have been reduced as we establish a base in this market. A full review of our product range and distribution channels has been completed, and we are currently implementing a more focused strategy, including our commercial fabric range. Range review and customer presentations are well underway for the following season with existing and new customers. Middle East / Africa Sales in the Middle East / Africa were down 7.6% on last year as a result of earlier bottlenecks in the production process in China, which have now been cleared. Management of the Middle East / Africa business has now been merged with the European operation to reduce costs and increase the senior management focus of this business. The Americas USA Sales in the USA have almost doubled since 2005, and grew by 29% in local currency over last year. During the year, we increased store coverage to 639 Home Depot stores, expanded retail fabric business into 1,327 Wal-Mart stores, and increased store coverage for Shade Sails at Costco. We have expanded our manufacturers representative network to 17 who now service independent retail customers across all major in North America, and have also established a new markets warehouse facility in Georgia to provide shorter lead times and improved customer service to our east coast customers. Sales of commercial / architectural fabrics grew during the year but not at the levels anticipated. We still see this as a strong growth area for the business and are currently exploring ways to expand our market penetration more rapidly. Results The Group reported a loss after tax of $16.36 million, which includes a trading loss of $2.7 million, write downs and provisions in relation to the European and New Zealand assets of $9.9 million, and the additional write-off of the deferred tax asset relating to Gale Europe GmbH of $3.75 million. Research and Development (R & D) We have now completed a full review of our R & D activities, structure and project list and have aligned our R & D strategy with that of the business. The R & D group now has a much clearer focus and is working on a number of projects under the direction of Dr Paul Cacioli, our new head of Research & Development appointed during the year. Our plan is to start to commercialise some of these projects within the FY08 financial year. Continuous product improvement and innovation will be a key factor to ensure the Group’s future growth. Information Technology A new Group wide, global information system is currently being implemented in Australia with the other regions to follow shortly. We have also invested in improved demand forecasting and production planning systems, which are expected to provide further improvements to working capital management and customer service levels. Cash Flow and Balance Sheet The Group has reduced borrowings by $58 million during the last twelve months through a combination of a capital raising, conversion of unsecured notes to equity, sale of the Jung business, and positive cash flow from operations. The Group also generated $9 million in operating cash flow for the year primarily through working capital reductions. Capital expenditure reduced to approximately $4 million, down from $19.4 million in the previous financial year, as the investment phase of the Group’s relocation and expansion plan was completed. Gale Pacific Limited 5 Annual Report Tax Corporate Governance During Gale’s start up and entry into Europe over the past three years, our German subsidiary has accumulated tax losses that are available for offset against future profit in Europe, and would have been classified in the accounts as a “deferred tax asset”. However, until such time that the European business demonstrates consistent profitability, it has been decided to write off the carrying value of this deferred tax asset. As the European operations generate profits, the ability to recover these tax losses will be an upside to the after tax profit of the Group. Dividends There will be no dividend paid for the 2006 / 2007 financial year, and Directors expect the payment of dividends will resume when the the business has been improved demonstrated. financial performance of Annual General Meeting A notice of the Company’s Annual General Meeting to be held on 26 November 2007 and a proxy form for voting is enclosed with this report. Directors One of the items of business at the Annual General Meeting is the re- election of Mr George Richards who retires as a Director by rotation in accordance with the constitution of the Company and, being eligible, offers himself for re-election. The Board endorses Mr Richards’ re- election. We also welcome Mr John Murphy to the board of directors of the Company. Mr Murphy’s appointment was approved by shareholders at the Company’s extraordinary general meeting on 24 August 2007. Mr Murphy is the Managing Director of Investec Wentworth Private Equity Limited. Mr Murphy’s qualifications which include Bachelors and Masters degrees in Commerce, and his experience in a number of public and private companies, strengthens the Board and we look forward to his contribution. to is committed The Group the principles of good corporate governance. A full discussion on the Group’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 Group seeks to align employee remuneration with Group 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. Management and Staff The Group has made a number of senior management appointments during the last twelve months. We are confident that this team will deliver improved performance for the business in the future. We would like to thank the whole team at Gale for their hard work and dedication to the business in what have been extremely challenging times. With the restructuring work that has been completed and a more positive outlook for the business we look forward to providing a more secure and rewarding environment for all of our employees. Outlook With the recently announced $20 million capital raising now complete, the Group will have a stronger Balance Sheet, significantly reduced borrowings and long term banking facilities in place. Driven by improved operating efficiencies and sales growth from our northern hemisphere operations, improved agricultural market conditions in Australia and traction being gained from our refocused R & D activities, we remain confident about the future prospects of the business. Mr Harry Boon Chairman 28 September 2007 Mr Peter McDonald Managing Director and Chief Executive Officer 28 September 2007 Gale Pacific Limited 6 Annual Report BOARD OF DIRECTORS HARRY BOON, LLB (HONS), B. Com PETER MCDONALD, Bachelor of Business (Marketing) JOHN MURPHY, CA, FCPA, B.Comm, M.Comm GEORGE RICHARDS, CPA, AAICD Harry Boon John Murphy Chairman & Non Executive Director since August 2005 Non Executive Director since August 2007 Mr Boon joined the Company in August 2005 and brings to the role his experience as a senior executive in one of Australia’s leading listed companies, Ansell Limited. Mr Boon’s executive career culminated with the position of Chief Executive Officer of Ansell Limited from April 2002 to June 2004, having previously been President, Chief Executive Officer and Managing Director of Ansell Healthcare since February 1989. Mr Boon is also Chairman of Tattersalls Limited, a Non Executive Director of Hastie Group Limited and Non Executive Director of Toll Group Limited. Mr Boon has lived and worked in Australia, Europe, UK and Canada, and has broad based experience in global marketing and sales, large scale manufacturing operations, and product development. He is multi-lingual, has a strong track record of delivering business results through setting ambitious goals, building the appropriate organisation structures, and pursuing achievement. Mr Boon is Chairman of the Company’s Nomination Committee and is a member of the Audit & Risk and Remuneration Committees. Mr Murphy is the Managing Director of Investec Wentworth Private Equity Limited and in this capacity is a board member of the fund’s investments, including the following listed companies: Ariadne Australia Limited, Staging Connections Group Limited and Gale Pacific Limited. Mr Murphy is also a non executive director of First Opportunity Fund Limited and Investec Bank (Australia) Limited. During the last 3 years, Mr Murphy was a non executive director of the following listed companies: Kids Campus Limited (2004-2006), Southcorp Limited (2003-2005), Invocare Limited (2001-2005) , SMS Management and Technology Limited (2001-2004), Fone Zone Group Limited (2005 -2006) and Australian Pharmaceutical Industries Limited (2004-2007). Mr Murphy is the Chairman of the Company’s Remuneration Committee and is a member of the Audit & Risk and Nomination Committees. Peter McDonald George Richards Managing Director & Chief Executive Officer Non Executive Director since May 2004 Mr McDonald is the Company Managing Director and Chief Executive Officer since April 2006 and Executive Director since 1998. 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. Mr Richards joined the Board in 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 Society of Accountants. Mr Richards is Chairman of the Company’s Audit & Risk Committee and is a member of the Nomination and Remuneration Committee. Gale Pacific Limited 7 Annual Report SENIOR MANAGEMENT JEFF COX DR PAUL CACIOLI STEPHEN CARROLL MARTIN DENNEY FRANK ALBERTSMEIER EMMA XU PAUL DUCRAY Jeff Cox Chief Financial Officer (“CFO”) Jeff Cox is an experienced CFO and has held senior finance positions for over 20 years. He has been the CFO of major divisions within the Pacific Dunlop Group including the Battery Group, Food Group and at Ansell. All these businesses had revenues in excess of $1 billion and significant international sales, distribution and manufacturing operations. Jeff’s experience at Ansell included residing in the USA for 5 years while playing a significant part of a successful and global company. Dr Paul Cacioli General Manager, Research & Development and Technical Services Dr Paul Cacioli joined Gale in late March 2007 and is responsible for planning and managing the Company’s research and development activities. Paul spent 19 years with Ansell, 14 of which were spent overseas in Malaysia, Sri Lanka and the USA, rising to the position of Senior Vice President of Science and Technology and Regulatory Affairs. Paul brings to Gale a broad range of technical skills and a world class knowledge of polymers and research and development processes. Stephen Carroll Managing Director, Australia In November 2005 Steve was appointed to the role of Managing Director for the Australian operation. Steve has been involved in helping manage the successful integration of numerous acquisitions into the Gale model whilst helping the brands, people and the Australian business strategy maintain its market leading position. Prior to this appointment, Steve held the positions of National Sales and Marketing Manager Consumer Products. As the business grew and acquired a larger industrial product portfolio, he was appointed Group Sales and Marketing Manager for Australia. Martin Denney Managing Director, USA Martin has strong commercial and strategic planning skills gained over 20 years across a range of industries including food and beverage, distribution, manufacturing, technology and property development. He has held senior management roles including General Manager of Socomin, a branded food import and distribution division of Pacific Dunlop Group (turnover A$40 million). Other roles include National Sales and Marketing Manager at Dennis Family Corporation (turnover A$250 million), a leading Australian property developer, and Business Development Manager at Adacel Technologies, a global simulation and systems company based in Australia. Frank Albertsmeier Managing Director, Europe / Middle East / Africa Frank has had extensive experience in managing sales, marketing and business development in the consumer and professional goods industry in various countries in Europe. Prior to joining Gale, Frank was the Director of Sales for ICI paints Europe for four years, responsible for a turnover of €85 million. He played a leading role in the strategic process to develop the future direction for ICI in Europe. Frank also managed more than 100 sales and marketing people within this division while doubling the bottom line. Frank has held many sales and management positions for Black and Decker Europe through his 18 year tenure, reaching the level of Commercial Director. Emma Xu Managing Director, China Prior to joining Gale, Emma worked as an attorney in China with extensive experience in law and international business management. Emma’s responsibilities initially included government relationships, finance, internal control and communication with the Board. Emma was promoted to Managing Director of Gale Pacific Special Textiles (Ningbo) Limited (“GPST”) in September 2003 as GPST became a wholly owned overseas enterprise of Gale. Emma was responsible for managing the construction of the Gale facility in Ningbo and the relocation of the manufacturing equipment from Braeside, Australia to Ningbo, the installation of new machines purchased from Europe, the set up of aluminium extrusion and powder coating lines in-house, and selecting and leading the Chinese management team. Paul Ducray Chief Manufacturing Officer Paul joined Gale in December 2004 and relocated to China in June 2006 and took on his current position of Chief Manufacturing Officer responsible for all manufacturing and logistics functions at GPST. Paul previously worked at BTR Dunlop in South Africa. In 2001 Paul migrated to New Zealand and joined Donaghy’s NZ in the role of Manufacturing Manager. A successful turnaround of the company started with a management buyout, new management team and restructuring of the business. This led to the purchase of the Industrial Textiles division of Donaghys by Gale Pacific Limited in December 2004. Gale Pacific Limited 8 Annual Report CORPORATE GOVERNANCE Gale Pacific Limited 9 Annual Report CORPORATE GOVERNANCE STATEMENT This statement sets out the corporate governance practices that were in operation throughout the financial year for Gale Pacific Limited (“the Company”) and its controlled entities (“the Group”). 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 has continued its strategy of strengthening its Corporate Governance practices and believes that Gale Pacific now complies with the Corporate Governance Council’s Principles of Good Corporate Governance and Best Practice Recommendation. A summary of how the Group 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 to the board and those delegated to management. Complying The Board has adopted a charter which establishes 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 Group, 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 Group’s website. Principle 2: Structure the Board to add value 2.1 A majority of the board members should be independent. Complying The Board comprises four directors, three of whom are non executive and independent. The Directors considered by the Board to constitute independent directors are Mr H Boon, Mr G Richards and Mr J Murphy. 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 chairman The independent director. should be an Complying The Chairman, Mr H Boon has been chairman of 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 executive officer should not be exercised by the same individual. Complying The positions of Chairman and Chief Executive Officer are held by separate persons. 2.4 The board should establish a nomination committee. Complying The Board has a formal Nomination Committee comprising of the non executive independent Directors. The Nomination Committee’s functions and powers are formalised in a Charter. Mr H Boon is Chairman of the Nominations Committee. Gale Pacific Limited 10 Annual Report ASX Principle Status Reference / Comment 2.5 Provide the information indicated in the Guide to reporting on Principle 2. Complying The following information is set out in the Group’s annual report: • • • • • The skills and experience of Directors. The Directors considered by the Board to constitute independent Directors and the Group’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 Complying The Group has formulated a Code of Conduct which can be viewed on its website. 3.1 Establish a code of conduct to guide the 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 and the for accountability of reporting and investigating reports of unethical practices. responsibility individuals 3.2 Disclose the policy concerning trading in company securities by directors, officers and employees. Complying The Group has adopted a Securities Trading Policy which can be viewed on its website. 3.3 Provide the information indicated the Guide to Reporting on Principle 3. Complying The Group’s policy documents are posted on its website. Principle 4: Safeguard integrity in financial reporting 4.1 to that the board Require the chief executive officer and the chief financial officer to state in writing 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 relevant accounting standards. in accordance with Complying The Directors are committed to the preparation of financial statements that present a balanced and clear assessment of the Group’s financial position and prospects. The Audit & Risk Committee reviews the Group’s half yearly and annual financial statements and makes recommendations to the Board. The Board requires the Managing Director and Chief Executive Officer and the Chief Financial Officer to state in writing to the Board that the Group’s financial reports present a true and fair view, in all material respects, of the Group’s financial condition and operational results and are in accordance with relevant accounting standards. 4.2 The board should establish an audit committee. Complying The Company has an Audit & Risk Committee. The 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. Gale Pacific Limited 11 Annual Report ASX Principle Status Reference / Comment 4.3 The audit committee should be structured so that it consists of only non executive directors; a majority of independent directors, and have an independent chairperson who is not chairman of the board and have at least three members. Complying The Audit & Risk Committee consists of only non executive, independent Directors and it has an independent Chairman who is not the Chairman of the Board. Mr G Richards is the Chairman of the Audit & Risk Committee. 4.4 The audit committee should have a formal charter. Complying The Audit & Risk Committee has a formal 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 Reporting on Principle 4. Complying Details of the names and qualifications of the 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 policies and Establish written procedures designed to ensure compliance with ASX Listing Rule to disclosure ensure accountability at a senior management that level compliance. requirements and for Complying The Group has a documented policy which has 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 Group’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 Reporting on Principle 5. Complying A copy of the Group’s Disclosure Policy is posted on its website. Principle 6: Respect the rights of shareholders 6.1 and disclose Design a communications strategy to promote effective with shareholders and encourage effective participation at general meetings. communication Complying The Board informs shareholders of all major developments affecting the Group’s state of affairs as follows: 1. 2. 3. 4. 5. The annual report is distributed to all shareholders, including relevant information about the operations of the Group during the year and changes in the state of affairs. The half-yearly report to the Australian Stock Exchange contains summarised financial information and a review of the operations of the Group during the period. All major announcements are lodged with the Australian Stock Exchange, and posted on the Group’s website. Proposed major changes in the Group which may impact on share ownership rights are submitted to a vote of shareholders. The Board encourages full participation of shareholders at the Annual General Meeting to ensure a high level of accountability and identification with the Group’s strategy and goals. Gale Pacific Limited 12 Annual Report ASX Principle Status Reference / Comment Complying The Company’s auditor attends the Annual General Meeting. 6.2 Request the external auditor to attend the Annual General Meeting and be available to 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 should establish policies on risk oversight and management. Complying The Board has responsibility for monitoring risk oversight and ensures that the Managing Director 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 Group. 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 financial officer should state to the the Board in writing statement the integrity of financial statements is founded on a sound system of risk management and internal compliance and control. that regarding given Complying The Managing Director and Chief Executive Officer and the Chief Financial Officer are required to state to the Board in writing that the integrity of the financial statements is founded on a sound system of risk management and internal compliance and control and that the Group’s risk management and internal compliance and control system is operating efficiently and effectively in all material respects. 7.3 Provide the information indicated in Guide to Reporting on Principle 7. Part Complying Management has completed a review of the Group’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 Group’s risk management policy and internal compliance and control systems has been documented and is posted on the Group’s web site. Principle 8: Encourage enhanced performance 8.1 Disclose the process for performance evaluation its committees and individual directors, and key executives. board, the of Complying The Group has in place systems designed to fairly review and actively encourage enhanced Board and management effectiveness. The Nomination Committee takes the Group’s key responsibility executives. the Board’s performance and for evaluating 8.2 Provide the information indicated in Guide to Reporting on Principle 8. Complying A performance evaluation for the Board and its members has been completed. No material internal deficiencies or issues were identified through this process. Gale Pacific Limited 13 Annual Report ASX Principle Status Reference / Comment Principle 9: Remunerate fairly and responsibly 9.1 Provide disclosure in relation to the company’s remuneration policies to enable 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. Complying Details of the Directors and key senior executives remuneration are set out in the Remuneration Report of the Annual Report. 9.2 The board should establish a remuneration committee. Complying 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 Group are consistent with its strategic goals and are designed individual performance as well as meet the appropriate recruitment and succession planning needs. The Chairman of the Remuneration Committee is Mr J Murphy. to enhance corporate and 9.3 9.5 9.4 Clearly distinguish the structure of non executive directors’ remuneration from that of executives. Complying The structure of non executive Directors’ remuneration is distinct from that of executives and is further detailed in the Remuneration Report of the Annual Report. Provide the information indicated in Guide to Reporting on Principle 9. Complying The charter setting out the responsibilities of the Remuneration Committee has been adopted and a copy of this charter is posted on the Group’s website. Ensure that payment of equity-based executive remuneration is made in accordance with thresholds set in plans approved by shareholders. Complying The Remuneration Committee is responsible for 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 Group’s needs and the remuneration framework for Directors (as approved by shareholders). The Committee may consult with remuneration advisors to assist in its role. Principle 10: Recognise the legitimate interests of stakeholders 10.1 Establish and disclose a code of conduct to guide compliance with legal and other obligations to legitimate stakeholders. Complying The Group has in place a Code of Conduct which sets standards for the Board and employees in dealing with the Group’s customers, suppliers, shareholders and other stakeholders. A copy of this Code of Conduct has been posted on the Group’s website. Gale Pacific Limited 14 Annual Report DIRECTORS’ REPORT Gale Pacific Limited 15 Annual Report DIRECTORS’ REPORT The Directors of Gale Pacific Limited (“the Company”) present their annual financial report of the consolidated entity, being the Company and its subsidiaries (“the Group”) for the financial year ended 30 June 2007. The Directors in office at any time during or since the end of the year to the date of this report are: Harry Boon, LLB (HONS), B. Com Chairman and Non Executive Director since August 2005 Mr Boon joined the Company in August 2005 and brings to the role his experience as a senior executive in one of Australia’s leading listed companies, Ansell Limited. Mr Boon’s executive career culminated with the position of Chief Executive Officer of Ansell Limited from April 2002 to June 2004, having previously been President, Chief Executive Officer and Managing Director of Ansell Healthcare since February 1989. During the last three years, Mr Boon has also served as a Director of Tattersall’s Limited, Hastie Group Limited, Toll Holdings Limited, Funtastic Limited. Mr Boon is a member of the Company’s Audit & Risk, Nomination and Remuneration Committees. Peter McDonald, Bachelor (Marketing) of Business John Murphy, CA, FCPA, B.Comm, M.Comm Non Executive Director since August 2007 Mr Murphy is the Managing Director of Investec Wentworth Private Equity Limited and in this capacity is a board member of the fund’s investments, including the following listed companies Ariadne Australia Limited and Staging Connections Group Limited. Mr Murphy is also a non executive director of First Opportunity Fund Limited and Investec Bank (Australia) Limited. During the last 3 years, Mr Murphy was a non executive director of the following listed companies Kids Campus Limited (2004-2006), Southcorp Limited (2003-2005), Invocare Limited (2001-2005), SMS Management and Technology Limited (2001-2004), Fone Zone Group Limited (2005 -2006) and Australian Pharmaceutical Industries Limited (2004-2007). Mr Murphy is Chairman of the Company’s Remuneration Committee and is also a member of the Audit and Risk and Nomination Committees. George Richards, CPA, AAICD Non Executive Director since May 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 Society of Accountants. Managing Director and Chief Executive Officer since April 2006 and Executive Director since 1998 No other directorships of listed companies were held by Mr Richards at any time during the three years prior to 30 June 2007. 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 2007. Mr Richards is Chairman of the Company’s Audit and Risk and Nomination Committees and is also a member of the Remuneration Committee. Gale Pacific Limited 16 Annual Report Gary Gale Review and Results of Operations Executive Director since 1998, Non Executive Director since April 2006, retired 21 November 2006 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 Managing Director of the Company in 1998. He was responsible for the Company entering the advanced polymer fabric industry as a manufacturer in 1977, taking the former Gale family business public in late 2000, expansion into world markets, and the establishment of a world-class manufacturing facility in China. Mr Gale resigned as Managing Director in April 2006 but remained on the Board as a Non Executive Director until his retirement at the 2006 Annual General Meeting. No other directorships of listed companies were held by Mr Gale at any time during the three years prior to his retirement. Daryl Reilly, Graduate Diploma Of Business (Accounting), CPA, ACIS, FTMA, AICD Non Executive Director since 1998, retired 21 November 2006 Mr Reilly was previously an Executive Director and principal of Advent Private Capital Pty Ltd (“APC”) and was APC’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 APC. He was a significant former shareholder of APC. 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 his retirement at the 2006 Annual General Meeting. Ms Sophie Karzis, B JURIS LLB The consolidated loss of the Group for the financial year attributable to the members of Gale Pacific Limited was $16.4 million. Refer to the Chairman and Managing Director’s & Chief Executive Officer’s Report for further details on the Group’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 On 30 August 2007, the Company completed a $20 million capital raising via the private placement of 40,000,000 ordinary fully paid shares at a price of 50 cents per share. Other than the matters discussed above, nothing has 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 Group, the results of those operations, or the state of affairs of the Group in future financial years. Likely Developments likely developments information regarding the Disclosure of operations of the Group in future financial years has been made in part in the Chairman and Managing Director’s 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 Group and has accordingly not been disclosed in this report. in Company Secretary Environmental Regulation and Performance Ms Karzis was appointed as Company Secretary in June 2004. Ms Karzis is a practising lawyer who holds roles at a number of public and private companies. Nature of Operations and Principal Activities The Group’s principal activities in the course of the financial year were the marketing, sales, manufacture and distribution of advanced polymer fabrics and related products to global markets. regulations under to any significant The Group’s operations are not subject environmental the Commonwealth or State legislation. However, the Directors believe that the Group 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 Group. Dividends In respect of the financial year ended 30 June 2007, no interim dividend was paid and the Directors have determined not to pay a final dividend. Gale Pacific Limited 17 Annual Report Share Based Payments 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 750,000. 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 750,000 options on issue, 180,000 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 2004. 450,000 options were issued on 16 November 2005 and 120,000 options were issued on 24 October 2006 to executives and staff of Gale. Included in these issues are options issued to senior executives; 40,000 options issued to Mr Stephen Carroll Managing Director Australia, 40,000 issued options to Mr Zafar Fakroddin Business Unit Manager Gale Europe GmbH, and 20,000 options issued to Mr Paul Ducray Chief Manufacturing Officer. The exercise price of the 180,000 issued options is $3.00, the exercise price of the 450,000 issued options and the 120,000 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 180,000 options their vesting is determined in accordance with the achievement of certain levels of adjusted weighted average earnings per share and the vesting of the 450,000 options and 120,000 options is determined in accordance with the achievement of certain levels of adjusted weighted average earnings per share. The 180,000 options and the 450,000 options are not exercisable after 1 December 2008. The 120,000 options are not exercisable after 31 December 2008. Options carry no rights to dividends and no voting rights. 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. A Binomial or a Black – Scholes option pricing model was used and these models take 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. Performance Rights On 2 February 2007, the Company issued 150,000 performance rights to the Managing Director and Chief Executive Officer, Mr Peter McDonald. Each performance right entitles the holder to one (1) ordinary share in Gale Pacific Limited when exercised and is subject to the satisfying of relevant performance hurdles based on improvements in the Company’s diluted earnings per share against the base year of the 2007 financial year. Performance rights are not exercisable until after 30 September 2009 and expire on 2 February 2017. No amount is payable on the vesting of a performance right. Performance rights carry no rights to dividends and no voting rights. Further details of the options and performance rights are disclosed in Note 16 to the Financial Statements. Indemnification of Officers and Auditors 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. The Company has not otherwise, during or since the financial year, indemnified or agreed to indemnify an officer or auditor of the Company or of any related body corporate against a liability incurred as an officer or auditor. 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. Directors Fully Paid Ordinary Shares Shares Options Performance Rights H Boon G Richards J Murphy 73,000 78,851 - - - - - - - P McDonald 334,714 180,000 150,000 Gale Pacific Limited 18 Annual Report Directors’ Meetings The following table sets out the number of Directors’ meetings (including meetings of committees of Directors) held during the financial year and the number of meetings attended by each Director while they were a Director or committee member. Directors H Boon P McDonald G Richards G Gale D Reilly Directors’ Meetings Audit & Risk Committee Meetings Remuneration Committee Meetings Nomination Committee Meetings No of meetings eligible to attend Attended No of meetings eligible to attend Attended No of meetings eligible to attend Attended No of meetings eligible to attend Attended 14 14 14 7 7 13 14 13 6 6 4 0 4 0 3 4 0 4 0 3 1 0 1 0 1 1 0 1 0 1 1 0 1 0 1 1 0 1 0 1 Remuneration Report Non Executive Director Remuneration This report contains the remuneration arrangements in place for Directors and executives of the Group. Objective 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 Group’s remuneration policy is based on the following principles: • • • Provide competitive rewards to attract high quality executives; Provide an equity incentive for senior executives that will provide an incentive to executives to align their interests with those of the Group and its shareholders; and Ensure that rewards are referenced to relevant employment market conditions. Remuneration packages contain the following key elements: • • Primary benefits – salary / fees; and Benefits, including the provision of motor vehicles and incentive schemes, the executive share option plan as disclosed in Note 16 and Note 22 to the financial statements. including share options under Remuneration Structure In accordance with best practice corporate governance, the structure of Non Executive Directors and senior manager remuneration is separate and distinct. The Board seeks to set remuneration at a level which provides the Company with the ability to attract and retain directors of relevant experience and skill, whilst incurring costs which are acceptable to shareholders. Structure that The Company’s Constitution and the Australian Stock Exchange Listing Rules specify the aggregate remuneration of Non Executive Directors shall be determined from time to time by a general meeting. An amount not exceeding the amount determined is then divided between the directors as agreed. The last determination was at the Annual General Meeting held on 14 December 2000 when shareholders’ approved the 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 in performance based Company and does not participate remuneration. Non Executive Directors are encouraged to hold shares in is considered good governance for Directors to have a stake in the Company. the Company (purchased by the Director on-market). It The remuneration of Non Executive Directors for the period ended 30 June 2007 is detailed below. Gale Pacific Limited 19 Annual Report & Executive Director Structure Senior Manager Remuneration Objective The Group aims to reward executives with a level and mix of remuneration commensurate with their position and responsibilities within the Group. The objective of the remuneration policy is: • • • Reward executives for Group and individual performance; Align the interests of the executives with those of the shareholders; and Ensure that total remuneration is competitive by market standards. 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. Options issued to executives as a form of compensation are dependant upon the performance conditions outlined in Note 16 of the financial statements. Cash bonuses granted to executives 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. The following table discloses the remuneration of the Directors of the Company: 2006 / 2007 Short term benefits Share based payments Post employ- ment Termin- ation benefits Total Performance related Directors Salary & fees Bonus Non- monetary Super Options Perform- ance rights Total Options ($) ($) ($) ($) ($) ($) ($) ($) % % Executive Directors P McDonald 354,215 32,000 44,609 27,929 47,138 19,930 Non Executive Directors H Boon G Richards D Reilly (i) G Gale (ii) Total 150,000 71,667 31,250 - - - - - - - - - - - - - - - - - - - - - 607,132 32,000 44,609 27,929 47,138 19,930 - - - - - - 525,821 18.8% 12.8% 150,000 71,667 31,250 - 778,738 - - - - - - - - - - 2005 / 2006 Short term benefits Share based payments Post employ- ment Termin- ation benefits Total Performance related Directors Salary & fees Bonus Non- monetary Super Options Perform- ance rights Total Options ($) ($) ($) ($) ($) ($) ($) ($) % % Executive Directors P McDonald G Gale (ii) Non Executive Directors H Boon (iii) G Richards D Reilly (i) T Eversteyn (iv) Total 359,942 371,635 137,500 65,000 75,000 14,166 1,023,243 - - - - - - - 62,401 61,964 5,171 12,139 72,580 51,658 - - - - - - - - - - - - 124,365 17,310 124,238 - - - - - - - - 500,094 617,096 1,114,492 14.5% 4.6% 14.5% 4.6% - - - - 137,500 65,000 75,000 14,166 617,096 1,906,252 - - - - - - - - Gale Pacific Limited 20 Annual Report The following table discloses the remuneration of the five highest remunerated executives of the Group. 2006 / 2007 Executives F Albertsmeier (v) Z Fakroddin (vi) S Carroll J Cox P Ducray (vii) Total 2005 / 2006 Executives Z Fakroddin (viii) E Jung (ix) S Carroll C McCallum (x) E Xu (xi) Total Post Employ Super Share Based Payments Options Total Performance Related Short Term Benefits Salary & Fees ($) 320,090 189,459 214,472 229,358 169,477 Bonus (xii) Non- monetary ($) ($) 77,506 33,479 - 105,064 15,000 25,000 30,873 - - 28,771 1,122,856 117,506 198,187 39,785 Salary & Fees ($) 148,610 255,940 208,900 198,825 150,013 962,288 Bonus ($) 129,111 38,538 - 36,357 24,318 Non- monetary ($) 60,031 15,784 27,070 15,558 18,919 228,324 137,362 24,698 ($) - - 19,143 20,642 - Post Employ Super ($) - 4,171 20,527 - - ($) - 6,408 6,408 - 3,204 16,020 ($) 431,075 300,931 285,896 275,000 201,452 1,494,354 Share Based Payments Options ($) 3,950 - 3,950 4,938 48,600 61,438 ($) 341,702 314,433 260,447 255,678 241,850 1,414,110 Total % 18.0% 2.1% 7.5% 9.1% 1.6% Options % - 2.1% 2.2% - 1.6% Total % 38.9% 12.3% 1.5% 16.2% 30.2% Options % 1.2% - 1.5% 1.9% 20.1% Short Term Benefits Total Performance Related (i) (ii) (iii) (iv) Mr Reilly retired from his role as a Non Executive Director on 21 November 2006 and therefore the details of his remuneration for the reporting period are to that date. Mr Gale resigned from his role as an Executive Director on 26 April 2006 and retired as a Non Executive Director on 21 November 2006. The details of his remuneration for the 2006 reporting period are to 26 April 2006. Mr Gale did not receive any remuneration in his role as a Non Executive Director. Mr Boon was appointed a Non Executive Director on 25 August 2005 and therefore the details of his remuneration for the reporting period are from that date. Mr Eversteyn retired from his role as a Non Executive Director on 25 August 2005 and therefore the details of his remuneration for the reporting period are to that date. (v) Mr Albertsmeier is based in Germany and is remunerated in Euro converted to Australian dollars in the table above. (vi) Mr Fakroddin is based in Europe and is remunerated in Euro converted to Australian dollars in the table above. (vii) Mr Ducray is based in China and is remunerated in United States dollars converted to Australian dollars in the table above. Mr Ducray was appointed Chief Manufacturing Officer on 1 July 2006. Prior to this appointment Mr Ducray was Manufacturing Manager Gale Pacific (New Zealand) Limited. (viii) Mr Fakroddin was based in the Middle East and was remunerated in United States dollars converted to Australian dollars in the table above. The bonus payments related to the period ended 30 June 2005 and 30 June 2006 and were paid in United States dollars converted to Australian dollars in the table above. (ix) Mr Jung is based in Germany and was remunerated in Euro converted to Australian dollars in the table above. (x) Mr McCallum is based in New Zealand and was remunerated in New Zealand dollars converted to Australian dollars in the table above. (xi) Ms Xu is based in China and was remunerated in United States dollars converted to Australian dollars in the table above. (xii) Incentive bonuses are granted annually. The grant date is tied to the performance review, which for the current year was completed by 30 June 2007. The service and performance criteria are set out in this report. Gale Pacific Limited 21 Annual Report 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. Non-audit services have been ratified by the Audit Committee and reported to the Board. 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 Group for: Taxation services Corporate secretarial services Systems review Capital raising related services Jung divestment Government grant review General assistance Total Consolidated Company 2006 / 2007 ($000) 84 46 25 13 5 3 2 178 2005 / 2006 ($000) 99 - - - - - - 99 2006 / 2007 ($000) 36 - 25 13 5 3 2 84 2005 / 2006 ($000) 74 - - - - - - 74 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 section 298(2) of the Corporations Act 2001. On behalf of the Directors; Mr Harry Boon Chairman 28 September 2007 Mr Peter McDonald Managing Director and Chief Executive Officer 28 September 2007 Gale Pacific Limited 22 Annual Report Auditor’s Independence Declaration To the Directors of Gale Pacific Limited and its controlled entities. In relation to the independent audit for the year ended 30 June 2007, 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. S Schonberg Partner 28 September 2007 PITCHER PARTNERS MELBOURNE Directors’ Declaration The Directors of the Company declare that: The financial statements and notes, as set out on pages 26 to 65 are in accordance with the Corporations Act 2001 including: • • • 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 2007 and of the performance, as represented by the results of the operations and the cash flows, of the Company and the Group 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. Mr Harry Boon Chairman 28 September 2007 Mr Peter McDonald Managing Director and Chief Executive Officer 28 September 2007 Gale Pacific Limited 23 Annual Report Independent Auditor’s Report We have audited the accompanying financial report of Gale Pacific Limited and its controlled entities. The financial report comprises the Balance Sheet as at 30 June 2007, and the Income Statement, Statement of Changes in Equity and Cash Flow Statement for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors' declaration of the consolidated entity comprising the company and the entities it controlled at the year's end or from time to time during the financial year. Directors' Responsibility for the Financial Report The directors of the company are responsible for the preparation and fair presentation of the financial report in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal control relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that compliance with the Australian equivalents to International Financial Reporting Standards ensures that the financial report, comprising the financial statements and notes, complies with International Financial Reporting Standards. Auditor's Responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor's judgement, including the assessment of the risks of material misstatement in the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. Auditor’s Opinion In our opinion, (a) the financial report of Gale Pacific Limited is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the company's and consolidated entity's financial position as at 30 June 2007 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and (b) the consolidated financial report also complies with International Financial Reporting Standards as disclosed in Note 1. S Schonberg Partner 28 September 2007 PITCHER PARTNERS MELBOURNE Gale Pacific Limited 24 Annual Report FINANCIAL RESULTS Gale Pacific Limited 25 Annual Report INCOME STATEMENT For the year ended 30 June 2007 Revenue Expenses Changes in inventories of finished goods & work in progress Raw materials and consumables used Employee benefits expense Depreciation & amortisation expenses Inventory write down Impairment of goodwill & assets Restructuring and termination costs Provision for non recovery of related party receivables Operating overheads Other expenses Finance costs Loss from continuing operations before income tax Income tax (expense) / benefit Loss from continuing operations after income tax Loss from discontinued operations Loss attributable to minority interests Loss attributable to the members of the parent entity Earnings Per Share From Continuing & Discontinued Operations: Basic earnings per share (cents per share) Diluted earnings per share (cents per share) From Continuing Operations: Basic earnings per share (cents per share) Diluted earnings per share (cents per share) The accompanying notes form part of these financial statements. Consolidated Company Note 2006 / 2007 2005 / 2006 2006 / 2007 2005 / 2006 ($000) ($000) ($000) ($000) 2 3 4 20(c) 19 18 29 29 29 29 110,404 112,190 57,801 62,212 5,776 (57,624) (22,623) (7,859) (4,339) (1,031) (4,672) - (2,377) (50,667) (22,171) (9,153) - (728) - - (25,343) (23,813) (228) (5,598) (13,137) (2,752) (15,889) (471) - (4,630) (5,408) (6,757) 4,037 (2,720) (9,224) 2 (479) (32,147) (8,049) (3,053) (440) (316) - (9,699) (8,080) (2,728) (4,379) (7,596) (23,539) (9,684) (5,287) - (6,478) - - (14,439) (3,043) (4,349) (11,569) (12,203) 2,884 (8,685) - - 3,196 (9,007) - - (16,360) (11,942) (8,685) (9,007) (17.07) (17.07) (16.58) (16.58) (22.57) (22.57) (5.14) (5.14) Gale Pacific Limited 26 Annual Report BALANCE SHEET As at 30 June 2007 Current Assets Cash and cash equivalents Trade and other receivables Inventories Current tax assets Other current assets Total current assets Non Current Assets Receivables Other financial assets Property, plant and equipment Intangible assets Deferred tax assets Total non current assets Total assets Current Liabilities Trade and other payables Income received in advance Borrowings Other financial liabilities Current tax liabilities Provisions Total current liabilities Non Current Liabilities Borrowings Deferred tax liabilities Provisions Total non current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained earnings Parent entity interest Minority interests Total equity Consolidated Company Note 2006 / 2007 ($000) 2005 / 2006 ($000) 2006 / 2007 ($000) 2005 / 2006 ($000) 5 6 7 4 8 6 9 10 11 4 12 13 14 4 15 13 4 15 16 17 18 19 7,642 19,363 30,143 362 1,517 59,027 - - 60,893 11,538 270 72,701 131,728 11,104 - 47,073 31 658 6,182 65,048 4,348 1,133 998 6,479 71,527 60,201 81,936 (7,280) (14,444) 60,212 (11) 60,201 10,552 36,702 47,599 1,047 1,497 97,397 - - 70,220 12,486 2,054 84,760 182,157 22,243 - 97,672 - 344 1,283 121,542 12,070 1,185 974 14,229 135,771 46,386 47,124 (2,643) 1,916 46,397 (11) 46,386 3,654 5,557 10,581 - 1,169 20,961 42,244 25,326 9,339 5,091 2,908 84,908 105,869 2,865 - 27,074 31 382 902 31,254 4,348 - 78 4,426 35,680 70,189 81,936 344 (12,091) 70,189 - 70,189 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 The accompanying notes form part of these financial statements. Gale Pacific Limited 27 Annual Report STATEMENT OF CHANGES IN EQUITY For the year ended 30 June 2007 Consolidated Company Note 2006 / 2007 2005 / 2006 2006 / 2007 2005 / 2006 ($000) ($000) ($000) ($000) Total Equity at the Beginning of the Period 46,386 54,534 43,896 49,373 Exchange differences on translation of foreign operations Employee share based payment reserve 17(a) 17(b) Net (loss) / income recognised directly in equity (4,803) 166 (4,637) 266 80 346 - 166 166 - 80 80 Loss for the period (16,360) (11,944) (8,685) (9,007) Total recognised income and expense for the period (20,997) (11,598) (8,519) (8,927) Transaction with Equity Holders in their Capacity as Equity Holders Contributions, net of raising costs and tax Dividends provided for or paid 16 23 34,812 - 34,812 5,053 (1,603) 3,450 34,812 - 34,812 5,053 (1,603) 3,450 Total equity at the end of the period 60,201 46,386 70,189 43,896 Total Recognised Attributable to Income and Expense for the Period is Members of the parent Minority interest Total The accompanying notes form part of these financial statements. (16,360) (11,944) (8,685) (9,007) - 2 - - (16,360) (11,942) (8,685) (9,007) Gale Pacific Limited 28 Annual Report STATEMENT OF CASH FLOWS For the year ended 30 June 2007 Consolidated Company Note 2006 / 2007 2005 / 2006 2006 / 2007 2005 / 2006 ($000) ($000) ($000) ($000) Cash Flow From Operating Activities Receipts from customers Payments to suppliers and employees Interest received Borrowing costs paid Income tax payments Net cash provided / (used) by operating activities 20(b) Cash Flow From Investing Activities Proceeds from sale of plant and equipment Proceeds from the disposal of business 20(c) Payment for plant and equipment Payment for intangible assets Proceeds / (payments) for investments Amounts advanced / (repaid) by related parties 127,586 181,639 (113,027) (176,266) 489 (5,740) (768) 8,540 537 15,690 (3,953) (174) - - 114 (6,157) (1,260) (1,930) 134 - (19,443) (1,921) - - Net cash provided / (used) by investing activities 12,100 (21,230) Cash Flow From Financing Activities Proceeds from issue of equity securities Proceeds from issue of convertible notes (Repayment) of / proceeds from borrowings Repayment of principal on finance leases Repayment of principal on hire purchase Dividends paid Net cash (used) / provided by financing activities Net increase / (decrease) in cash held Cash at beginning of year Effects of exchange rate changes on items denominated in foreign currencies Cash at end of year 20(a) The accompanying notes form part of these financial statements. 19,017 - (30,949) (226) (1,783) - (13,941) 6,699 (6,414) 254 539 4,681 9,000 8,849 (219) (1,646) (1,232) 19,433 (3,727) (2,348) (339) 59,654 (55,849) 2,785 (4,379) 59 2,270 7,830 - (1,211) (174) 83 3,129 9,657 19,017 - (26,489) (226) (1,783) - (9,481) 2,446 (3,236) - 67,492 (56,648) 1,560 (4,349) (721) 7,334 4,483 - (3,208) (1,941) (6,843) (15,341) (22,850) 4,681 9,000 2,891 (220) (1,819) (1,232) 13,301 (2,215) (1,021) - (6,414) (790) (3,236) Gale Pacific Limited 29 Annual Report NOTES TO THE FINANCIAL STATEMENTS NOTE 1: BASIS OF PREPARATION (c). Principals 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 26. 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. (d). Change in Accounting Estimate During the year, the Group reclassified a portion of the company’s related party balances as net investments in foreign operations as permitted by AASB 121 The Effects of Changes in Foreign Exchange Rates. The balances reclassified were identified as being monetary items of a non current nature as settlement of these balances is not planned and the Group’s forecasts showed that any settlement would not occur in the foreseeable future. While this situation persists, impacting the Group’s current year profits with the movement in the foreign exchange rates applying to these monetary items would not provide the best representation of a current year’s performance. As permitted by AASB 121, from the date of reclassification, all changes in the Australian dollar value of these items arising from changes in foreign exchange rates are, in the consolidated financial statements, being recognised in the foreign currency translation reserve. As and when settlements occur, the cumulative amount of these changes in value deferred in the foreign currency translation reserve will be recognised in that current year’s profit in the consolidated accounts. In the accounts of the Company, these changes in value continue to be recognised in the current year’s profit as required by AASB 121. This financial report is a general purpose financial report that has been prepared in accordance with Australian Accounting Standards, Urgent Issues Group Interpretations and other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001. The financial report covers Gale Pacific Limited (“the Company”) as an individual parent entity and Gale Pacific Limited and controlled entities as a consolidated entity (“the Group”). 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 Group 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). 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. Compliance with AIFRS ensures compliance with International Financial Reporting Standards (IFRS). (b). Going Concern Basis of Accounting to led the improvement Restructuring initiatives that have been taken during the year have in our balance sheet, strengthening of our management team and systems, and improvements in many operational areas within the business. Efficiency levels in our China operation have increased, improvements have been made to working capital management, there is a renewed focus on research and development activities, our senior management team is now in place worldwide and a concentrated effort was made to streamline the business and to ensure that the Group’s cost structure is better matched to projected revenue generation. In August 2007, the Company issued 40,000,000 shares at a price of $0.50 per share raising $20 million. The net proceeds of the placement have been used to repay banking facilities with HSBC and the CBA. A new long term multi option facility of $15 million has been arranged with the CBA. The remaining net proceeds of the placement will be used to fund the restructure of the New Zealand manufacturing operations and support the growth of the business. the Given foregoing has been satisfactorily completed, Directors believe that the Company will continue to be able to pay its debts as and when they become due and payable. Gale Pacific Limited 30 Annual Report Details of the monetary items reclassified and the total exchange difference recognised in the foreign currency translation reserve are detailed below. Note Consolidated 2006 / 2007 ($000) 2005 / 2006 ($000) 16,855 13,421 5,238 35,514 17(a) (2,783) - - - - - Monetary item identified as a net investment in a foreign operation Related party receivable to the company from Gale Europe GmbH Vertriebsgesellschaft Related party receivable to the company from Gale Pacific Special Textiles (Ningbo) Limited Related party receivable to the company from Gale Pacific (New Zealand) Limited Total Exchange movement arising on monetary item forming part of the net investment in related party, recognised in foreign currency translation reserve It is impracticable to estimate the effect of this change on future periods because movements in foreign exchange rates cannot be predicted. (e). Revenue Recognition Revenue from the sale of goods is recognised upon the delivery of goods to customers. Where a government grant (including Strategic Investment Plan income (SIP)) 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). (f). 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 in money market investments instruments maturing within less than two months and net of bank overdrafts. institutions, (g). 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. (h). 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(k). The cost of fixed assets constructed within the Group includes the cost of materials, direct labour and an appropriate proportion of fixed and variable overheads. Depreciation to lives their estimated useful The depreciable amounts of all fixed assets, including capitalised leased assets, are depreciated on a straight line basis over 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 improvements. Depreciation and amortisation rates are reviewed annually for appropriateness. When changes are made, adjustments are reflected in current and future periods only. lives of the The depreciation rates used for each class of assets are: Class of Fixed Asset Depreciation Rates Depreciation Basis Buildings 2.25% Straight line Leasehold improvements Determined by lease term Straight line Plant and equipment Leased plant and equipment 6.7% - 20.0% Straight line 6.7% - 20.0% Straight line Motor vehicles 20.0% Straight line Office equipment 14.3% - 50.0% Straight line Gale Pacific Limited 31 Annual Report (i). 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 Group 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 Group 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. (k). 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. Operating Leases (l). Taxes 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. (j). 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. is not amortised but for Goodwill 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. tested annually is 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 Expenditure on research is recognised as an expense when incurred. Expenditure on development activities is capitalised only when it is expected that future benefits will exceed the deferred costs. Capitalised development expenditure is stated at cost less accumulated amortisation. Amortisation is calculated using a straight line method to allocate the cost over a period (not exceeding three years), during which the related benefits are expected to be realised, once commercial production is commenced. 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. for A balance sheet approach is adopted under which deferred tax assets and temporary liabilities are recognised differences between the tax bases of assets and liabilities and financial statements. No the their carrying amounts 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. in 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. (m). Employee Benefits Provision is made for the Group’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 to employee superannuation funds and are charged as expenses when incurred. the Group Gale Pacific Limited 32 Annual Report Share Based Payments (o). Foreign Currencies The Group operates an employee share option plan for senior executives and a long term performance rights incentive plan for the Managing Director and Chief Executive Officer. The bonus element over the exercise price for these instruments is recognised as an expense in the income statement in the period(s) when the benefit is earned. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options at grant date. The fair value of options and performance rights at grant date is determined using either the Binomial Tree or a Black Scholes option pricing model, and is recognised as an employee expense over the employees become entitled to the option or performance right. the period during which The market value of shares issued to employees for no cash consideration under is recognised as an expense when the employees become entitled to the shares. the employee share scheme (n). Financial Instruments 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. Investment in Controlled Entities Investments in controlled entities are carried at cost and tested for impairment. 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 Group 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. Group Companies financial statements of The 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 foreign operations are transferred directly to the Group’s foreign currency translation reserve as a separate component of equity in the balance sheet. translation of (p). 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. Fixed Assets at Fair Value Through Profit and Loss (q). Comparatives Forward foreign currency contracts that do not qualify for hedge accounting are measured at their fair value with any increment or decrement in fair value recognised in profit and loss. Where necessary, comparative information has been reclassified and repositioned for consistency with current year disclosures. Gale Pacific Limited 33 Annual Report NOTE 2: REVENUE Operating Activities Sale of goods – other parties SIP income Interest income – other parties Other revenue Total revenue Operating Activities Sale of goods – other parties Sale of goods – related parties SIP income Interest income – other parties Interest income – related parties Other revenue Total revenue Consolidated 2006 / 2007 ($000) 2005 / 2006 ($000) Continuing Discontinuing Continuing Discontinuing 109,338 8,184 110,931 54,954 110 626 330 - - 28 748 114 397 - - 25 110,404 8,212 112,190 54,979 Company 2006 / 2007 ($000) 2005 / 2006 ($000) Continuing Discontinuing Continuing Discontinuing 53,930 969 110 446 2,339 7 57,801 - - - - - - - 53,026 6,758 748 114 1,446 120 62,212 - - - - - - - Gale Pacific Limited 34 Annual Report NOTE 3: LOSS Loss before income tax expense has been determined after charging / (crediting): Consolidated 2006 / 2007 ($000) 2005 / 2006 ($000) Continuing Discontinuing Continuing Discontinuing Cost of sales Finance Costs Other persons Depreciation of Non Current Assets Buildings 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 Impairment of Non Current Assets Plant and equipment Goodwill Inventory write down Restructuring and termination costs Increase 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 the Parent Entity For Auditing the financial report Taxation services Systems review Capital raising related services Jung divestment Government grant review General assistance Total remuneration of the auditors of the parent entity Remuneration of Other Auditors of Controlled Entities For Auditing the financial report Taxation services Corporate secretarial services Total remuneration of other auditors Total remuneration of auditors Foreign currency translation (gains) Net Loss on Disposal of Non Current Assets Plant and equipment Motor vehicles Office equipment Operating lease rental expense Net equity settled share based payment expense 74,982 5,598 195 100 5,775 121 563 46 80 55 924 652 317 714 - 4,339 4,672 1,338 107 49 316 36 25 13 5 3 2 400 142 48 46 236 636 (1,238) 66 42 18 3,615 166 4,479 142 - - 12 5 14 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 74,727 33,712 5,408 178 44 5,434 233 541 162 40 76 2,445 - - 728 - - - 1,353 36 (179) 117 74 - - - - - 191 143 25 - 168 359 (984) 5 - - 2,665 80 749 - - 78 62 179 - - - - - - 736 2,998 2,143 - 2,502 - - - - - - - - - - 50 - - 50 50 - - - - 1,048 - Gale Pacific Limited 35 Annual Report NOTE 3: LOSS (CONTINUED) 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 Impairment of investment in subsidiary Inventory write down Provision for non recoverability of related party balances Loss on sale of investment in subsidiary Increase 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 the Parent Entity For Auditing the financial report Taxation services Systems review Capital raising related services Jung divestment Government grant review General assistance Total remuneration of the auditors of the parent entity Foreign currency translation losses / (gains) Net Loss on Disposal of Non Current Assets Plant and equipment Motor vehicles Office equipment Operating lease rental expense Net equity settled share based payment expense Company 2006 / 2007 ($000) 2005 / 2006 ($000) Continuing Discontinuing Continuing Discontinuing 32,506 4,379 22 1,581 62 227 46 80 111 924 119 316 - 440 9,699 - 649 38 (28) 316 36 25 13 5 3 2 400 1,819 - 5 2 1,696 166 - - - - - - - - - - - - - - - 467 - - - - - - - - - - - - - - - - - 45,146 4,349 21 2,158 148 240 162 40 73 2,445 - 728 - - - - 632 2 25 117 74 - - - - - 191 (984) 5 - - 2,311 80 - - - - - - - - - - - - 5,750 - - - - - - - - - - - - - - - - - - - - Gale Pacific Limited 36 Annual Report NOTE 4: INCOME TAX EXPENSE (a). The Components of Tax Expense Current tax Deferred tax Total income tax expense / (benefit) Disclosed in the financial statements as Income tax expense / (benefit) from continuing business Income tax expense / (benefit) from discontinuing business Total Consolidated Company 2006 / 2007 ($000) 2005 / 2006 ($000) 2006 / 2007 ($000) 2005 / 2006 ($000) 811 1,917 2,728 2,752 (24) 2,728 1,631 (5,668) (4,037) (4,037) - (4,037) 914 (3,798) (2,884) (2,884) - (2,884) 712 (3,908) (3,196) (3,196) - (3,196) (b). The Prima Facie Income Tax Payable on Profit is Reconciled to the Income Tax Expense as Follows Consolidated Company 2006 / 2007 ($000) 2005 / 2006 ($000) 2006 / 2007 ($000) 2005 / 2006 ($000) Prima facie tax payable on profit before income tax at 30% (4,089) (4,794) (3,471) (3,661) Add tax effect of: Tax rate differentials in foreign countries Impairment of goodwill Tax losses not recognised / derecognised Attributed CFC income Interest expense non allowable Capital loss on divestment of business Other non allowable / (non assessable) items Movements of SIP income Less tax effect of: Over/(under) provision for income tax in the prior year Income tax expense / (benefit) attributed to profit from ordinary activities Less income tax benefit from discontinuing business Income tax expense / (benefit) from continuing business (c). Income Tax Recognised Directly in Equity 408 - 5,910 - 134 79 249 - 2,691 37 2,728 (24) 2,752 (271) 899 1,151 303 - - (12) (70) - - - - - 140 277 - (2,794) (3,054) (1,243) (4,037) - (4,037) 170 (2,884) - (2,884) - - 1,725 303 - - (250) (70) (1,953) (1,243) (3,196) - (3,196) The following current and deferred tax amounts were credited directly to equity during the period Consolidated Company 2006 / 2007 ($000) 2005 / 2006 ($000) 2006 / 2007 ($000) 2005 / 2006 ($000) Deferred Tax Equity raising costs deductible over 5 years Total (295) (295) - - (295) (295) - - Gale Pacific Limited 37 Annual Report NOTE 4: INCOME TAX EXPENSE (CONTINUED) (d). Current Tax Current tax asset Current tax liability Total (e). Deferred Tax Consolidated Company 2006 / 2007 2005 / 2006 2006 / 2007 2005 / 2006 ($000) ($000) ($000) ($000) 362 (658) (296) 1,047 (344) 703 - (382) (382) 591 - 591 Consolidated Company 2006 / 2007 2005 / 2006 2006 / 2007 2005 / 2006 ($000) ($000) ($000) ($000) Deferred Tax (Liabilities) / Assets Arise from the Following Property, plant and equipment (1,172) (2,788) Foreign exchange Income not derived Finance leases Research and development Doubtful debts Other financial liabilities Provisions Employee benefits Capitalised costs Borrowing costs Equity raising costs Other Total Unused Tax Losses and Credits Tax losses Net deferred tax (liability) / asset Represented By Deferred tax asset Deferred tax liability Total (250) (153) (15) (449) 22 102 379 369 (170) 78 315 81 (863) - (863) 270 (1,133) (863) - (524) (55) (698) - - 324 790 389 - 20 424 (866) 585 (153) (15) (449) - 28 3,064 209 112 78 315 - (1,526) - (524) (55) (698) - - 240 263 133 - 20 132 (2,118) 2,908 (2,015) 2,987 869 2,054 (1,185) 869 - 2,908 2,908 - 2,908 830 (1,185) - (1,185) (1,185) Gale Pacific Limited 38 Annual Report NOTE 4: INCOME TAX EXPENSE (CONTINUED) (f). Unrecognised Deferred Tax Assets The following deferred tax assets have not been brought to account as it is not probable that these can be recovered. Consolidated Company 2006 / 2007 ($000) 2005 / 2006 ($000) 2006 / 2007 ($000) 2005 / 2006 ($000) Tax losses – income Temporary differences not brought to account Tax losses – capital Total 4,071 1,567 1,990 7,628 1,151 - 1,725 2,876 - - 1,990 1,990 - - 1,725 1,725 Unrecognised deferred tax assets are calculated by applying to the pre tax value the tax rate of the jurisdiction in which the asset resides. Assets are converted to Australian dollars at the prevailing period end exchange rate. (g). Tax Losses The Group has recognised as a deferred tax asset income tax losses of nil (2006: $2,987,000) in tax jurisdictions where it is probable that future taxable income will be available to utilise these losses. The Group has derecognised as a deferred tax asset previously recognised income tax losses of $1,248,000 (2006: Nil) as it is no longer probable that these can be recovered. NOTE 5: CASH & CASH EQUIVALENTS Cash on hand Cash at bank Cash on deposit Total NOTE 6: TRADE & OTHER RECEIVABLES Current Trade debtors Less provision for doubtful debt Other receivables Total Non Current Amounts receivable from controlled entities Less provision for non recoverability Total Consolidated Company 2006 / 2007 ($000) 2005 / 2006 ($000) 2006 / 2007 ($000) 2005 / 2006 ($000) 13 3,806 3,823 7,642 2 10,550 - 10,552 1 1,173 2,480 3,654 2 6,053 - 6,055 Consolidated Company 2006 / 2007 ($000) 2005 / 2006 ($000) 2006 / 2007 ($000) 2005 / 2006 ($000) 18,784 (159) 18,625 738 19,363 - - - 32,243 (135) 32,108 4,594 36,702 - - - 5,012 - 5,012 545 5,557 51,943 (9,699) 42,244 4,633 (28) 4,605 1,809 6,414 55,072 - 55,072 Gale Pacific Limited 39 Annual Report NOTE 7: INVENTORIES Current Raw materials at cost Work in progress at cost Finished goods at cost Less provision for obsolescence Total NOTE 8: OTHER ASSETS Current Prepayments Total NOTE 9: OTHER FINANCIAL ASSETS Consolidated Company 2006 / 2007 2005 / 2006 2006 / 2007 2005 / 2006 ($000) ($000) ($000) ($000) 3,892 3,369 24,406 (1,524) 30,143 4,891 4,608 42,334 (4,234) 47,599 255 1,031 9,478 (183) 452 2,249 9,327 (771) 10,581 11,257 Consolidated Company 2006 / 2007 2005 / 2006 2006 / 2007 2005 / 2006 ($000) ($000) ($000) ($000) 1,517 1,517 1,497 1,497 1,169 1,169 365 365 Consolidated Company 2006 / 2007 2005 / 2006 2006 / 2007 2005 / 2006 ($000) ($000) ($000) ($000) Non Current Investments in subsidiaries at cost - - 25,326 25,909 Gale Pacific Limited 40 Annual Report NOTE 10: PROPERTY, PLANT & EQUIPMENT Consolidated Company 2006 / 2007 2005 / 2006 2006 / 2007 2005 / 2006 ($000) ($000) ($000) ($000) Buildings At cost Less accumulated depreciation 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 Capital Work in Progress Total property, plant and equipment 7,842 (415) 7,427 62,047 (13,269) 48,778 270 (254) 16 578 (264) 314 594 (271) 323 342 (125) 217 3,673 (2,638) 1,035 2,783 60,893 8,618 (261) 8,357 77,189 (19,512) 57,677 1,376 (661) 715 409 (177) 232 2,174 (1,338) 836 240 (43) 197 5,430 (3,224) 2,206 - 70,220 - - - 13,479 (5,968) 7,511 270 (254) 16 328 (145) 183 306 (130) 176 342 (125) 217 2,188 (1,717) 471 765 9,339 - - - 29,034 (11,687) 17,347 1,376 (661) 715 318 (122) 196 899 (535) 364 240 (43) 197 2,082 (1,494) 588 - 19,407 Gale Pacific Limited 41 Annual Report NOTE 10: PROPERTY, PLANT & EQUIPMENT (CONTINUED) Movements in Carrying Amounts Movement in the carrying amounts for each class of property, plant and equipment between the beginning and the end of the year. Consolidated Company 2006 / 2007 ($000) 2005 / 2006 ($000) 2006 / 2007 ($000) 2005 / 2006 ($000) Buildings Balance at the beginning of the year Additions / (transfers) Depreciation expense Net foreign currency movements arising from foreign operations Carrying amount at the end of the year Plant and Equipment Balance at the beginning of the year Reclassifications Additions / (transfers) Disposals Depreciation expense Impairment loss Net foreign currency movements arising from foreign operations Carrying amount at the end of the year Plant and Equipment Under Lease Balance at the beginning of the year Reclassifications Additions / (transfers) Depreciation expense Carrying amount at the end of the year Leasehold Improvements Balance at the beginning of the year Reclassifications Additions / (transfers) 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 Reclassifications Additions / (transfers) Disposals Depreciation expense Net foreign currency movements arising from foreign operations Carrying amount at the end of the year Motor Vehicles Under Lease Balance at the beginning of the year Additions / (transfers) Depreciation expense Carrying amount at the end of the year Office Equipment Balance at the beginning of the year Reclassifications Additions / (transfers) Disposals Depreciation expense Net foreign currency movements arising from foreign operations Carrying amount at the end of the year 8,357 53 (195) (788) 7,427 57,677 6 384 (623) (5,787) (714) (2,165) 48,778 715 (38) (615) (46) 16 232 46 133 (100) 3 314 836 (25) 71 (408) (126) (25) 323 197 100 (80) 217 2,206 9 218 (556) (577) (265) 1,035 5,637 2,475 (178) 423 8,357 48,225 - 16,017 (99) (5,512) (1,464) 510 57,677 877 - - (162) 715 259 - 7 (44) 10 232 1,000 - 65 (28) (295) 94 836 29 208 (40) 197 1,738 - 879 (12) (720) 321 2,206 - - - - - 17,347 (23) 80 (7,996) (1,581) (316) - 7,511 715 (38) (615) (46) 16 196 (1) 10 (22) - 183 364 9 - (135) (62) - 176 197 100 (80) 217 588 - 132 (22) (227) - 471 - - - - - 21,471 - 3,230 (4,468) (2,158) (728) - 17,347 877 - - (162) 715 217 - - (21) - 196 525 - - (13) (148) - 364 29 208 (40) 197 683 - 153 (8) (240) - 588 Gale Pacific Limited 42 Annual Report NOTE 11: INTANGIBLE ASSETS Goodwill at cost Less accumulated impairment Patents, trademarks and licenses at cost Less accumulated amortisation Research and development Less accumulated amortisation Total intangible assets Movements in Carrying Amounts Movement in the carrying amounts for each class of intangible assets between the beginning and the end of the year Goodwill Balance at the beginning of the year Additions / (transfers) Impairment loss Net foreign currency movements arising from foreign operations Carrying amount at the end of the year Patents, Trademarks and Licences Balance at the beginning of the year Additions / (transfers) Amortisation expense Net foreign currency movements arising from foreign operations Carrying amount at the end of the year Research and Development Balance at the beginning of the year Reclassifications Additions / (transfers) Amortisation expense Impairment loss Carrying amount at the end of the year NOTE 12: TRADE & OTHER PAYABLES Consolidated Company 2006 / 2007 ($000) 2005 / 2006 ($000) 2006 / 2007 ($000) 2005 / 2006 ($000) 10,313 (986) 9,327 1,281 (565) 716 4,865 (3,370) 1,495 11,538 9,491 - - (164) 9,327 669 120 (55) (18) 716 2,326 356 54 (924) (317) 1,495 13,928 (4,437) 9,491 1,169 (500) 669 4,772 (2,446) 2,326 12,486 12,315 294 (2,998) (120) 9,491 648 103 (76) (6) 669 3,247 - 1,524 (2,445) - 2,326 4,127 (1,054) 3,073 1,057 (534) 523 4,865 (3,370) 1,495 5,091 3,073 - - - 4,127 (1,054) 3,073 937 (423) 514 4,772 (2,446) 2,326 5,913 2,782 291 - - 3,073 3,073 514 120 (111) - 523 2,326 39 54 (924) - 1,495 461 126 (73) - 514 3,247 - 1,524 (2,445) - 2,326 Current Unsecured Liabilities Trade creditors Sundry creditors and accruals Total Consolidated Company 2006 / 2007 ($000) 2005 / 2006 ($000) 2006 / 2007 ($000) 2005 / 2006 ($000) 6,751 4,353 11,104 16,702 5,541 22,243 1,268 1,597 2,865 1,602 2,166 3,768 Gale Pacific Limited 43 Annual Report NOTE 13: BORROWINGS Current Secured liabilities: Bank overdrafts Bank loans Other loans Commercial bills Finance lease liability Hire purchase liability Convertible notes Convertible notes Unsecured liabilities: Bank loans Other loans Non Current Secured liabilities: Bank loans Other loans Finance lease liability Hire purchase liability Unsecured liabilities: Other loans Consolidated Company 2006 / 2007 ($000) 2005 / 2006 ($000) 2006 / 2007 ($000) 2005 / 2006 ($000) 7,103 35,197 747 - 228 2,225 - - 16,966 52,906 681 9,700 239 1,680 6,500 9,000 4,444 19,215 747 - 228 2,225 - - 9,291 35,939 681 9,700 239 1,680 6,500 9,000 45,500 97,672 26,859 73,030 1,358 215 1,573 - 3,267 273 406 3,946 402 402 - - - 4,833 4,015 488 2,734 12,070 - - - 215 215 - 3,267 273 406 3,946 402 402 - - - - 4,015 488 2,734 7,237 - - Total 51,421 109,742 31,422 80,267 Disclosed in the Financial Statements As Current borrowings Non current borrowings Security Liabilities are secured by: 47,073 4,348 97,672 12,070 27,074 4,348 73,030 7,237 (i) (ii) (iii) (iv) First ranking registered equitable mortgage by Gale Pacific Limited over its assets and undertakings including uncalled capital. First ranking registered equitable mortgage by Gale Pacific USA Inc. over its assets and undertakings including uncalled capital. Mortgage over the buildings of Gale Pacific Special Textiles (Ningbo) Limited. Fixed and floating charges (or equivalent) over assets of Gale Europe GmbH Vertriebsgescellsehaft, Gale Pacific (New Zealand) Limited and Gale Pacific Special Textiles (Ningbo) Limited. Gale Pacific Limited 44 Annual Report NOTE 14: OTHER FINANCIAL LIABILITIES Derivatives carried at fair value: Current Foreign currency forward contracts Total NOTE 15: PROVISIONS Current Employee benefits Restructuring and termination costs Factory make good costs Non Current Employee benefits Disclosed in the Financial Statements As Current provisions Non current provisions (a) Aggregate employee benefits liability (b) Number of employees at year end Consolidated Company 2006 / 2007 2005 / 2006 2006 / 2007 2005 / 2006 ($000) ($000) ($000) ($000) 31 31 - - 31 31 - - Consolidated Company 2006 / 2007 2005 / 2006 2006 / 2007 2005 / 2006 ($000) ($000) ($000) ($000) 1,181 4,751 250 998 7,180 6,182 998 2,179 815 1,283 - - 974 2,257 1,283 974 2,257 1,218 652 - 250 78 980 902 78 730 86 768 - - 73 841 768 73 841 109 Restructuring and termination costs comprise costs associated with the New Zealand plant closure and the relocation of its equipment to China and Australia. Gale Pacific Limited 45 Annual Report NOTE 16: CONTRIBUTED EQUITY Paid Up Capital 96,834,516 fully paid ordinary shares (2006: 55,069,815) 81,936 47,124 Company 2006 / 2007 ($000) 2005 / 2006 ($000) Movement in Share Capital Shares issued at the beginning of the financial year Costs of capital raising (net of tax) 99,969 shares used 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 23,529,412 shares issued as part of a private placement and a Share Purchase Plan – 3 July 2006 10,941,177 shares issued in conversion of 4,270,271 convertible notes – 5 July 2006 7,294,112 shares issued in conversion of 2,594,593 convertible notes – 1 August 2006 47,124 (688) - - - 20,000 9,000 6,500 81,936 42,071 (162) 160 4,844 211 - - - 47,124 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 consider it prudent not to pay a dividend this financial year. (a). Movement in Share Capital During 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. On 1 August 2006, the Company issued 7,294,112 ordinary shares in conversion of 2,594,593 convertible notes. Subsequent to the financial year, (30 August 2007) the Company raised $20 million through private placements of 40,000,000 shares issued at 50 cents per share. (b). Share Based Payments The Group maintains an option scheme for certain staff and executives, including executive Directors, as approved by shareholders at an annual general meeting. This scheme is designed to reward key personnel when the Group meets performance hurdles relating to: • • • Improvement in net profit after tax Improvement in return to shareholders Improvement in share price The number of unissued ordinary shares under option as at the date of this report is 750,000. The issue price of each option is zero. Each option entitles the holder to one (1) ordinary share in Gale Pacific Limited in the event that the option is exercised. Additionally, during the year the Group issued 150,000 performance rights to the Managing Director and Chief Executive Officer. Each performance right entitles the holder one (1) ordinary share in Gale Pacific Limited when exercised and is subject to the satisfying of relevant performance hurdles based on improvements in the Company’s diluted earnings per share. Options and performance rights issued to executives during the year were the Group’s remuneration policy which: in accordance with issued • • • Reward performance; executives for Group and individual Align the interests of the executives with those of the shareholders; and Ensure that total remuneration is competitive by market standards. The following share based payment arrangements were in existence during the current and comparative reporting periods. Gale Pacific Limited 46 Annual Report NOTE 16: CONTRIBUTED EQUITY (CONTINUED) Options Grant Date Expiry Date Consolidated and Parent Entity - 2007 5 May 2004 15 Dec 2004 16 Nov 2005 1 Dec 2006 1 Dec 2008 1 Dec 2008 24 Oct 2006 31 Dec 2008 Total Weighted average exercise price Consolidated and Parent Entity – 2006 5 May 2004 15 Dec 2004 16 Nov 2005 Total 1 Dec 2006 1 Dec 2008 1 Dec 2008 Weighted average exercise price Exercise Price Balance at Start of the Year No. Granted During the Year No. Exercised During the Year No. Lapsed During the Year No. Balance at End of the Year No. Exercisable at End of the Year No. $1.50 $3.00 $1.52 $1.52 $1.50 $3.00 $1.52 50,000 240,000 580,000 - 870,000 $1.93 50,000 560,000 - - - 370,000 370,000 $1.52 - - - 1,260,000 610,000 1,260,000 $2.88 $1.52 - - - - - - - - - - - (50,000) (60,000) (130,000) (250,000) (490,000) $1.70 - (320,000) (680,000) (1,000,000) $1.99 - 180,000 450,000 120,000 750,000 $1.88 50,000 240,000 580,000 870,000 $1.93 - - - - - - - - - - - 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 Grant Date 15 December 2004 Grant Date 16 November 2005 Grant Date 24 October 2006 $3.00 $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% $1.60 $1.52 40% 2.49 years 2.99 years - - 2.96% 5.21% 5.21% - - $0.90 $1.52 45% 2.10 years - - - 1.70% 6.04% - - - Gale Pacific Limited 47 Annual Report NOTE 16: CONTRIBUTED EQUITY (CONTINUED) Performance Rights Grant Date Expiry Date Consolidated and Parent Entity - 2007 Exercise Price Balance at Start of the Year No. Granted During the Year No. Exercised During the Year No. Lapsed During the Year No. Balance at End of the Year No. Exercisable at End of the Year No. 2 Feb 2007 2 Feb 2017 N/A - 150,000 - - 150,000 - Performance Rights Valuation Assumptions Grant date share price Exercise price Expected volatility Expected life Dividend yield Risk free interest rate NOTE 17: RESERVES Foreign currency translation reserve Employee share based payment reserve Total (a). Foreign Currency Translation Reserve Grant Date 2 February 2007 $0.83 N/A N/A 2.40 years 1.80% N/A Consolidated Company 2006 / 2007 2005 / 2006 2006 / 2007 2005 / 2006 ($000) ($000) ($000) ($000) (7,624) 344 (7,280) (2,821) 178 (2,643) - 344 344 - 178 178 Balance at the beginning of the year Translation of foreign subsidiaries for the year Movement arising from the reclassification of non current related party monetary items to net investments in foreign operations Gain realised on disposal of foreign subsidiary Balance at the end of the year Consolidated Company 2006 / 2007 2005 / 2006 2006 / 2007 2005 / 2006 ($000) (2,821) (1,789) (2,783) (231) (7,624) ($000) (3,087) 266 - - (2,821) ($000) ($000) - - - - - - - - - - Exchange differences relating to foreign currency monetary items forming part of the net investment in a foreign operation and the translation of foreign controlled entities are brought to account by entries made directly to the foreign currency translation reserve, as described in Note 1(o). Gale Pacific Limited 48 Annual Report NOTE 17: RESERVES (CONTINUED) (b). Employee Share Based Payment Reserve Balance at the beginning of the year Net equity settled share based payment expense Balance at the end of the year NOTE 18: RETAINED EARNINGS Consolidated Company 2006 / 2007 2005 / 2006 2006 / 2007 2005 / 2006 ($000) ($000) ($000) ($000) 178 166 344 98 80 178 178 166 344 98 80 178 Consolidated Company 2006 / 2007 2005 / 2006 2006 / 2007 2005 / 2006 ($000) ($000) ($000) ($000) Balance at the beginning of the year 1,916 15,461 Net loss attributable to members of the parent entity (16,360) (11,942) Dividends paid Balance at the end of the year - (14,444) (1,603) 1,916 (3,406) (8,685) - (12,091) 7,204 (9,007) (1,603) (3,406) NOTE 19: MINORITY INTERESTS Minority interest in controlled entities comprises: Opening balance Net loss attributable to minority interest Balance at the end of the year Consolidated Company 2006 / 2007 2005 / 2006 2006 / 2007 2005 / 2006 ($000) ($000) ($000) ($000) (11) - (11) (9) (2) (11) - - - - - - Gale Pacific Limited 49 Annual Report NOTE 20: CASH FLOW INFORMATION (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 Cash at bank Cash on deposit Bank overdrafts Consolidated Company 2006 / 2007 ($000) 2005 / 2006 ($000) 2006 / 2007 ($000) 2005 / 2006 ($000) 13 3,806 3,823 (7,103) 539 2 10,550 - (16,966) (6,414) 1 1,173 2,480 (4,444) (790) 2 6,053 - (9,291) (3,236) (b). Reconciliation of Cash Flow from Operations with Profit from Ordinary Activities Consolidated Company 2006 / 2007 ($000) 2005 / 2006 ($000) 2006 / 2007 ($000) 2005 / 2006 ($000) Loss after income tax (16,360) (11,942) (8,685) (9,007) Non Cash Flows in Loss from Ordinary Activities Attributable to minority interest Loss on disposal of fixed assets Loss on disposal of investments Depreciation of fixed assets Impairment of fixed assets Impairment of related party balances Amortisation / impairment of intangible assets Equity settled share based payments Other Changes in tax balances processed directly in equity Changes in tax balances due to foreign exchange movements - 126 - 6,911 714 - 1,296 166 - 295 (15) Changes in assets and liabilities from the divestment of Jung (15,914) Changes in Assets and Liabilities Decrease / (increase) in receivables Decrease in inventories Increase in other assets (Increase) / decrease in payables, accruals and other financial liabilities Decrease / (increase) in tax balances Net cash inflow /(outflow) provided by operations 17,339 17,456 (20) (6,185) 2,731 8,540 (2) 5 - 6,951 1,464 - 5,519 - - - - - (3,949) 2,978 (48) 2,391 (5,297) (1,930) - 7 467 2,018 316 9,699 1,035 166 - 295 - 76 857 676 (804) (733) (3,120) 2,270 - 5 - 2,567 6,478 - 2,720 - 80 - - - 704 7,985 12 (745) (3,465) 7,334 Gale Pacific Limited 50 Annual Report NOTE 20: CASH FLOW INFORMATION (CONTINUED) (c). Discontinued Business On 24 August 2006 the Group announced the sale of its German garden products entity Jung Garten Freizeit Vertriebsgesellschaft mbH (“Jung”). The entity was sold on 1 September 2006 and is reported in the financial report as a discontinued operation. As the details of this sale were finalised prior to the completion of the Group’s accounts for the year end 30 June 2006, the impairment loss identified by the sale was recognised in these accounts so that the loss on disposal generated in the current period relates only to the adjustments to the final settlement. Financial information relating to the discontinued operation for the period to the date of the disposal is set out below. Further information is set out in Note 27 Segment Reporting. Profit From Discontinued Operations Revenue Expenses Loss before income tax Income tax benefit Loss after income tax of discontinued operations Loss on sale of division before income tax Income tax (expense) / benefit Loss on sale of division after income tax Loss from discontinued operations Cash Flows From Discontinued Operations Net cash inflow / (outflow) from ordinary activities Net cash inflow / (outflow) from investing activities Effect of exchange rate changes on items nominated in foreign currencies Net increase / (decrease) in cash generated by Jung Carrying Amounts of Assets and Liabilities The carrying amounts of assets and liabilities as at 1 September 2006 were: Property, plant and equipment Receivables Inventories Total assets Payables Net assets Details of Sale of Jung Consideration received Foreign currency translation reserve realised on sale Carrying amount of net assets sold Foreign currency movements on deferred consideration from date of sale written off on final settlement Loss on sale before income tax Income tax (expense) / benefit Loss on sale after income tax Reconciliation of Proceeds From Disposal of Business Repayment of related party balances by the purchaser Assumption of debt Sale consideration received from the purchaser Total proceeds from disposal of business Consolidated 2006 / 2007 ($000) 2005 / 2006 ($000) 8,212 (8,442) (230) 24 (206) (265) - (265) (471) 1,400 15,674 (1,111) 15,963 968 13,426 7,290 21,684 (21,030) 654 83 231 314 (654) 75 (265) - (265) 12,416 3,191 83 15,690 54,979 (64,203) (9,224) - (9,224) - - - (9,224) (2,208) (427) - (2,635) - - - - - - - - - - - - - - - - - - Gale Pacific Limited 51 Annual Report NOTE 21: COMPANY DETAILS The registered office of the Company is: Gale Pacific Limited 145 Woodlands Drive Braeside, Vic, 3195 Australia NOTE 22: DIRECTORS AND EXECUTIVES’ COMPENSATION The key management personnel of the Group who held office during the year were: Directors H Boon (Chairman, Non Executive) G Richards (Non Executive) P McDonald (Managing Director and Chief Executive Officer) G Gale (Non Executive), retired 21 November 2006 D Reilly (Non Executive), retired 21 November 2006 Executives F Albertsmeier (Managing Director, Europe / Middle East / Africa) P Cacioli (General Manager, Research & Development and Technical Services), appointed 30 March 2007 S Carroll (Managing Director, Australia) J Cox (Chief Financial Officer) M Denney (Managing Director, USA), appointed 25 September 2006 P Ducray (Chief Manufacturing Officer) Z Fakroddin (Business Unit Manager, Gale Europe GmbH) C McCallum (Managing Director, New Zealand) E Xu (Managing Director, China) Key Management Personnel 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. b. c. Salary/fees; Benefits, including the provision of motor vehicles and superannuation; and Incentive schemes, including bonus and share options under the Executive Share Option Plan as disclosed in Note 16 to the Financial Statements. Gale Pacific Limited 52 Annual Report NOTE 22: DIRECTORS AND EXECUTIVES’ COMPENSATION (CONTINUED) 2006 / 2007 Short Term Benefits Post Employ Share Based Payments Termin. Benefits Total Performance Related Directors Salary & Fees Bonus Non- monetary Super Options Perform. Rights Total Options ($) ($) ($) ($) ($) ($) ($) ($) % % Executive Directors P McDonald 354,215 32,000 44,609 27,929 47,138 19,930 Non Executive Directors H Boon G Richards D Reilly (i) G Gale (ii) Total 150,000 71,667 31,250 - - - - - - - - - - - - - - - - - - - - - 607,132 32,000 44,609 27,929 47,138 19,930 - - - - - - 525,821 18.8% 12.8% 150,000 71,667 31,250 - 778,738 - - - - - - - - - - 2005 / 2006 Short Term Benefits Post Employ Share Based Payments Termin. Benefits Total Performance Related Directors Salary & Fees Bonus Non- monetary Super Options Perform. Rights Total Options ($) ($) ($) ($) ($) ($) ($) ($) % % Executive Directors P McDonald G Gale (ii) Non Executive Directors H Boon (iii) G Richards D Reilly (i) T Eversteyn (iv) 359,942 371,635 137,500 65,000 75,000 14,166 Total 1,023,243 - - - - - - - 62,401 5,171 72,580 61,964 12,139 51,658 - - - - - - - - - - - - 124,365 17,310 124,238 - - - - - - - - 500,094 14.5% 14.5% 617,096 1,114,492 4.6% 4.6% - - - - 137,500 65,000 75,000 14,166 617,096 1,906,252 - - - - - - - - (i) (ii) (iii) (iv) Mr Reilly retired from his role as a Non Executive Director on 21 November 2006 and therefore the details of his remuneration for the reporting period are to that date. Mr Gale resigned from his role as an Executive Director on 26 April 2006 and retired as a Non Executive Director on 21 November 2006. The details of his remuneration for the 2005 / 2006 reporting period are to 26 April 2006. Mr Gale did not receive remuneration in his role as Non Executive Director. Mr Boon was appointed a Non Executive Director on 25 August 2005 and therefore the details of his remuneration for the reporting period are from that date. Mr Eversteyn retired from his role as a Non Executive Director on 25 August 2005 and therefore the details of his remuneration for the reporting period are to that date. Gale Pacific Limited 53 Annual Report NOTE 22: DIRECTORS AND EXECUTIVES’ COMPENSATION (CONTINUED) 2006 / 2007 Short Term Benefits Key Management Personnel F Albertsmeier (i) Z Fakroddin (ii) S Carroll J Cox P Ducray (iii) C McCallum (iv) E Xu (v) M Denney (vi) P Cacioli (vii) Total Salary & Fees ($) 320,090 189,459 214,472 229,358 169,477 190,748 179,517 126,964 62,713 1,682,798 Bonus (xiii) ($) 77,506 - 15,000 25,000 - - 12,457 55,017 - 184,980 2005 / 2006 Short Term Benefits Key Management Personnel Z Fakroddin (viii) E Jung (ix) S Carroll C McCallum (iv) E Xu (v) A London (x) F Albertsmeier (xi) J Cox (xii) Total Salary & Fees ($) 148,610 255,940 208,900 198,825 150,013 157,888 79,888 69,833 1,269,897 Bonus ($) 129,111 38,538 - 36,357 24,318 - - - 228,324 Post Employment Superann- uation ($) - - 19,143 20,642 - - - - 5,644 45,429 Post Employment Superann- uation ($) - 4,171 20,527 - - 10,956 4,650 6,285 46,589 Non- monetary ($) 33,479 105,064 30,873 - 28,771 - 4,028 - 1,507 203,722 Non- monetary ($) 60,031 15,784 27,070 15,558 18,919 17,007 2,422 - 156,791 Share Based Payments Options Total Performance Related Total Options ($) - 6,408 6,408 - 3,204 8,010 2,493 - - 26,523 ($) 431,075 300,931 285,896 275,000 201,452 198,758 198,495 181,981 69,864 2,143,452 % 18.0% 2.1% 7.5% 9.1% 1.6% 4.0% 7.5% 30.2% - % - 2.1% 2.2% - 1.6% 4.0% 1.3% - - Share Based Payments Options Total Performance Related Total Options ($) 3,950 - 3,950 4,938 48,600 6,406 - - 67,844 ($) 341,702 314,433 260,447 255,678 241,850 192,257 86,960 76,118 1,769,445 % 38.9% 12.3% 1.5% 16.2% 30.2% 3.3% - - % 1.2% - 1.5% 1.9% 20.1% 3.3% - - (i) (ii) (iii) (iv) (v) (vi) (vii) Mr Albertsmeier is based in Germany and remunerated in Euro converted to Australian dollars in the table above. Mr Fakroddin is based in Europe and is remunerated in Euro converted to Australian dollars in the table above. Mr Ducray is based in China and remunerated in US dollars converted to Australian dollars in the table above. Mr Ducray was appointed Group Manufacturing Manager on 1 July 2006. Prior to this appointment Mr Ducray was Manufacturing Manager Gale Pacific (New Zealand) Limited. Mr McCallum is based in New Zealand and is remunerated in New Zealand dollars converted to Australian dollars in the table above. Ms Xu is based in China and is remunerated in US dollars converted to Australian dollars in the table above. Mr Denney was appointed Managing Director Gale Pacific USA on 1 August 2006 and therefore the details of his remuneration for the reporting period are from that date. He is based in USA and remunerated in US dollars converted to Australian dollars in the table above. Mr Cacioli was appointed General Manager of R & D Technical Services on 1 March 2007 and therefore the details of his remuneration for the reporting period are from that date. (viii) Mr Fakroddin was based in the Middle East and is remunerated in US dollars converted to Australian dollars in the table above. The bonus payments related to the period ended 30 June 2005 and 30 June 2006 and were paid in USD converted to Australian dollars in the table above. (ix) (x) (xi) (xii) (xiii) Mr Jung resigned 31 March 2006 and therefore the details of his remuneration for the reporting period are to that date. He is based in Germany and remuneration is in Euro converted to Australian dollars in the table above. Mr London resigned on 1 March 2006 and therefore the details of his remuneration for the reporting period are to that date. 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. Mr Cox was appointed as Chief Financial Officer on 1 March 2006 and therefore the details of this remuneration for the reporting period are form that date. Incentive bonuses are granted annually. The grant date is tied to the performance review, which for the current year was completed by 30 June 2007. The service and performance criteria are set out in this report. Gale Pacific Limited 54 Annual Report NOTE 22: DIRECTORS AND EXECUTIVES’ COMPENSATION (CONTINUED) Compensation by Category Consolidated Company 2006 / 2007 2005 / 2006 2006 / 2007 2005 / 2006 ($000) ($000) ($000) ($000) Short term employment benefits 2,755 2,380 1,263 1,206 Post employment benefits Share based payments Termination benefits Total 73 94 - 59 120 617 73 73 - 50 62 617 2,922 3,176 1,409 1,935 Directors’ Equity Holdings: Fully Paid Ordinary Shares 2006 / 2007 Executive Directors P McDonald Non Executive Directors H Boon G Richards Total 2005 / 2006 Executive Directors G Gale P McDonald Non Executive Directors H Boon D Reilly G Richards Total Balance 30 June 2006 Received as Remuneration Options Exercised Net Change Balance 30 June 2007 334,714 73,000 78,851 486,565 - - - - - - - - - - - - 334,714 73,000 78,851 486,565 Balance 30 June 2005 Received as Remuneration Options Exercised Net Change Balance 30 June 2006 15,329,709 306,295 - 316,065 57,778 16,009,847 - - - - - - - - - - - - 70,000 28,419 73,000 107,076 21,073 15,399,709 334,714 73,000 423,141 78,851 299,568 16,309,415 Gale Pacific Limited 55 Annual Report NOTE 22: DIRECTORS AND EXECUTIVES’ COMPENSATION (CONTINUED) Directors’ and Executives’ Equity Holdings, Compensation Options and Performance Rights: Granted and Vested During the Year 2006 / 2007 Vested Number Granted Number Grant Date Value Per Option / Right at Grant Date Exercise Price Expiry Date First Exercise Date Last Exercise Date Executive Directors (Performance Rights) P McDonald - 150,000 02/02/2007 $0.79 Nil 02/02/2017 30/09/2009 02/02/2017 Terms & Conditions for Each Grant Non Executive Directors None Executives (Options) E Xu Total - - 80,000 24/10/2006 $0.10 $1.52 31/12/2008 29/09/2008 31/12/2008 230,000 2005 / 2006 Vested Number Granted Number Grant Date Value Per Option / Right at Grant Date Exercise Price Expiry Date First Exercise Date Last Exercise Date Terms & Conditions for Each Grant Executive Directors None Non Executive Directors None Executives (Options) S Carroll Z Fakroddin A London C McCallum Total - - - - 80,000 16/11/2005 80,000 16/11/2005 80,000 16/11/2005 100,000 16/11/2005 340,000 $0.445 $0.445 $0.445 $0.445 $1.52 01/12/2008 28/09/2007 01/12/2008 $1.52 01/12/2008 28/09/2007 01/12/2008 $1.52 01/12/2008 28/09/2007 01/12/2008 $1.52 01/12/2008 28/09/2007 01/12/2008 Gale Pacific Limited 56 Annual Report NOTE 22: DIRECTORS AND EXECUTIVES’ COMPENSATION (CONTINUED) Directors’ and Executives’ Equity Holdings Compensation Options and Performance Rights: Movements During the Year 2006 / 2007 Balance 30 June 2006 Received as Remuneration Options / Rights Exercised Options / Rights Lapsed Balance 30 June 2007 Total Vested 30 June 2006 Total Exercisable 30 June 2007 Executive Directors (Options) P McDonald 240,000 - Executive Directors (Performance Rights) P McDonald - 150,000 Non Executive Directors None Executives (Options) S Carroll P Ducray Z Fakroddin C McCallum E Xu Total 40,000 20,000 40,000 50,000 50,000 440,000 - - - - 80,000 230,000 - - - - - - - - (60,000) 180,000 - - - - - (90,000) (150,000) 150,000 40,000 20,000 40,000 50,000 40,000 520,000 - - - - - - - - - - - - - - - - 2005 / 2006 Balance 30 June 2006 Received as Remuneration Options / Rights Exercised Options / Rights Lapsed Balance 30 June 2007 Total Vested 30 June 2006 Total Exercisable 30 June 2007 Executive Directors (Options) G Gale P McDonald Non Executive Directors None Executives (Options) S Carroll Z Fakroddin A London C McCallum E Xu Total 320,000 240,000 - - - - 50,000 610,000 Remuneration Practices - - 80,000 80,000 80,000 100,000 - 340,000 - - - - - - - - (320,000) - - 240,000 (40,000) (40,000) (80,000) (50,000) - (530,000) 40,000 40,000 - 50,000 50,000 420,000 - - - - - - - - - - - - - - - - The Group 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 Group. The contracts of service between the Group 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 Group based predominantly on an objective review of the Group’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 and performance rights issued to executives as a form of compensation are dependant upon the performance conditions outlined in Note 16(b). For the current year bonuses have been granted as at the 30 June 2007. Bonuses are paid out in cash as determined at the discretion of the Remuneration Committee. Gale Pacific Limited 57 Annual Report NOTE 23: DIVIDENDS Ordinary Shares Interim dividend – fully franked Final dividend – fully franked Adjusted franking account balance 2006 / 2007 Cents Per Share 2005 / 2006 Total ($000) Cents Per Share - - - - - 1,076 1.5 1.5 Total ($000) 779 824 1,603 508 NOTE 24: CAPITAL AND LEASING COMMITMENTS Consolidated Company Note 2006 / 2007 ($000) 2005 / 2006 ($000) 2006 / 2007 ($000) 2005 / 2006 ($000) Finance Leasing Commitments Payable: Not later than one year Later than one year and not later than five years Minimum lease payments Less future finance charges Total lease liability Represented By Current liability Non current liability 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 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 13 13 13 13 438 365 803 (302) 501 228 273 501 2,376 430 2,806 (175) 2,631 2,225 406 2,631 444 691 1,135 (408) 727 239 488 727 2,002 2,909 4,911 (497) 4,414 1,680 2,734 4,414 3,009 9,256 752 13,017 3,156 6,146 3,321 12,623 438 365 803 (302) 501 228 273 501 2,376 430 2,806 (175) 2,631 2,225 406 2,631 1,596 6,828 - 8,424 444 691 1,135 (408) 727 239 488 727 2,002 2,909 4,911 (497) 4,414 1,680 2,734 4,414 1,818 2,007 171 3,996 The Group leases property and equipment under operating leases expiring in 1 to 10 years. Leases of property generally provide the Group with a right of renewal at which time all leases are renegotiated. Lease payments comprise a base amount plus an incremental contingent rental. Contingent rental increases are based on the consumer price index. Gale Pacific Limited 58 Annual Report NOTE 25: RELATED PARTY TRANSACTIONS Equity Investments in Controlled Entities Details of the percentage of ordinary shares held in controlled entities are disclosed in Note 26 to the financial statements. Directors’ Remuneration Details of Directors’ remuneration are disclosed in Note 22. (a) 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 or payable to entities in the wholly owned group are disclosed in Note 6. These amounts are unsecured and are subordinate to other liabilities. These amounts outstanding will be settled in cash. At 30 June 2007 a review was undertaken on the timing of recovery of related party balances owed to the parent by wholly owned controlled entities. Using discounted projected cash flows it was concluded that the timeframes for recovery of the balances owed by Gale Europe GmbH Vertriebsgesellschaft and Gale (New Zealand) Limited were of sufficient length to warrant the creation of a provision for impairment totalling $9,699,000 in the parent’s accounts against these two balances. This provision is reversed on consolidation of the parent and wholly owned controlled entities so that the consolidated result is unaffected by this provision. During the financial year, the following transactions occurred between entities in the wholly owned group: • • • • • Sale and purchase of goods totalling $39,624,000 (2006: $22,958,000) Gale Pacific Limited received interest income from its subsidiaries totalling $2,339,000 (2006: $1,446,000) Gale Pacific Limited made interest payments to its subsidiaries totalling $1,337,000 (2006: $336,000) Plant and equipment was transferred at written down value totalling $9,084,000 (2006: $3,274,000) Reimbursement of certain operating costs totalling $1,577,000 (2006: $313,000) (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 nil (2006: $139,000) (c) Transactions with Directors and Director Related Entities The following amounts were payable to Directors and their Director related entities as at the reporting date. Consolidated Company 2006 / 2007 2005 / 2006 2006 / 2007 2005 / 2006 ($000) ($000) ($000) ($000) Current – accrued bonus and director fees 38 5 38 5 Gale Pacific Limited 59 Annual Report NOTE 26: CONTROLLED ENTITIES Parent Entity Gale Pacific Limited Controlled Entities Gale Pacific USA Inc Gale Pacific FZE Aquaspan Pty Ltd Gale Pacific Special Textiles (Ningbo) Limited Jung Garten & Freizeit Vertriebsgesellschaft mbH Gale Europe GmbH Vertriebsgesellschaft Gale Pacific (New Zealand) Limited NOTE 27: SEGMENT REPORTING Country of Incorporation Ownership Interest (%) 2006 / 2007 2005 / 2006 Australia United States of America United Arab Emirates Australia China Germany Germany New Zealand - 100% 100% 50% 100% - 100% 100% - 100% 100% 50% 100% 100% 100% 100% 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 Group comprises the following main geographical segments, based on the Group’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. Gale Pacific Limited 60 Annual Report NOTE 27: SEGMENT REPORTING (CONTINUED) Business Segment The Group operates predominantly in one business segment, being the advanced polymer fabrics industry. The Group manufactures and markets advanced durable knitted and woven polymer fabrics and value added structures made from these fabrics. Segment Information Primary Reporting – Geographical Segments Asia / Pacific Americas ($000) ($000) Europe / Middle East / Africa ($000) Discontinued Business Eliminations Consolidation ($000) ($000) ($000) 30 June 2007 Revenue outside the Group 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 Inventory write down Restructuring and termination costs Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Acquisition of non current assets 30 June 2006 Revenue outside the Group 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 Inventory write down Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Acquisition of non current assets Gale Pacific Limited 10,279 222 10,501 (10,472) (1,609) (12,081) 771 - - (3,899) - 13,280 - 13,280 2,672 - 2,672 88 9,277 - 9,277 (1,728) 1,278 (450) 8,212 - 8,212 (495) 24 (471) 31 - - - - - - - - - - 16 54,979 - 54,979 (9,224) - (9,224) 621 319 - - - 7,396 - 7,396 636 - 636 963 - (3,734) (2,143) 41,226 - 41,226 12,365 - 12,365 459 72,787 23,938 96,725 (4,298) (492) (4,790) 6,524 110 (1,031) (440) (4,672) 101,856 - 101,856 66,436 - 66,436 3,570 80,402 32,703 113,105 (5,204) 2,931 (2,273) 8,198 748 (728) - 117,313 - 117,313 120,505 - 120,505 19,558 27,837 43 27,880 1,947 (737) 1,210 564 - - - - 18,052 - 18,052 2,714 - 2,714 453 22,511 - 22,511 340 (145) 195 453 - - - 14,099 - 14,099 1,360 - 1,360 592 61 (499) (24,203) (24,702) (314) 86 (228) - - - - - (1,564) - (1,564) (89) - (89) - - (32,703) (32,703) (165) (27) (192) (119) - - - 1,790 - 1,790 - - - - 118,616 - 118,616 (13,632) (2,728) (16,360) 7,890 110 (1,031) (4,339) (4,672) 131,624 104 131,728 71,733 (206) 71,527 4,127 167,169 - 167,169 (15,981) 4,037 (11,944) 9,472 748 (4,462) (2,143) 181,824 333 182,157 134,866 905 135,771 21,572 Annual Report NOTE 29: EARNINGS PER SHARE Basic Earnings Per Share From continuing operations From discontinued operations Total basic earnings per share Diluted Earnings Per Share From continuing operations From discontinued operations Total diluted earnings per share Consolidated 2006 / 2007 2005 / 2006 (Cents Per Share) (Cents Per Share) (16.58) (0.49) (17.07) (16.58) (0.49) (17.07) (5.14) (17.43) (22.57) (5.14) (17.43) (22.57) Consolidated 2006 / 2007 ($000) 2005 / 2006 ($000) Earnings Per Share The earnings and weighted average number of ordinary shares used in the calculation of basic and diluted earnings per share are as follows: Net loss (16,360) (11,944) Earnings Used in the Calculation of Basic and Diluted EPS Adjustments to exclude loss for the period from discontinued operations Earnings used in the calculation of basic and diluted EPS from continuing operations Weighted average number of ordinary shares for the purposes of basic earnings per share 471 (15,889) 9,224 (2,720) Consolidated 2006 / 2007 (No. 000) 95,852 2005 / 2006 (No. 000) 52,911 Potential ordinary shares have not been included in the calculation of diluted EPS as losses for the current and comparative periods means that they are anti-dilutive in nature. Gale Pacific Limited 62 Annual Report NOTE 30: FINANCIAL INSTRUMENTS (a). Financial Instruments Derivative financial instruments may be used by the Group 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 Group 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 Group does not have any material credit risk exposure to any single debtor or group of debtors under financial instruments entered into by the Group. (c). Net Fair Values The net fair value of assets and liabilities approximates their carrying value. No financial assets and financial liabilities are readily traded on organised markets in standardised form other than forward exchange contracts. (d). Interest Rate Risk The Group’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: 30 June 2007 Note Weighted Average Effective Interest Rate (%) Balance with Variable Interest Rate ($000) Balance with Fixed Interest Maturing In Less Than 1 Year 1 to 2 Years 2 to 5 Years Balance That is Non Interest Bearing Total ($000) ($000) ($000) ($000) ($000) Financial Assets Cash and cash equivalents Trade receivables Other receivables Current tax assets Total Financial Liabilities Bank overdrafts Trade creditors Other payables (sundry creditors and accruals) Foreign currency forward contracts Current tax liabilities Bank loans Other loans Finance lease liabilities Hire purchase liabilities Employee benefit provisions Total 5 6 6 4 13 12 12 14 4 13 13 13 13 15 3.47% 4,691 2,142 - - - - 10.22% - - - - 5.90% 8.80% 7.04% 8.77% - - - - - - - 4,691 2,142 7,103 759 - - - - - - - - 1,459 32,576 - - - - 1,364 228 2,225 - - - - - - - - - - - - 3,267 273 406 - 9,321 36,393 3,946 - - - - - - - - - - - - - - - - 809 18,625 738 362 7,642 18,625 738 362 20,534 27,367 - 5,992 4,353 7,103 6,751 4,353 31 31 658 2,520 - - - 2,179 658 36,555 4,631 501 2,631 2,179 15,733 65,393 Gale Pacific Limited 63 Annual Report NOTE 30: FINANCIAL INSTRUMENTS (CONTINUED) 30 June 2006 Note Weighted Average Effective Interest Rate (%) Balance with Variable Interest Rate ($000) Balance with Fixed Interest Maturing In Less Than 1 Year 1 to 2 Years 2 to 5 Years Balance That is Non Interest Bearing Total ($000) ($000) ($000) ($000) ($000) Financial Assets Cash and cash equivalents Trade receivables Other receivables Current tax assets Total Financial Liabilities Bank overdrafts Trade creditors Other payables (sundry creditors and accruals) Current tax liabilities Bank loans Other loans Convertible notes Finance lease liabilities Hire purchase liabilities Employee benefit provisions Total 5 6 6 4 13 12 12 4 13 13 13 13 13 15 5.50% 10,550 - - - - - - 10,550 8.10% 16,966 - - - 6.20% 9.10% 8.67% 7.50% 8.20% - - - - 57,739 - - - - - - - - - - - - - - 9,700 681 15,500 239 1,680 - - - - - - - - - - - 4,015 - 488 2,734 - 74,705 27,800 7,237 - - - - - - - - - - - - - - - - 2 10,552 32,108 32,108 4,594 1,047 4,594 1,047 37,751 48,301 - 16,966 16,702 16,702 5,541 5,541 344 344 - - - - - 1,299 67,439 4,696 15,500 727 4,414 1,299 23,886 133,628 (e). Forward Exchange Contracts The Group 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 Group 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 Group 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 Group has been recognised in the Company’s balance sheet. At balance date the net amount payable was $31,200. The accounting policy in regard to forward exchange contracts is detailed in Note 1(n). Gale Pacific Limited 64 Annual Report At balance date, the details of outstanding forward exchange contracts are: Average Exchange Rate Foreign Currency Contract Value Fair Value 2007 2006 2007 (FC000) 2006 (FC000) 2007 ($000) 2006 ($000) 2007 ($000) 2006 ($000) Buy United States Dollars / Sell Australian Dollars Less than 6 months 0.7741 0.7405 57 1,200 73 1,620 (6) (29) Buy European Euro / Sell Australian Dollars Less than 6 months 0.5742 0.6075 176 45 306 74 (25) 6 Buy United States Dollars / Sell European Euro Less than 6 months - 1.2133 - 955 - 1,705 Total - (31) (55) (78) NOTE 31: SUBSEQUENT EVENTS On 30 August 2007, the Company completed a $20 million capital raising via the private placement of 40,000,000 ordinary fully paid shares at a price of 50 cents per share. Other than the matters 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 Group, the results of those operations, or the state of affairs of the Group in future financial years. Gale Pacific Limited 65 Annual Report ADDITIONAL STOCK EXCHANGE INFORMATION Gale Pacific Limited 66 Annual Report ADDITIONAL STOCK EXCHANGE INFORMATION Number of Holdings of Equity Securities as at 18 September 2007 Twenty Largest Holders of Quoted Equity Securities The fully paid issued capital of the Company consisted of 136,834,516 ordinary fully paid shares held by 967 shareholders. Each share entitles the holder to one vote. Shareholder Thorney Holdings Pty Ltd Gale Australia Pty Ltd No. 16,567,324 13,927,844 % 12.11 10.18 Thirty five holders hold 750,000 options and 150,000 performance rights over ordinary shares. Options and performance rights do not carry a right to vote. IWPE Nominees Pty Ltd 12,120,000 Invia Custodian Pty Limited 10,501,938 Distribution of Holders of Equity Securities Size of Shareholding 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total Number of Shareholders Fully Paid Ordinary Shares 137 334 174 272 Options Over Ordinary Shares 57,481 947,306 1,344,702 7,413,080 50 127,071,947 967 136,834,516 ANZ Nominees Limited Citicorp Nominees Pty Limited UBS Nominees Pty Ltd IWPE Nominees Pty Ltd HSBC Custody Nominees (Australia) Limited-GSI ECSA Investec Bank (Australia) Limited National Nominees Limited MGB Equity Growth Pty Limited Equity Trustees Limited Ruminator Pty Ltd 8,903,912 8,639,263 8,387,722 7,791,428 7,237,940 6,060,000 5,153,587 4,328,572 3,978,058 2,164,705 Unmarketable Parcels as at 18 September 2007 Minimum $500 parcel at $0.52 per unit Total Minimum Parcel Size 962 962 Holders Units National Australia Trustees Limited 1,410,791 ANZ Nominees Limited 1,528,548 Gwynvill Trading Pty Limited 118 39,507 Crystal Transport Pty Ltd 118 39,507 GFS Securities Pty Ltd Mr Daryl Edward James Reilly 916,213 853,243 554,638 377,731 8.86 7.67 6.51 6.31 6.13 5.69 5.29 4.43 3.77 3.16 2.91 1.58 1.12 1.03 0.67 0.62 0.41 0.28 88.73 Substantial Shareholders as at 18 September 2007 Shareholder No. Investec Wentworth Private Equity Limited 30,300,000 Thorney Holdings Pty Ltd UBS Nominees Pty Ltd 27,336,560 16,647,761 Monterrey Investment Management Limited 14,051,045 Gale Australia Pty Ltd Warakirri Asset Management Pty Ltd Regal Funds Management Pty Ltd 13,927,844 10,354,702 9,599,656 % 22.14 19.98 12.17 10.30 10.18 7.57 7.02 Top 20 Holders of Ordinary Fully Paid Shares as at 17 September 2007 121,403,457 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, 3195, Victoria, Australia, telephone is (03) 9518 3333. The Company is listed on the Australian Stock Exchange. The home exchange is Melbourne. Registers of securities are held by Computer Investor Services Pty Ltd, Yarra Falls, 452 Johnston Street, Abbotsford, 3067, Australia, local call is 1300 850 505, international call is + 613 9415 4000. Gale Pacific Limited 67 Annual Report Melbourne, Australia Christchurch, New Zealand Orlando, USA Jebel Ali, Dubai Neunkirchen, Germany Beilun, China Gale Pacific Limited ABN 80 082 263 778

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