GALE Pacific
Annual Report 2010

Plain-text annual report

ANNUAL REPORT 2010 Gale Pacific is a trusted global marketer and manufacturer of branded screening and shading products CONTENTS Corporate Directory ............................................................................................................................................................. 5 Chairman’s and Managing Directors and Chief Executive’s Report ............................................................................ 6 Board of Directors ............................................................................................................................................................. 10 Senior Management .......................................................................................................................................................... 12 Corporate Governance .................................................................................................................................................... 14 Directors’ Report ................................................................................................................................................................ 19 Financial Results .................................................................................................................................................................. 32 Additional Securities Exchange Information .................................................................................................................. 76  2 | Gale Pacific Limited ABN 80 082 263 778 OUR VISION & VALUES To provide leading branded screening and shading products to world markets, consistent with the following core values: (cid:0) (cid:0) (cid:0) (cid:0) (cid:0) (cid:0) (cid:0) To understand and consistently meet our customers' expectations To provide a safe working environment, personal development and open communication with all employees To foster a culture of continuous improvement To maintain a reputation of excellence in our endeavours To constantly innovate to develop new and improved products to drive sales and profit growth To deliver strong financial performance and growing returns to shareholders To be responsible with our impact on the environment 2010 Annual Report | 3 4 | Gale Pacific Limited ABN 80 082 263 778 CORPORATE DIRECTORY GALE PACIFIC LIMITED ABN 80 082 263 778 DIRECTORS Mr David Allman (Chairman) Mr Peter McDonald (Managing Director and Chief Executive Officer) Mr John Murphy (Non Executive Director) Mr George Richards (Non Executive Director) COMPANY SECRETARY Ms Sophie Karzis REGISTERED OFFICE 145 Woodlands Drive, Braeside, Victoria, 3195 T + 613 9518 3333 SOLICITORS Norton Gledhill Level 23, 459 Collins Street, Melbourne, Victoria, 3000 T + 613 9614 8933 AUDITOR Pitcher Partners Level 19, 15 William Street, Melbourne, Victoria, 3000 T + 613 8610 5000 SHARE REGISTER Computershare Yarra Falls, 452 Johnston Street, Abbotsford, Victoria, 3067 T + 613 9415 4000 WEBSITE ADDRESS www.galepacific.com 2010 ANNUAL GENERAL MEETING The Annual General Meeting will be held on 29 October 2010, 11.00am at Pitcher Partners, Level 19, 15 William Street, Melbourne, Victoria, 3000. The Notice of Meeting and Proxy Form are separate items accompanying this 2010 Annual Report. 2010 Annual Report | 5 CHAIRMAN’S AND MANAGING DIRECTORS AND CHIEF EXECUTIVE OFFICER’S REPORT DAVID ALLMAN CHAIRMAN PETER MCDONALD MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER DEAR SHAREHOLDERS, THE YEAR IN REVIEW It is very pleasing to report to shareholders the significantly improved results for the year ended 30 June 2010. Gale has undergone major restructuring in the prior three years and the positive results for the year ended 30 June 2010 are confirmation that the turnaround of Gale has been successful. Gale has developed a very solid base for future growth. Gale has posted these improved results while operating with some weak economic conditions in several markets. The highlights of the results were: (cid:0) Revenue increase of 1% to $98.8 million Revenue for the year grew by 1% to $98.8 million, resulting from strong sales growth in the Australian and USA markets in local currencies, offset by weaker sales in the New Zealand and Middle East markets. (cid:0) EBITDA increase of 17% to $16.5 million Earnings before interest, tax, depreciation and amortisation was $16.5 million for the year compared to $14.1 million for continuing businesses for the previous corresponding period. The improved margins are a result of new product introductions, leaner operating costs and ongoing yield and efficiency improvements in our Chinese manufacturing facility. (cid:0) EBIT increase of 63% to $9.3 million Earnings before interest and tax was $9.3 million compared to $5.7 million for continuing businesses (and excluding the FY09 impairment of goodwill in New Zealand) before significant items. (cid:0) (cid:0) Reported NPAT up $18.0 million to $6.0 million Cash from operations increase of 58% to $18.0 million The consistently increasing annual cash generation from operations is the result of strong EBITDA margins and also improvements in working capital management, particularly in the management of inventory levels and production planning. Inventory reduced by $3.4 million to $20.3 million. (cid:0) Net cash on deposit of $3.1million at 30 June 2010 compared to net debt of $14.1 million at 30 June 2009 The strong cash generation from operations and the business requiring a low level of capital expenditure of $1.2 million, has resulted in Gale having net cash on deposit at 30 June 2010 of $3.1 million. 6 | Gale Pacific Limited ABN 80 082 263 778 REGIONAL RESULTS Asia Pacific (excluding China) Sales EBITDA EBIT FY10 (A$M’s) 71.4 9.3 7.2 FY09 (A$M’s) 66.3 6.5 4.1 Change (%) +8% +43% +75% Sales growth of 8% was generated from new products and strong sell through of consumer products in Australia and New Zealand. The continued weak horticultural market in New Zealand resulted in lower sales of commercial shade fabric and protective nets. Sales to Japanese customers increased by more than 20% on the previous year. Improved margins resulted from the stronger Australian dollar and new product sales growth. FY09 EBIT is before significant items. Americas Sales EBITDA EBIT FY10 (US$M’s) 18.7 0.8 0.4 FY09 (US$M’s) 17.7 (0.5) (1.0) Change (%) +6% The 6% sales growth rate is pleasing given that market conditions continue to be subdued. New products and category expansion were the drivers of growth. Leaner infrastructure costs and lower product costs resulted in improved margins. Middle East Sales EBITDA EBIT FY10 (US$M’s) 5.4 0.9 0.9 FY09 (US$M’s) 6.1 1.0 1.0 Change (%) - 11% - 10% - 10% Subdued (construction) market conditions particularly in Dubai and Kuwait remain a challenge. Excellent growth was recorded in the Saudi market. Selling prices and margins have been steady. The company has maintained the market leading position and has recently added waterproof fabrics and high end architectural PVC products to the range. China Sales (intercompany) EBITDA EBIT FY10 (US$M’s) 26.5 4.3 0.4 FY09 (US$M’s) 28.4 5.1 1.1 Change (%) - 7% - 16% - 74% We are extremely pleased with the progress that has been made in our Chinese manufacturing operation. Plant yields have increased and scrap rates have reduced throughout the year as part of the continuous manufacturing improvement program. The margin decline was due to higher prices on some inputs and lower production volumes resulting mainly from the group inventory reductions achieved. 2010 Annual Report | 7 DIVIDEND PAYMENTS RESUME Directors are extremely pleased to confirm to shareholders that the major restructuring of Gale is complete and announce the resumption of the payment of dividends. An ordinary fully franked dividend of one (1) cent per share has been declared. SPECIAL DIVIDEND PAYMENT As a consequence of the excellent result and significant cash generation from operations, the Directors have further declared a special dividend, fully franked of one (1) cent per share. A total dividend payment of two (2) cents per share fully franked will be paid to shareholders on Friday 22 October 2010. The Company’s Dividend Reinvestment Plan was suspended in September 2006 and the Directors have determined that the plan is to remain suspended. STRATEGY REVIEW COMPLETED During the year management completed a review of the business which has given us a clearer view of where we see our growth opportunities. Historically the business has been defined with a technical focus on advanced polymer fabrics which has limited our growth in the markets we service. By redefining our strategy to be more market driven in branded shading and screening products, we now have a much broader view to leverage off our core capabilities to grow the business. NEW PRODUCTS – “XCELTEX” WATERPROOF OUTDOOR FABRIC After several years of research and development, Gale has successfully trialed a new outdoor waterproof fabric in a range of umbrella’s during the 2009/10 summer season. The trial was very successful and quickly sold out. Listings for an expanded range of products has been won for the 2010/11 summer sales season in both Australia and New Zealand and presentations are underway in the USA and European markets. This exciting new fabric also provides Gale with further opportunities in the commercial markets which are currently being explored. NEW PRODUCT CATEGORIES – “COOLAROO” SYNTHETIC GRASS Gale has expanded its product offerings and product sourcing capabilities and has won new listings of product into the fast growing synthetic grass market. While Gale does not manufacture these products, the production techniques and technologies for these outdoor polymer based products are well understood, particularly in the important product benefits of colorfastness and UV stability. POSITIONED FOR ORGANIC AND ACQUISITION GROWTH Gale has built and maintains a strong continuous improvement culture, skilled and motivated employees and management, and effective and efficient infrastructure. Innovation and product development continues to be a main focus of organic growth and plans are in place to ensure that we grow our core business. With a much stronger Balance Sheet and ongoing strong cash generation, complementary acquisitions are also a growth imperative which are being actively pursued. 8 | Gale Pacific Limited ABN 80 082 263 778 MANAGEMENT AND STAFF On behalf of the Directors, we would like to thank all Gale employees for their hard work, dedication and commitment to the business and congratulate the whole team for the results which have been achieved this year. In all areas of the business the team has been challenged to focus on continuing to improve the way we operate and do business with our customers. Many positive changes have been implemented and will continue to be made as we look forward into the new financial year. During the year our lost time injury rate has declined as we strive to eliminate safety hazards from the business. This is a good result and an area we will continue to look for improvement. Employee safety and personal development are a key part of the values of the business. OUTLOOK Trading conditions in most markets are expected to remain subdued. The strength of Gale’s brands, Coolaroo for consumer products sold through retail channels and Synthesis for the commercial products, will continue to provide a positive competitive position. Exciting new product initiatives and the expansion of ranges into the existing distribution network provide growth opportunities for the company. In view of the global market volatility it is difficult to provide firm guidance of the future profitability of Gale. On the basis of current economic conditions, raw material prices, and exchange rates, Gale expects to achieve moderate sales and profit growth for the year ended 30 June 2011. ANNUAL GENERAL MEETING A notice of the Company’s Annual General Meeting to be held on 29th October 2010 and a proxy voting form is enclosed with this report. Mr David Allman Chairman 27 August 2010 Mr Peter McDonald Managing Director and Chief Executive Officer 27 August 2010 2010 Annual Report | 9 BOARD OF DIRECTORS DAVID ALLMAN PETER MCDONALD JOHN MURPHY GEORGE RICHARDS DAVID ALLMAN B.SC. CHAIRMAN AND NON EXECUTIVE DIRECTOR SINCE NOVEMBER 2009 Mr Allman was Managing Director of McPherson’s Limited from 1995 to 2009 and prior to that he was Managing Director of Cascade Group Limited for 7 years. Before this he held senior positions with Elders IXL Limited and Castlemaine Tooheys Limited. Mr Allman holds a degree in engineering and prior to obtaining general management positions held managerial roles in production management, finance and marketing. Mr Allman is the Chairman of the Company’s Nomination Committee and is a member of the Audit and Risk and Remuneration Committees. PETER MCDONALD B.BUS (MARKETING) MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER SINCE APRIL 2006 Mr McDonald is the Company’s 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, Chief Operating Officer and Managing Director of the Gale’s United States operations. 10 | Gale Pacific Limited ABN 80 082 263 778 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, Staging Connections Group Limited, Vocus Communications Limited (formally First Opportunity Fund Limited), ClearView Wealth Limited and Gale Pacific Limited. Mr Murphy is also a Non Executive Director of Investec Bank (Australia) Limited and Specialty Fashion Group Limited. Mr Murphy is the Chairman of the Company's Remuneration Committee and is a member of the Audit and Risk and Nomination Committees. GEORGE RICHARDS CPA, AAICD NON EXECUTIVE DIRECTOR SINCE MAY 2004 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 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 and Risk Committee and is a member of the Nomination and Remuneration Committees. 2010 Annual Report | 11 SENIOR MANAGEMENT JEFF COX SHAUN MCPHERSON MARTIN DENNEY BERNIE WANG JEFF COX CHIEF FINANCIAL OFFICER (“CFO”) Jeff joined Gale in March 2006 and is an experienced CFO having 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 in a successful and global company. SHAUN MCPHERSON MANAGING DIRECTOR, ASIA PACIFIC Shaun joined Gale in late November 2008 as Managing Director Asia Pacific. Shaun has extensive experience in general management, sales and marketing in commercial / industrial and retail markets. He has held senior management positions with global companies including General Manager, Country Director for Newell Rubbermaid Australia / New Zealand, Group Category Manager (Industrial, Engineering & Safety) for Hagemeyer Australia, and Regional Sales Manager (Industrial) for Ansell. Shaun has an Associate Diploma in Business Management and a MBA. MARTIN DENNEY MANAGING DIRECTOR, USA Martin joined Gale in June 2006 and 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), and Business Development Manager at Adacel Technologies. BERNIE WANG MANAGING DIRECTOR, CHINA Bernie joined Gale in February 2009 and has 20 years experience in the chemical fibre textile industry. Bernie started his career with a large tyre cord manufacturer in China as a spinning process engineer and was promoted to Plant Manager and finally to Technical Director. Bernie then spent four years with DuPont Fibre as Operations Manager and Maintenance Manager. Before joining Gale, he worked for 5 years as General Manager for a German company in China where he was responsible for the design and construction of the factory and the establishment of manufacturing operations. 12 | Gale Pacific Limited ABN 80 082 263 778 2010 Annual Report | 13 CORPORATE GOVERNANCE This statement sets out the corporate governance practices that were in operation throughout the 2010 financial year for Gale Pacific Limited (“the Company”) and its controlled entities (“the Group”) and includes a summary of how the Group complies with the revised ASX Corporate Governance Principles and Recommendations. The various charters and policies are all available on the Gale Pacific web site: www.galepacific.com. PRINCIPLE 1: LAY SOLID FOUNDATION FOR MANAGEMENT OVERSIGHT 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. Each Director is given a letter upon his or her appointment which outlines the Director’s duties. The Group has in place systems designed to fairly review and actively encourage enhanced Board and management effectiveness. The Nomination Committee takes responsibility for evaluating the Board’s performance and the Remuneration Committee evaluates the Group’s Key Executives annually. PRINCIPLE 2: STRUCTURE THE BOARD TO ADD VALUE 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 D Allman, 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. Directors may seek independent professional advice, at the Company’s expense, on any matter connected with the discharge of their responsibilities, provided the advice, together with a copy of the letter of instructions, is provided to the Board. 14 | Gale Pacific Limited ABN 80 082 263 778 The chairman should be an independent Director. Complying. The Chairman, Mr D Allman has been Chairman of the Company since 17 November 2009 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. 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. The board should establish a nomination committee. Complying. The Board has a formal Nomination Committee comprising of all of the independent Non Executive Directors. The Nomination Committee’s functions and powers are formalised in a Charter. Provide the information indicated in the Guide to reporting on Principle 2. Complying. The following information is set out in the Company’s annual report: (cid:0) (cid:0) (cid:0) (cid:0) (cid:0) The skills and experience of directors. The directors considered by the Board to constitute independent directors. 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 Establish a code of conduct and disclose the code as to: (cid:0) (cid:0) (cid:0) (cid:0) The practices necessary to maintain confidence in the Company’s integrity. The practices necessary to take into account their legal obligations and the reasonable expectations of their stakeholders. The responsibility and accountability of individuals for reporting and investigating reports of unethical practices. Companies should establish a policy concerning trading in company securities by directors, senior executives and employees, and disclose the policy or a summary of that policy. Companies should provide the information indicated in the Guide to reporting on Principle 3. Complying. The Company has formulated a Code of Conduct which can be viewed on its website. The Code of Conduct has the commitment of the directors and senior management to ensure practices are operating that are necessary to maintain confidence in the Company’s integrity, and responsibility and accountability of individuals for reporting and investigating reports of unethical practices. The Company has adopted a Share Trading Policy which can be viewed on its website. 2010 Annual Report | 15 The Company has a policy concerning the trading in the Company’s securities by Directors, Senior Managers and employees. In summary, Directors, Senior Managers and employees must not deal in the Company’s securities when they are in possession of insider information. Directors and Senior Managers must not trade during the “trading blackout” beginning at the end of the half year and full year reporting periods until the release to the ASX of the Financial Results for the relevant period. Details of the Company’s trading policy are posted on its website. PRINCIPLE 4: SAFEGUARD INTEGRITY IN FINANCIAL REPORTING Companies should have a structure to independently verify and safeguard the integrity of their financial reporting. The board should establish an audit committee. The audit committee should be structured so that it: (cid:0) (cid:0) (cid:0) (cid:0) Consists only of non executive directors. Consists of a majority of independent directors. Is chaired by an independent chair, who is not chair of the board. Has at least three members. The audit committee should have a formal charter. Companies should provide the information indicated in the Guide. 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 Board reviews the Group’s half yearly and annual financial statements. The Board requires that the Chief Executive Officer and the Chief Financial Officer 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. The Board has an Audit Committee that reports to the Board. The Company’s Audit Committee comprises only non executive independent directors; and a chairman who is not chairman of the Board. The members of the Audit Committee during the year and attendance at meetings of the Committee are disclosed in the Directors’ Report in the Annual Report. The role of the Audit Committee is to advise on the establishment and maintenance of a framework of internal controls and appropriate ethical standards for the management of the Group and to advise on financial information prepared for use by the Board or for inclusion in financial statements. The Audit Committee has a formal charter that is posted on the Company’s website. The Board, with the involvement of the Audit Committee, has established procedures in relation to the external auditor selection and appointment and for discussing with the auditor the rotation of the lead partner. PRINCIPLE 5: MAKE TIMELY AND BALANCED DISCLOSURE Companies should promote timely and balanced disclosure of all material matters concerning the company. Companies should establish written policies designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior executive level for that compliance and disclose those policies or a summary of those policies. Companies should provide the information indicated in the Guide. Complying. 16 | Gale Pacific Limited ABN 80 082 263 778 The Company has a documented policy which has established procedures designed to ensure compliance with Australian Securities Exchange Listing Rule disclosure requirements and to ensure accountability at a senior management level for that compliance. The focus of these procedures is on continuous disclosure of any information concerning the Group that a reasonable person would expect to have a material effect on the price of the Company’s securities and improving access to information for all investors. The 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 Securities 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. The policy on continuous disclosure is posted on the Company’s website. PRINCIPLE 6: RESPECT THE RIGHTS OF SHAREHOLDERS Companies should respect the rights of shareholders and facilitate the effective exercise of those rights. Companies should design a communications policy for promoting effective communication with shareholders and encouraging their participation at general meetings and disclose their policy or a summary of that policy. Companies should provide the information indicated in the Guide to reporting on Principle 6. Complying. The Board informs shareholders of all major developments affecting the Group’s state of affairs as follows: (cid:0) (cid:0) (cid:0) (cid:0) (cid:0) (cid:0) The annual report is distributed to all shareholders who have elected to receive it, including relevant information about the operations of the consolidated entity during the year and changes in the state of affairs. The half yearly report to the Australian Securities 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 Securities Exchange, and posted on the Company’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. The Company’s auditor attends the Annual General Meeting. PRINCIPLE 7: RECOGNISE AND MANAGE RISK Companies should establish policies for the oversight and management of material business risks and disclose a summary of those policies. Complying. The Board has responsibility for monitoring risk oversight and ensures that the Chief Executive Officer and the Chief Financial Officer or equivalent report on the status of business risks through risk management programs aimed at ensuring risks are identified, assessed and appropriately managed. In addition the Board is responsible for reviewing the risk management framework and policies of the Group. The Board oversees policies on risk assessment and management and has delegated certain responsibilities in these matters to the Audit Committee. The Group has established policies and procedures to identify, assess and manage critical areas of financial and operating risk. The Group’s Risk Management policy is posted on the Company’s website. The board should require management to design and implement the risk management and internal control system to manage the company’s material business risks and report to it on whether those risks are being managed effectively. The board should disclose that management has reported to it as to the effectiveness of the company’s management of its material business risks. Complying. 2010 Annual Report | 17 Management has previously completed a review of the Group’s major business units, organisational structure and accounting controls and processes. This review by management has been reported to the Audit Committee and in turn to the Board and the Board is satisfied that the processes in place to identify the Group’s material business risks are appropriate and that these risks are being effectively managed. The Group’s risk management processes continue to be monitored and reported against on an ongoing basis. A description of the Group’s risk management policy and internal compliance and control systems is available on the Company’s website. The board should disclose whether it has received assurance from the chief executive officer (or equivalent) and the chief financial officer (or equivalent) that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks. Companies should provide the information indicated in the Guide to reporting on Principle 7. Complying. The Chief Executive Officer and Chief Financial Officer are required to state to the Board in writing that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks. PRINCIPLE 8: REMUNERATE FAIRLY AND RESPONSIBLY Companies should ensure that the level and composition of remuneration is sufficient and reasonable and that its relationship to performance is clear. Complying. The Group has in place systems designed to fairly review and actively encourage enhanced Board and management effectiveness. The board should establish a remuneration committee. Complying. The Board has established a Remuneration Committee. The role of the Remuneration Committee is to review and make recommendations to the Board on remuneration packages and practices applicable to the Chief Executive Officer, Senior Executives and Directors themselves. This role also includes responsibility for share option schemes incentive performance packages and retirement and termination entitlements. Remuneration levels are competitively set to attract the most qualified and experienced Directors and Senior Executives. The Remuneration Committee may obtain independent advice on the appropriateness of remuneration packages. The members of the Remuneration Committee during the year and attendance at meetings of the Committee are disclosed in the Directors’ Report in the Annual Report. Companies should clearly distinguish the structure of non executive directors’ remuneration from that of executive directors and senior executives. Complying. Details of the Directors and Key Senior Executives remuneration are set out in the Remuneration Report of the Annual Report. 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. Equity based executive remuneration is made in accordance with thresholds set in plans approved by shareholders. In addition, the Company has issued equity based remuneration to both Executive and Senior Management which has been approved by shareholders at a general meeting. Companies should provide the information indicated in the Guide to reporting on Principle 8. Complying. A charter setting out the responsibilities of the Remuneration Committee has been adopted and a copy of this charter is posted on the Company’s website. 18 | Gale Pacific Limited ABN 80 082 263 778 DIRECTORS’ REPORT The Directors of Gale Pacific Limited (“the Company”) present their annual financial report for the Company and its controlled entities (“the Group”) for the financial year ended 30 June 2010. The Directors in office at any time during or since the end of the year to the date of this report are: DAVID ALLMAN, B.SC. Chairman and Non Executive Director since November 2009 Mr Allman was Managing Director of McPherson’s Limited from 1995 to 2009 and prior to that he was Managing Director of Cascade Group Limited for 7 years. Before this he held senior positions with Elders IXL Limited and Castlemaine Tooheys Limited. Mr Allman holds a degree in engineering and prior to obtaining general management positions held managerial roles in production management, finance and marketing. Mr Allman is a Director of McPherson's Limited and Non Executive Director of Lomb Scientific Pty Ltd. Mr Allman is Chairman of the Company’s Nomination Committee and is a member of the Audit and Risk and Remuneration Committees. PETER MCDONALD, B.BUS (MARKETING) Managing Director and Chief Executive Officer since April 2006 and Executive Director since 1998 Mr McDonald was appointed Managing Director and Chief Executive Officer of Gale in April 2006. Mr McDonald joined Gale in 1988 and was appointed as an Executive Director of the Company in 1998. Mr McDonald has held the positions of Product Manager, National Marketing Manager, National Sales and Marketing Manager, Chief Operating Officer and Managing Director of the Gale’s United States operations. No other directorships of listed companies were held by Mr McDonald at any time during the three years prior to 30 June 2010. 2010 Annual Report | 19 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, Staging Connections Group Limited, Vocus Communications Limited( formally First Opportunity Fund Limited), ClearView Wealth Limited and Gale Pacific Limited. Mr Murphy is also a Non Executive Director of Investec Bank (Australia) Limited and Specialty Fashion Group Limited. During the last three years, Mr Murphy was a Non Executive Director of Australian Pharmaceutical Industries Limited (2004- 2007). Mr Murphy is the Chairman of the Company's Remuneration Committee and is 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, Director of Bowen & Pomeroy Pty Ltd, Chairman of Carpet Court Australia Limited, Associate Member of the Australian Institute of Company Directors and Australian Society of Accountants. No other directorships of listed companies were held by Mr Richards at any time during the three years prior to 30 June 2010. Mr Richards is Chairman of the Company’s Audit and Risk Committee and is a member of the Nomination and Remuneration Committees. HARRY BOON, LLB (HONS), B. COM Chairman and Non Executive Director since August 2005 Mr Boon joined the Company in August 2005. During the last three years, Mr Boon has also served as Chairman of Tatts Group Limited, Non Executive Director of Paperlinx Limited, Hastie Group Limited, Toll Holdings Limited and Funtastic Limited. Mr Boon retired as a Director of Gale Pacific Limited, effective after the Company’s Annual General Meeting on 17 November 2009. MS SOPHIE KARZIS, B JURIS LLB Company Secretary 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. 20 | Gale Pacific Limited ABN 80 082 263 778 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 screening and shading products to global markets. REVIEW AND RESULTS OF OPERATIONS The consolidated profit of the Group for the financial year attributable to the members of Gale Pacific Limited was $6.022 million. Refer to the Chairman and Managing Director’s and 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 Group that occurred during the financial year under review not otherwise disclosed in this report or the accompanying financial report. EVENTS SUBSEQUENT TO BALANCE DATE In the interval between the end of the financial year and the date of this report, no item, transaction or event of a material and unusual nature has arisen that is likely, in the opinion of the Directors, 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 Disclosure of information regarding likely developments in the 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. ENVIRONMENTAL REGULATION AND PERFORMANCE The Group’s operations are not subject to any significant environmental regulations under the Commonwealth or State legislation. 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 2010, no interim dividend was paid and the Directors have determined to pay a final dividend of one cent per share. In addition, the Directors have declared a special dividend of one cent per share. The total of two cents per share will be franked and is to be paid to the holders of fully paid ordinary shares on Friday 22 October 2010. The Company’s Dividend Reinvestment Plan was suspended in September 2006 and the Directors have determined that the plan is to remain suspended. 2010 Annual Report | 21 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. At the date of this report the number of unissued ordinary shares under option was nil. All options on issue at the end of the previous reporting period lapsed unexercised during the reporting period. No new options were issued during the reporting period. Performance Rights The number of performance rights on issue at the date of this report is 13,940,000. No amount is payable on the vesting of a performance right. Each performance right entitles the holder to one (1) ordinary share in Gale Pacific Limited in the event that the performance right is exercised. Performance rights carry no rights to dividends and no voting rights. Of the performance rights on issue, 3,000,000 performance rights were issued to the Managing Director and Chief Executive Officer, Mr Peter McDonald on 1 December 2009. 8,000,000 performance rights were issued on 30 June 2009 to the following Senior Executives; 2,000,000 each to Mr Jeff Cox, Chief Financial Officer; Mr Martin Denney, Managing Director USA; Mr Shaun McPherson, Managing Director Asia Pacific; and Mr Bernie Wang, Managing Director China. These performance rights are subject to the satisfying of relevant performance hurdles based on improvements in the Group’s diluted earnings per share over the two year period 1 July 2009 to 30 June 2011. None of these performance rights can vest until 30 June 2012 and expire on 30 June 2019. 2,940,000 performance rights have been issued to Senior Executives outside the key management group on 18 August 2010. These performance rights are subject to the satisfying of relevant performance hurdles based on the Group’s diluted earnings per share over the two year period 1 July 2010 to 30 June 2012. None of these performance rights can vest until 30 June 2013 and expire on 18 August 2020. Further details of the options and performance rights movements during the reporting period are disclosed in Note 25 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, options and performance rights in shares of the Company as at the date of this report. Directors D Allman P McDonald J Murphy G Richards Fully Paid Ordinary Shares Options Performance Rights - 978,105 - 491,899 - - - - - 3,000,000 - - 22 | Gale Pacific Limited ABN 80 082 263 778 DIRECTORS’ MEETINGS The table below sets out the attendance by Directors. Directors D Allman H Boon P McDonald J Murphy G Richards Directors’ Meetings Audit and 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 6 6 12 12 12 6 6 12 11 12 1 2 0 3 3 1 2 0 2 3 1 2 0 3 3 1 2 0 3 3 0 1 0 1 1 0 1 0 1 1 By Board invitation, Mr Peter McDonald also attended all of the Audit and Risk, Remuneration and Nomination Committee meetings. The members of the Audit Committee are David Allman, John Murphy, and George Richards. The Chairman of the Audit Committee is George Richards. The members of the Remuneration Committee are David Allman, John Murphy, and George Richards. The Chairman of the Remuneration Committee is John Murphy. The members of the Nomination Committee are David Allman, John Murphy, and George Richards. The Chairman of the Nomination Committee is David Allman. REMUNERATION REPORT This report contains the remuneration arrangements in place for Directors and Executives of the Group. 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: (cid:0) (cid:0) (cid:0) 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: (cid:0) (cid:0) Primary benefits – salary / fees; and Benefits, including the provision of motor vehicles and incentive schemes, including share options and performance rights; Share options entitle an executive, assuming the performance criteria are satisfied, to purchase shares in the Company at a future date at a pre determined price. The decision to and / or when to exercise any entitlement remains with the recipient up to the point that an option expires; and Performance rights, if the performance criteria and any Board discretion are satisfied, entitle an executive to be issued shares in the Company at no cost to the executive. Shares are issued automatically at the time the performance rights vest. Details of these benefits are disclosed in this report. 2010 Annual Report | 23 Remuneration Practices 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. Remuneration Structure In accordance with best practice corporate governance, the structure of Non Executive Directors and Senior Manager remuneration is separate and distinct. Non Executive Director Remuneration Objective The Board seeks to set remuneration at a level which provides the Company with the ability to attract and retain directors of relevant experience and skill, whilst incurring costs which are acceptable to shareholders. Structure The Company’s Constitution and the Australian Securities Exchange Listing Rules specify that 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 Company and does not participate in performance based remuneration. The remuneration of Non Executive Directors for the period ended 30 June 2010 is detailed below. Senior Manager and Executive Director 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: (cid:0) (cid:0) (cid:0) 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. 24 | Gale Pacific Limited ABN 80 082 263 778 Structure In determining the level and make up of executive remuneration, the Remuneration Committee reviews reports detailing market levels of remuneration for comparable roles. Remuneration consists of fixed and variable elements. (a). Share Based Payments The Group maintains option and performance rights schemes for certain staff and executives, including the Managing Director, as approved by shareholders at an annual general meeting. These schemes are designed to reward key personnel when the Group meets performance hurdles relating to: (cid:0) (cid:0) (cid:0) 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 nil. The number of unissued ordinary shares under the performance rights scheme at the date of this report is 13,940,000. 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 Group’s diluted earnings per share. Options and performance rights issued to executives during the year were issued in accordance with the Group’s remuneration policy which: (cid:0) (cid:0) (cid:0) 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. (b). Cash Bonuses 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. For the current year bonuses have been granted as at 30 June 2010. 2010 Annual Report | 25 Key Management Personnel of the Group Who Held Office During the Year Directors D Allman (Chairman, Non Executive, Appointed 17 November 2009) J Murphy (Non Executive) G Richards (Non Executive) P McDonald (Managing Director and Chief Executive Officer) H Boon (Chairman, Non Executive, Retired as at 17 November 2009) Executives J Cox (Chief Financial Officer) M Denney (Managing Director, USA) S McPherson (Managing Director, Asia Pacific) B Wang (Managing Director, China) The following table discloses the remuneration of the Directors of the Company: 2009 / 2010 Short Term Benefits Share Based Payments Total Performance Related Post Employ- ment Directors Salary & Fees Bonus Non Monetary Super Options Performa- nce Rights Total Options Rights $ $ $ $ $ $ $ % % % Executive Directors P McDonald 415,485 163,500 28,643 20,872 Non Executive Directors D Allman 1 H Boon 2 G Richards J Murphy Total 65,602 54,287 68,807 65,000 - - - - - - - - 5,904 2,636 6,193 - 669,181 163,500 28,643 35,605 - - - - - - 94,076 722,576 35.6 0.0 13.0 - - - - 71,506 56,923 75,000 65,000 - - - - - - - - - - - - 94,076 991,005 2008 / 2009 Short Term Benefits Share Based Payments Total Performance Related Post Employ- ment Directors Salary & Fees Bonus Non Monetary Super Options Performa- nce Rights Total Options Rights $ $ $ $ $ $ $ % % % Executive Directors P McDonald 401,200 50,000 27,591 36,209 12,011 49,285 576,296 19.3 2.1 8.6 Non Executive Directors H Boon G Richards J Murphy Total 137,615 68,807 65,000 - - - - - - 12,385 6,193 - - - - - - - 150,000 75,000 65,000 - - - - - - - - - 672,622 50,000 27,591 54,787 12,011 49,285 866,296 1 Mr Allman was appointed as a Non Executive Director and Chairman on 17 November 2009. His remuneration for the reporting period are from that date. 2 Mr Boon retired from his role as a Non Executive Director on 17 November 2009. His remuneration for the reporting period are to that date. 26 | Gale Pacific Limited ABN 80 082 263 778 The following table discloses the remuneration of the Group’s key management personnel and the five highest paid executives. 2009 / 2010 Short Term Benefits Post Employ- ment Share Based Payments Termin. Benefits Total Performance Related Super Options Key management personnel Salary & Fees $ Bonus $ Non Monetary $ J Cox 264,908 118,388 S McPherson 275,000 81,000 - - M Denney 1 265,108 87,483 16,887 B Wang 2 128,902 35,064 14,457 $ 23,842 25,229 - - R Campbell 169,129 19,261 102,262 37,069 - - - - 15,222 6,482 26,414 - 1,242,378 341,196 57,758 70,775 P Cacioli 3 P Ducray 4 Total Perf. Rights $ 40,630 40,630 40,630 40,630 - - - 162,520 Total Options Rights $ - - - - - - - - $ % % 447,768 35.5 421,859 28.8 410,108 31.2 219,053 34.6 203,612 9.5 108,744 63,483 1,874,627 - - - - - - - - - % 9.07 9.63 9.91 18.55 - - - $ - - - - - - - - 2008 / 2009 Short Term Benefits Post Employ- ment Share Based Payments Termin. Benefits Total Performance Related Key management personnel Salary & Fees $ F Albertsmeier 5 300,033 Bonus $ - Non Monetary $ 47,497 M Denney 304,923 15,262 15,612 $ - - Super Options 174,319 4,672 4,573 S McPherson 7 160,417 25,000 262,853 25,000 260,092 223,967 - - - - 25,894 23,137 - - 14,583 40,411 - - 22,214 19,774 1,828 1,615 50,958 32,641 9,004 - - 1,759,776 122,349 117,097 65,442 2,884 J Cox P Cacioli P Ducray E Xu 6 S Carroll 8 B Wang 9 Total $ - - - - 808 461 - Perf. Rights $ - - - - - - - - - - Total Options Rights $ $ 66,846 414,376 - - - - 335,797 313,747 283,229 265,186 32,374 216,399 % - 4.5 8.0 - 0.3 2.4 - 200,000 12.5 132,345 177,776 12.0 - 92,603 35.2 231,565 2,299,113 % % - - - - 0.3 0.2 - 0.9 - - - - - - - - - - 1 Mr Denney is based in the United States of America and remunerated in United States dollars converted to Australian dollars in the table above. 2 Mr Wang is based in China and remunerated in Chinese renminbi converted to Australian dollars in the table above. 3 Mr Cacioli departed his role as General Manager, Research and Development and Technical Services on 9 October 2009. His remuneration details for the reporting period are to that date. 4 Mr Ducray is based in China and remunerated in Chinese renminbi and United States dollars converted to Australian dollars in the table above. Mr Ducray departed his role as Chief Manufacturing Officer on 30 September 2009. His remuneration details for the reporting period are to that date. 5 Mr Albertsemeier is based in Germany and remunerated in euro converted to Australian dollars in the table above. Mr Albertsmeier departed his role as Managing Director Europe, Middle East, Africa on 1 April 2009 following the closure of the European full service operation. His remuneration details for the comparative period are to that date. 6 Ms Xu is based in China and remunerated in Chinese renminbi converted to Australian dollars in the table above. Ms Xu departed her role as Managing Director China on 12 December 2008. Her remuneration details for the comparative period are to that date. 7 Mr McPherson was appointed Managing Director Asia Pacific on 24 November 2008. His remuneration details for the comparative period are from that date. 8 Mr Carroll departed his role as Managing Director Australia on 1 August 2008. His remuneration details for the comparative period are to that date. 9 Mr Wang was appointed Managing Director China on 26 February 2009. His remuneration details for the comparative period are from that date. 2010 Annual Report | 27 Share Based Compensation The terms and conditions of each grant of performance rights granted as at 30 June 2010 affecting remuneration in the current or a future reporting period are as follows: Grant Date Value per performance rights at grant date 30 June 2009 1 December 2009 0.061 0.140 Each performance right entitles the holder to one (1) ordinary share in Gale Pacific in the event that the performance rights are exercised. Performance rights carry no rights to dividends and no voting rights. The performance rights are subject to the satisfying of relevant performance hurdles based on improvements in the Group’s diluted earnings per share over the two year period 1 July 2009 to 30 June 2011. None of these performance rights can vest until 30 June 2012 and expire on 30 June 2019. Executive Directors P McDonald Key Management Personnel J Cox M Denney P Ducray P Cacioli Total No of Performance Rights Granted During the Year Value Per Performance Rights at Grant Date Value of Performance Rights at Grant Date ($) No. of Performance Rights Lapsed During the Year Value of Lapsed Performance Rights ($) 3,000,000 0.14 420,000 150,000 (118,500) - - - - - - - - - - - - 3,000,000 420,000 75,000 75,000 75,000 1,075,000 1,450,000 (30,750) (30,750) (30,750) (91,750) (302,500) 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 Non audit services have been approved 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: Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) 43 - - 2 2 47 50 86 2 - 2 140 Taxation services Corporate secretarial and management services Systems review Capital registration audit Government grant review Total 28 | Gale Pacific Limited ABN 80 082 263 778 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 David Allman Chairman 27 August 2010 Mr Peter McDonald Managing Director and Chief Executive Officer 27 August 2010 2010 Annual Report | 29 AUDITOR’S INDEPENDENCE DECLARATION To the Directors of Gale Pacific Limited In relation to the independent audit for the year ended 30 June 2010, 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 27 August 2010 PITCHER PARTNERS MELBOURNE DIRECTORS’ DECLARATION The Directors of the Company declare that: The financial statements and notes, as set out on pages 32 to 75 are in accordance with the Corporations Act 2001 including: (cid:0) (cid:0) (cid:0) (cid:0) 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 2010 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; As stated in Note 1, the (consolidated) financial statements also comply with International Financial Reporting Standards; 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 David Allman Chairman 27 August 2010 Mr Peter McDonald Managing Director and Chief Executive Officer 27 August 2010 30 | Gale Pacific Limited ABN 80 082 263 778 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF GALE PACIFIC LIMITED We have audited the accompanying financial report of Gale Pacific Limited and controlled entities. The financial report comprises the consolidated statement of financial position as at 30 June 2010, the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows 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 of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 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) (ii) giving a true and fair view of the consolidated entity's financial position as at 30 June 2010 and of its performance for the year ended on that date; and 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. Report on the Remuneration Report We have audited the remuneration report included in pages 23 - 28 of the directors' report for the year ended 30 June 2010. The directors of the company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. Auditor’s Opinion In our opinion the remuneration report of Gale Pacific Limited and controlled entities for the year ended 30 June 2010, complies with section 300A of the Corporations Act 2001. S Schonberg Partner 27 August 2010 PITCHER PARTNERS MELBOURNE 2010 Annual Report | 31 FINANCIAL RESULTS FINANCIAL RESULTS Consolidated Income Statement ...................................................................................................................................... 33  Consolidated Statement of Comprehensive Income .................................................................................................... 34  Consolidated Statement of Financial Position ............................................................................................................... 35  Consolidated Statement of Changes In Equity ............................................................................................................. 36  Consolidated Statement of Cash Flows ......................................................................................................................... 37  Notes To The Financial Statements ................................................................................................................................. 38  32 | Gale Pacific Limited ABN 80 082 263 778 CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 30 JUNE 2010 Revenue Cost of goods sold Gross profit Other Income Warehousing and distribution Marketing and selling Administration Impairment of goodwill Other expenses Net finance costs Profit from continuing operations before income tax Income tax expense Profit / (loss) from continuing operations after income tax Profit / (loss) from discontinued operations Profit / (loss) for the year Depreciation and amortisation Earnings Per Share From continuing and discontinued operations Basic earnings / (loss) per share (cents per share) Diluted earnings / (loss) per share (cents per share) From continuing operations Basic earnings / (loss) per share (cents per share) Diluted earnings / (loss) per share (cents per share) The accompanying notes form part of these financial statements. Consolidated Note 2009 / 2010 ($000) 2008 / 2009 ($000) 2 3 3 4 24 19 3 98,811 98,251 (62,788) (64,664) 36,023 472 (7,675) (7,538) 33,587 1,904 (8,130) (8,334) (10,458) (11,335) - (1,506) (1,247) 8,071 (2,060) 6,011 11 6,022 (3,155) (1,969) (1,892) 676 (1,166) (490) (11,461) (11,951) (7,216) (8,427) 2.15 2.08 2.15 2.07 (6.75) (6.75) (0.28) (0.28) 2010 Annual Report | 33 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2010 Consolidated Note 2009 / 2010 ($000) 2008 / 2009 ($000) 18 18 6,022 (11,951) 558 (2,749) (2,191) 3,831 (316) 4,302 3,986 (7,965) 6,022 (11,962) - 11 6,022 (11,951) 3,831 (7,976) - 11 3,831 (7,965) Profit / (loss) for the year Other Comprehensive Income Movement in fair value of cash flow hedges, net of tax Exchange differences on translation of foreign operations Other comprehensive income for the year Total comprehensive income for the year Profit / (Loss) Attributable To Members of the parent Non controlling interest Profit / (loss) for the year Total Comprehensive Income Attributable To Members of the parent Non controlling interest Total comprehensive income for the year The accompanying notes form part of these financial statements. 34 | Gale Pacific Limited ABN 80 082 263 778 CONSOLIDATED STATEMENT OF FINANCIAL POSITION FOR THE YEAR ENDED 30 JUNE 2010 Current Assets Cash and cash equivalents Receivables Other financial assets Inventories Current tax assets Other current assets Total current assets Non Current Assets Property, plant and equipment Intangible assets Deferred tax assets Total non current assets Total assets Current Liabilities Trade and other payables 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 Accumulated losses Total equity The accompanying notes form part of these financial statements. Consolidated Note 2009 / 2010 ($000) 2008 / 2009 ($000) 6 7 9 8 4 10 11 12 4 13 14 15 4 16 14 4 16 17 18 19 15,139 14,142 341 20,281 - 913 7,141 14,674 - 23,663 980 741 50,816 47,199 49,552 6,649 379 56,580 107,396 7,269 11,989 - 1,355 2,832 23,445 - 4,382 73 4,455 27,900 79,496 105,586 (7,899) (18,191) 79,496 57,505 7,405 1,038 65,948 113,147 8,703 19,419 459 217 2,689 31,487 1,754 4,372 118 6,244 37,731 75,416 105,594 (5,965) (24,213) 75,416 2010 Annual Report | 35 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2010 30 June 2010 Note Contributed Equity Reserves Accumulated Losses ($000) ($000) ($000) Non Controlling Interest ($000) Balance at 1 July 2009 105,594 (5,965) (24,213) Profit for the year Other comprehensive income for the year Total comprehensive income for the year Transactions With Owners In Their Capacity As Owners Cost of capital raising net of tax Employee share based payments 17 18 Total transactions with owners in their capacity as owners - - - (8) - (8) - 6,022 (2,191) (2,191) - 6,022 - 257 257 - - - Balance at 30 June 2010 105,586 (7,899) (18,191) - - - - - - - - Total Equity ($000) 75,416 6,022 (2,191) 3,831 (8) 257 249 79,496 30 June 2009 Note Contributed Equity Reserves Accumulated Losses ($000) ($000) ($000) Non Controlling Interest ($000) Total Equity ($000) Balance at 1 July 2008 100,813 (10,026) (12,030) (11) 78,746 (Loss) / profit for the year Other comprehensive income for the year Total comprehensive income for the year - - - - (11,962) 3,986 - 3,986 (11,962) 11 - 11 (11,951) 3,986 (7,965) Transactions With Owners In Their Capacity As Owners Contributions, net of raising costs and tax Employee share based payments Statutory transfer to reserves 17 18 18 4,781 - - Total transactions with owners in their capacity as owners 4,781 - (146) 221 75 - - (221) (221) Balance at 30 June 2009 105,594 (5,965) (24,213) The accompanying notes form part of these financial statements. - - - - - 4,781 (146) - 4,635 75,416 36 | Gale Pacific Limited ABN 80 082 263 778 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2010 Consolidated Note 2009 / 2010 ($000) 2008 / 2009 ($000) Cash Flow From Operating Activities Receipts from customers Payments to suppliers and employees Interest received Borrowing costs paid Income tax refunds / (payments) Net cash provided by operating activities 24 Cash Flow From Investing Activities Proceeds from sale of plant and equipment Payment for plant and equipment Payment for intangible assets Net cash used by investing activities Cash Flow From Financing Activities (Cost of) / proceeds from issue of equity securities Repayment of borrowings Repayment of principal on finance leases Repayment of principal on hire purchase Net cash used 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 the end of the year 24 The accompanying notes form part of these financial statements. 106,302 (87,652) 95 (1,350) 558 17,953 40 (1,160) - (1,120) (11) (8,588) (69) (29) 114,700 (100,090) 471 (2,468) (1,225) 11,388 470 (1,007) (198) (735) 4,687 (20,584) (148) (359) (8,697) (16,404) 8,136 7,141 (138) 15,139 (5,751) 15,685 (2,793) 7,141 2010 Annual Report | 37 NOTES TO THE FINANCIAL STATEMENTS NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES This financial report is a general purpose financial report that has been prepared in accordance with Australian Accounting Standards, Interpretations and other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001. The financial report covers 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 financial report was authorised for issue by the Directors at the date of the Directors Report. 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, comply with Australian equivalents to International Financial Reporting Standards. 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 Australian equivalents of International Financial Reporting Standards ensures compliance with International Financial Reporting Standards. (b). Principles of Consolidation The consolidated financial statements are those of the consolidated entity, comprising the financial statements of the parent entity and of all entities, which Gale Pacific Limited controlled from time to time during the year and at balance date. Details of the controlled entities are contained in Note 27. The financial statements of subsidiaries are prepared for the same reporting period as the parent entity, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies, which may exist. All related party balances and transactions, including any unrealised profits or losses have been eliminated on consolidation. Minority interests in the equity and results of the entities that are controlled are shown separately in the consolidated financial report. (c). Use of Estimates and Judgements The preparation of the financial report requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Information about areas of estimation and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial report is included in the following notes: (cid:0) (cid:0) Note 12 – Intangible Assets Note 28 – Financial Instruments 38 | Gale Pacific Limited ABN 80 082 263 778 NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (d). Foreign Currencies Functional and Presentation Currency The financial statements of each Group entity are measured using its functional currency, which is the currency of the primary economic environment in which that entity operates. The consolidated financial statements are presented in Australian dollars, as this is the parent entity’s functional and presentation currency. Transactions and Balances Transactions in foreign currencies of entities within the 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 restatement are recognised as revenues and expenses for the financial year. Group Companies The financial statements of foreign operations whose functional currency is different from the Group’s presentation currency are translated as follows: (cid:0) (cid:0) (cid:0) Assets and liabilities are translated at year end exchange rates prevailing at that reporting date; Income and expenses are translated at average exchange rates for the period; and All resulting exchange differences are recognised as a separate component of equity. Exchange differences arising on translation of foreign operations are transferred directly to the Group’s foreign currency translation reserve as a separate component of equity in the statement of financial position. (e). Net Investments in Foreign Operations During 2006 / 2007, 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. During the comparative period, the net investment in Gale Europe GmbH was written off following the closure of the European full service operation; a portion of the net investment in Gale Pacific Special Textiles (Ningbo) Limited was converted to equity and additional balances in Gale Pacific (New Zealand) Limited and Gale Pacific USA Inc were reclassified as net investments in foreign operations. No further adjustments to these balances occurred in the reporting period. 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. Details of the monetary items reclassified and the total exchange difference recognised in the foreign currency translation reserve are detailed below. 2010 Annual Report | 39 NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Monetary item identified as a net investment in a foreign operation 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 Related party receivable to the company from Gale Pacific USA Inc Total Consolidated Note 2009 / 2010 2008 / 2009 ($000) ($000) 6,842 6,800 9,473 6,842 6,800 9,473 23,115 23,115 Exchange movement arising in the reporting period on monetary item forming part of the net investment in related party, recognised in foreign currency translation reserve 18 559 1,334 It is impracticable to estimate the effect of this change on future periods because movements in foreign exchange rates cannot be predicted. (f). Segment Reporting AASB 8 Operating Segments has been adopted as of 1 July 2009. Operating segments are now reported based on internal reporting provided to the Managing Director and Chief Executive Officer who is the Group’s chief operating decision maker. This has resulted in China being identified as an operating segment as disclosed in Note 5; previously China was part of the Asia Pacific operating segment. Changes in segment reporting have also impacted the goodwill allocation by management to groups of cash generating units on a segment level. This change in reportable segments has resulted in a reallocation of goodwill of $176,000 from the Asia Pacific operating segment to the newly identified China operating segment. Comparative operating segment information has been restated to conform to the transitional requirements of AASB 8. (g). 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). (h). Cash and Cash Equivalents Cash and cash equivalents include cash on hand at call, deposits with banks or financial institutions, investments in money market instruments maturing within less than three months and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the statement of financial position For the purposes of the statement of cash flows, cash includes cash on hand and at call, deposits with banks or financial institutions, investments in money market instruments maturing within less than three months and net of bank overdrafts. 40 | Gale Pacific Limited ABN 80 082 263 778 NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (i). Inventories Inventories are measured at the lower of cost or 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. (j). 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 a 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( m). Depreciation The depreciable amounts of all fixed assets, including capitalised leased assets, are depreciated on a straight line basis over their estimated useful lives to the entity commencing from the time the asset is held ready for use. Leasehold improvements are depreciated over the shorter of either the unexpired period of the lease or the estimated useful lives of the improvements. Depreciation and amortisation rates are reviewed annually for appropriateness. When changes are made, adjustments are reflected in current and future periods only. The depreciation rates used for each class of assets are: Class of Fixed Asset Buildings Leasehold improvements Plant and equipment Motor vehicles Office equipment (k). Leases Finance Leases Depreciation Rates Depreciation Basis 2.25% Determined by lease term 6.7% - 50.0% 20.0% 20% - 50.0% Straight line Straight line Straight line Straight line Straight line 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 or over the term of the lease where it is likely that the Group will obtain ownership of the asset. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for the period. Operating Leases Lease payments for operating leases, where substantially all the risks and benefits remain with the lessor, are charged as expenses in the periods in which they are incurred. Lease incentives received under operating leases are recognised as a liability. 2010 Annual Report | 41 NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (l). Intangibles Goodwill Goodwill on consolidation represents the excess of the cost of an acquisition over the fair value of the Group’s share of net identifiable assets of the acquired entities at the date of acquisition. Goodwill is not amortised but is tested annually for impairment, or more frequently if events or changes in circumstances indicate that it might be impaired. Goodwill is carried at cost less accumulated impairment losses. 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. Application Software Application software is valued in the accounts at cost and amortised on a straight line basis over its expected useful life but not exceeding five 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. (m). 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 annually. 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. Refer to note 1(c) for the significant estimates and assumptions relating to impairment of assets. (n). Taxes Current income tax expense or revenue is the tax payable on the current period’s taxable income based on the applicable income tax rate adjusted by changes in deferred tax assets and liabilities. A balance sheet approach is adopted under which deferred tax assets and liabilities are recognised for temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements. No deferred tax asset or liability is recognised in relation to temporary differences arising from the initial recognition of an asset or a liability if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profit or taxable profit or loss. Deferred tax assets are recognised for temporary differences and unused tax losses only when it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. 42 | Gale Pacific Limited ABN 80 082 263 778 NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Tax Offset Deferred tax assets and deferred tax liabilities are only offset when the Group has: (cid:0) (cid:0) Legally enforceable right to offset current tax assets with current liabilities; and The deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority. (o). Provisions A provision is recognised if, as a result of a past event , the Group has a present legal or constructive obligation that can be estimated reliably and it is probable that an outflow of economic benefits will be required to settle the obligation. (p). 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 the Group to employee superannuation funds and are charged as expenses when incurred. Share Based Payments The Group operates share option and performance rights schemes for certain staff and Executives including Executive Directors. The total amount to be expensed over the vesting period is determined by reference to the fair value of the share options and performance rights 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 period during which the employees become entitled to the option or performance right. The market value of shares issued to employees for no cash consideration under an employee share scheme is recognised as an expense when the employees become entitled to the shares. (q). Financial Instruments The Group classifies its financial instruments in the following categories Non Derivative Financial Instruments Loans and Receivables Loans and receivables are measured at fair value at inception and subsequently at amortised cost using the effective interest rate method less any impairment losses. Financial Liabilities Financial liabilities include trade payables, other creditors, loans from third parties, related party balances and loans from or other amounts due to director related entities. Financial liabilities are recognised at amortised cost, comprising original debt less principal payments and amortisation. 2010 Annual Report | 43 NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Derivative Financial Instruments Cash Flow Hedges Forward foreign currency contracts are classified as cash flow hedges when they hedge exposure to variability in cash flows of a recognised asset, liability or a highly probable forecasted transaction. When established, a cash flow hedge is formally documented. This documentation includes identification of the hedging instrument, the hedged item or transaction, the foreign currency risk being hedged and an assessment of the hedging instrument’s effectiveness in offsetting the exposure to the hedged item’s cash flows. Cash flow hedges are expected to be highly effective in offsetting changes in cash flows and are assessed on an ongoing basis to determine effectiveness. The portion of any gain or loss on a hedging instrument that is an effective hedge is recognised directly in equity. Any ineffective portion is immediately recognised through profit and loss. Hedge accounting is discontinued when the hedging instrument matures or is closed out, or the designation as a cash flow hedge is terminated. At that point in time any gain or loss recognised in equity remains in equity until the hedged transaction occurs when it is transferred to profit and loss in the same period that the hedged item affects profit and loss, or is included as a basis adjustment to a non financial hedged item. Financial Instruments at Fair Value Through Profit and Loss 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. (r). 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. (s). Comparatives Where necessary, comparative information has been reclassified and repositioned for consistency with current year disclosures. (t). Discontinued Operations On 22 December 2008 the Company closed its European full service operation Gale Europe GmbH and entered into a distribution agreement with an established European sales and distribution company, Windhager GmbH, to have it take over the inventory, sales and distribution of Gale products in key European markets. The income statements of the current and comparative periods reflect this change by disclosing the trading results and closure costs of Gale Europe GmbH as a separate line under the description “profit/(loss) from discontinued operations”. (u). New Accounting Standards and Interpretations A number of accounting standards have been issued at the reporting date but are not yet effective. Managment has not yet assessed the impact of these standards and interpretations. 44 | Gale Pacific Limited ABN 80 082 263 778 NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (v). Presentation of Financial Statements Revised AASB 101 Presentation of Financial Statements, which became effective from 1 January 2009, has been adopted. All non-owner changes in equity are now presented in the new Statement of Comprehensive Income where previously these were included in the Statement of Changes in Equity. Comparative information has been re-stated so that it conforms to the revised standard. The presentation of the Consolidated Income Statement has been changed from the nature of expense method used in previous reporting periods to the function of expense method. This change has been made because the function of expense method aligns the financial report with the presentation used for management reporting and provides a better understanding of the expense drivers within the Group’s operations. The comparative period information has been reclassified to this new format and to assist with the transition to this change, all the significant items disclosed under the nature of expense method are disclosed in Note 3. NOTE 2: REVENUE Consolidated Operating Activities Sale of goods – other parties Total revenue 2009 / 2010 ($000) 2008 / 2009 ($000) Continuing Discontinued Continuing Discontinued 98,811 98,811 - - 98,251 98,251 2,219 2,219 2010 Annual Report | 45 NOTE 3: PROFIT Profit before income tax expense has been determined after charging / (crediting): 2009 / 2010 ($000) 2008 / 2009 ($000) Continuing Discontinued Continuing Discontinued 399 3 70 472 37,665 16,154 (108) 1,355 - - 1,247 228 66 5,872 30 353 - 41 204 262 130 189 - - - 23 199 20 224 33 - 2 259 86 10 2 98 357 137 1 6 2,174 257 - - - - 23 - - - - - - - - - - - - - 30 - - - - - - - - - - - - - - - - - - - - - - - - 321 31 1,552 1,904 42,085 16,384 (375) 2,441 (174) - 1,892 227 86 6,441 54 423 4 84 62 252 547 373 3,155 - 422 189 122 22 207 19 2 2 230 138 25 - 163 393 1 63 7 2,213 (146) - 248 79 327 3,249 1,006 - - - 174 174 - - 247 - - - - - - - - - 144 - - - - 18 - - - 18 37 6 - 129 147 - - - 753 - Consolidated Other Income Government grant income Other revenue Net foreign exchange gains Total other income Changes in inventories of finished goods and work in progress and raw materials and consumables used Employee benefits Net Finance Costs Finance income – other parties Finance expense – other parties Finance income – related parties Finance expense – related parties Net finance costs 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 Application software Research and Development Expenditure Amortisation of previously capitalised expenditure Expensed as incurred Impairment of Non Current Assets Goodwill Intangible assets Restructuring and termination costs Increase / (decrease) in provision for obsolete inventory Bad and Doubtful Debts Bad debts written off – trade debtors Movement in provisions for doubtful debts – trade debtors Remuneration of the Auditors of the Parent Entity For Auditing the financial report Taxation services Capital raising related services Government grant review Total remuneration of the auditors of the parent entity Remuneration of Other Auditors of Controlled Entities For Auditing the financial report Taxation services Capital registration review Total remuneration of other auditors Total remuneration of auditors Net Loss on Disposal of Non Current Assets Plant and equipment Motor vehicles Office equipment Operating lease rental expense Share based payment (benefit) / expense 46 | Gale Pacific Limited ABN 80 082 263 778 NOTE 4: INCOME TAX (a). The Components of Tax Expense Current tax Deferred tax Total income tax expense Disclosed in the financial statements as Income tax expense from continuing operations Income tax (benefit) / expense from discontinued operations Total Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) 1,581 456 2,037 2,060 (23) 2,037 659 1,760 2,419 1,166 1,253 2,419 (b). The Prima Facie Income Tax Payable on Profit is Reconciled to the Income Tax Expense as Follows Prima facie tax payable on profit before income tax at 30% Add tax effect of: Tax rate differentials in foreign countries Impairment of goodwill Tax losses not recognised Previously unrecognised tax losses utilised Tax credits Other non allowable / (non assessable) items Total Less tax effect of: Over provision for income tax in the prior year Income tax expense attributed to profit from continuing operations Add income tax (benefit) / expense from discontinued operations Total income tax expense Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) 2,420 (366) - 101 (227) (133) 225 2,020 40 2,060 (23) 2,037 202 (515) 946 1,166 - (321) (322) 1,156 10 1,166 1,253 2,419 (c). Income Tax Recognised Directly in Equity The following current and deferred tax amounts were credited directly to equity during the period. Deferred Tax Equity raising costs deductible over 5 years Cash flow hedges Total Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) (3) 238 235 (94) (135) (229) 2010 Annual Report | 47 NOTE 4: INCOME TAX (CONTINUED) (d). Current Tax Current tax asset Current tax liability Total Consolidated 2009 / 2010 ($000) - (1,355) (1,355) 2008 / 2009 ($000) 980 (217) 763 (e). Movement in Net Carrying Amount Movement in the current tax net carrying amount between the beginning and the end of the year. Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) 763 (1,581) (558) 21 (1,355) 172 (659) 1,225 25 763 Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) (10) (4,711) (71) 109 - 18 (275) 293 482 (278) 7 310 123 (406) (3,881) 126 80 (39) 77 (298) 262 300 (295) 19 492 229 (4,003) (3,334) 379 (4,382) (4,003) 1,038 (4,372) (3,334) Balance at the beginning of the year Current year tax expense Income tax (refunds) / payments Net foreign currency movements arising from foreign operations Carrying amount at the end of the year (f). Deferred Tax Deferred Tax Assets / (Liabilities) Arise from the Following Property, plant and equipment Foreign exchange Income not (received) / derived Finance leases Research and development Doubtful debts Other financial liabilities Provisions Employee benefits Capitalised costs Borrowing costs Equity raising costs Other Net deferred tax liability Represented By Deferred tax asset Deferred tax liability Total 48 | Gale Pacific Limited ABN 80 082 263 778 NOTE 4: INCOME TAX (CONTINUED) (g). 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. Tax losses – income Tax losses – capital Total NOTE 5: OPERATING SEGMENTS Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) 1,834 33,403 35,237 2,228 33,360 35,588 The Group has identified its operating segments based on the internal reports that are reviewed and used by the Chief Executive Officer in assessing performance and determining the allocation of resources. The Group’s four operating segments are identified by geographic location and identity of the service line manager. Discrete financial information about each of these segments is reported on a monthly basis. Revenue, result, depreciation and amortisation, significant items, assets and liabilities for the Group’s four operating segments plus discontinued operations are set out in the tables below. Asia / Pacific (excluding China) Manufacturing and distribution facilities are located in Australia, and distribution facilities are located in New Zealand. Sales offices are located in all states in Australia and in New Zealand. China Manufacturing facilities are located in Beilun, China which supply to the Group’s sales and marketing operations throughout the world. Americas Sales offices are located in Florida and custom blind assembly and distribution facilities are located in California which service the North American region. Middle East / Africa A sales office and distribution facility is located in the United Arab Emirates to service this market. Business Segment The Group operates predominantly in one business segment, being the branded shading and screening products. The Group manufactures, sources and markets advanced durable knitted and woven polymer fabrics and value added structures made from these fabrics. 2010 Annual Report | 49 NOTE 5: OPERATING SEGMENTS (CONTINUED) Segment Information Primary Reporting – Geographical Segments 30 June 2010 Asia Pacific China Americas Middle East / Africa Unallocated ($000) ($000) ($000) ($000) ($000) Total Continuing Operations ($000) Discontinued Operations Total Group ($000) ($000) 71,401 (81) 21,343 6,148 - 98,811 Revenue outside the economic entity Inter segment revenue Total revenue Segment EBITDA Depreciation and amortisation 571 71,972 9,286 27,721 27,640 5,082 (2,136) (4,586) 69 150 (28,511) 21,412 6,298 (28,511) 915 (457) 989 (7) 982 232 - 232 Segment EBIT 7,150 496 458 Net finance expense Profit before income tax Income tax expense Profit for the year Segment assets Segment liabilities 34,235 12,175 52,901 12,701 16,381 1,869 4,116 286 (311) (44) - 98,811 16,504 (7,186) 9,318 (1,247) 8,071 (2,060) 6,011 107,322 26,987 - - - 18 (30) (12) - (12) 23 11 74 913 98,811 - 98,811 16,522 (7,216) 9,306 (1,247) 8,059 (2,037) 6,022 107,396 27,900 30 June 2009 Asia Pacific China Americas Middle East / Africa Unallocated ($000) ($000) ($000) ($000) ($000) Total Continuing Operations ($000) Discontinued Operations Total Group ($000) ($000) 66,275 742 23,263 7,971 - 98,251 2,219 100,470 593 66,868 6,499 34,072 34,814 6,446 (2,349) (5,087) 484 23,747 (650) (717) 8,207 1,412 (27) 236 (35,385) (35,385) 196 - - Impairment of assets (3,155) - - - Segment EBIT 995 1,359 (1,367) 1,385 196 - 98,251 13,903 (8,180) (3,155) 2,568 (1,892) - 2,219 (9,643) (247) (144) (10,034) (174) 676 (10,208) (1,166) (1,253) (490) (11,461) - 100,470 4,260 (8,427) (3,299) (7,466) (2,066) (9,532) (2,419) (11,951) 113,147 37,731 Revenue outside the economic entity Inter segment revenue Total revenue Segment EBITDA Depreciation and amortisation Net finance expense Profit before income tax Income tax expense Loss for the year Segment assets Segment liabilities 33,323 19,307 59,672 14,782 16,017 2,387 4,503 278 (543) (95) 112,972 36,659 175 1,072 Notes: (a). (b). (c). (d). (e). All inter segment pricing is on a commercial basis. Asia Pacific result excludes finance costs, interest revenue and income tax expense. Asia Pacific includes foreign exchange hedge and Australian Corporate costs. Asia Pacific excludes China which is now disclosed separately. Revenue from one customer in the Asia Pacific region represents $31,546,000 (2009 : $26,515,000) of the Group’s total revenues. 50 | Gale Pacific Limited ABN 80 082 263 778 NOTE 6: CASH AND CASH EQUIVALENTS Cash on hand Cash at bank Cash on deposit Total NOTE 7: TRADE AND OTHER RECEIVABLES Current Trade debtors Less provision for doubtful debts Total Other receivables Total NOTE 8: INVENTORIES Current Raw materials at cost Work in progress at cost Finished goods at cost Less provision for obsolescence Total NOTE 9: OTHER FINANCIAL ASSETS Current Foreign currency forward contracts Total Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) 12 8,486 6,641 15,139 8 4,647 2,486 7,141 Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) 13,900 (282) 13,618 524 14,142 14,315 (258) 14,057 617 14,674 Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) 2,866 1,952 15,699 (236) 20,281 3,174 2,200 18,500 (211) 23,663 Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) 341 341 - - 2010 Annual Report | 51 NOTE 10: OTHER ASSETS Current Prepayments Total NOTE 11: PROPERTY, PLANT AND EQUIPMENT Buildings At cost Less accumulated depreciation Total Plant and Equipment At cost Less accumulated depreciation Total Plant and Equipment Under Lease At cost Less accumulated amortisation Total Leasehold Improvements At cost Less accumulated depreciation Total Motor Vehicles At cost Less accumulated depreciation Total Motor Vehicles Under Lease At cost Less accumulated amortisation Total Office Equipment At cost Less accumulated depreciation Total Capital Work in Progress Total property, plant and equipment 52 | Gale Pacific Limited ABN 80 082 263 778 Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) 913 913 741 741 Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) 9,641 (1,129) 8,512 67,622 (27,621) 40,001 - - - 560 (431) 129 212 (123) 89 179 (76) 103 4,378 (3,823) 555 163 49,552 9,246 (917) 8,329 69,909 (22,406) 47,503 75 (75) - 605 (387) 218 328 (196) 132 251 (79) 172 4,097 (3,276) 821 330 57,505 NOTE 11: PROPERTY, PLANT AND 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 2009 / 2010 ($000) 2008 / 2009 ($000) Buildings Balance at the beginning of the year Reclassifications Additions 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 Additions Disposals Depreciation expense 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 Amortisation expense Carrying amount at the end of the year Leasehold Improvements Balance at the beginning of the year Reclassifications Additions Disposals Depreciation expense Net foreign currency movements arising from foreign operations Carrying amount at the end of the year Motor Vehicles Balance at the beginning of the year Reclassifications 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 Reclassifications Additions Disposals Amortisation expense Carrying amount at the end of the year Office Equipment Balance at the beginning of the year Reclassifications Additions Disposals Depreciation expense Net foreign currency movements arising from foreign operations Carrying amount at the end of the year 8,329 23 746 (228) (358) 8,512 47,503 440 (142) (5,872) (1,928) 40,001 - - - 218 (23) 8 (3) (66) (5) 129 132 - (7) (30) (6) 89 172 - - (28) (41) 103 821 - 119 (7) (353) (25) 555 7,164 - - (227) 1,392 8,329 42,522 5,012 (374) (6,688) 7,031 47,503 4 (4) - 248 - 37 - (86) 19 218 316 (137) (25) (54) 32 132 185 137 76 (142) (84) 172 952 (2) 224 (12) (423) 82 821 2010 Annual Report | 53 NOTE 12: INTANGIBLE ASSETS Goodwill at cost Less accumulated impairment Total Patents, trademarks and licenses at cost Less accumulated amortisation Total Application software at cost Less accumulated amortisation Total Research and development Less accumulated amortisation Total 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 Impairment 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 Amortisation expense Net foreign currency movements arising from foreign operations Carrying amount at the end of the year Application Software Balance at the beginning of the year Reclassifications Additions Amortisation expense Impairment loss 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 Amortisation expense Carrying amount at the end of the year 54 | Gale Pacific Limited ABN 80 082 263 778 Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) 8,768 (2,939) 5,829 2,399 (2,002) 397 1,332 (909) 423 4,865 (4,865) - 6,649 5,950 - (121) 5,829 635 (234) (4) 397 690 - - (262) - (5) 423 130 (130) - 8,810 (2,860) 5,950 2,414 (1,779) 635 1,494 (804) 690 4,865 (4,735) 130 7,405 8,659 (3,155) 446 5,950 680 (62) 17 635 829 36 198 (252) (144) 23 690 677 (547) 130 NOTE 12: INTANGIBLE ASSETS (CONTINUED) Goodwill The recoverable amount of the cash generating units (CGU) have been determined based on a value in use calculation using financial projections approved by the Board of Directors covering the next five financial years. The revenue growth for the five year period varies within the range of 2% to 10% depending on the demographic, economic, trading conditions and growth potential, of the CGU. The discount rate applied to the cash flow projections is 12.99% (2009 : 7.50%) being the Group’s pre tax weighted average cost of capital. The terminal value multiple represents the growth rate applied to extrapolate the cash flows beyond the five year forecast period. These growth rates are based on the Board of Directors expectations, industry knowledge, market comparative multiples and other features specific to each CGU. Key assumptions used in value in use calculations The key assumptions on which management has based its cash flow projections when determining the value in use of the cash generating units is that projected turnover, margins and expenses are determined based on historical performance, adjusted for internal / external changes anticipated in the forecast years. Impairment losses recognised In the 2009 financial year an impairment loss on consolidation, based upon a value in use calculation of $3.155 million (refer Note 1) relating to goodwill was recognised for continuing operations. The impaired goodwill related to Gale Pacific New Zealand. The impairment loss has been recognised in the income statement in the line item “impairment of goodwill and assets”. The cash generating units consist of the working capital, property, plant and equipment and goodwill of the subsidiary. The impairment was a consequence of lower profitability in response to increased competition following structural changes in that market and therefore, the current and forecast results do not support the carrying value of the full amount of goodwill paid upon acquisition. NOTE 13: TRADE AND OTHER PAYABLES Current Trade payables Sundry payables and accruals Total Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) 4,979 2,290 7,269 6,219 2,484 8,703 2010 Annual Report | 55 NOTE 14: BORROWINGS Current Secured liabilities: Bank loans Other loans Commercial bills Finance lease liability Hire purchase liability Total Unsecured liabilities: Bank loans Other loans Total Non Current Secured liabilities: Other loans Finance lease liability Hire purchase liability Total Unsecured liabilities: Other loans Total Total Disclosed in the Financial Statements As Current borrowings Non current borrowings NOTE 15: OTHER FINANCIAL LIABILITIES Derivatives Carried at Fair Value Current Foreign currency forward contracts Total Disclosed in the Financial Statements As Current other financial liabilities 56 | Gale Pacific Limited ABN 80 082 263 778 Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) 7,430 1,554 - 109 18 9,111 2,803 75 2,878 - - - - - - 8,387 895 7,700 69 29 17,080 2,036 303 2,339 1,553 109 18 1,680 74 74 11,989 21,173 11,989 - 19,419 1,754 Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) - - - 459 459 459 NOTE 16: PROVISIONS Current Employee benefits Restructuring and termination costs Discontinued operations closure Warranty claims Non Current Employee benefits Total Disclosed in the Financial Statements As Current provisions Non current provisions (a) Aggregate employee benefits liability (b) Number of employees at year end Movements in Carrying Amounts Movement in the carrying amounts for the following classes of provision between the beginning and the end of the year Restructuring and Termination Costs 1 Balance at the beginning of the year Provisions recognised Payments made Net foreign currency movements arising from foreign operations Carrying amount at the end of the year Factory Make Good Balance at the beginning of the year Payments made Carrying amount at the end of the year Discontinued operations closure 2 Balance at the beginning of the year Provisions recognised Reductions resulting from re measurement Carrying amount at the end of the year Warranty claims Balance at the beginning of the year Provisions recognised Payments made Carrying amount at the end of the year Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) 1,776 445 553 58 73 2,905 2,832 73 1,849 722 860 1 (429) 13 445 - - - 628 - (75) 553 31 493 (466) 58 1,170 860 628 31 118 2,807 2,689 118 1,288 734 478 490 (115) 7 860 70 (70) - - 628 - 628 - 208 (177) 31 1 The provision for restructuring and termination costs represents the Directors’ best estimate of the remaining costs to be incurred by the New Zealand operation for the closure of its manufacturing facility and the onerous lease obligation of the site. The restructuring is expected to be completed by January 2014 when the lease expires. 2 The provision for discontinued operations closure represents the Directors best estimate of the remaining costs to be incurred for the closure of the European full service operation. The liquidation of the Gale Europe GmbH is expected to be completed by 30 June 2011. 2010 Annual Report | 57 NOTE 17: CONTRIBUTED EQUITY Paid Up Capital 279,691,658 fully paid ordinary shares (2009: 279,691,658) 105,586 105,594 Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) Movement in Share Capital Shares issued at the beginning of the financial year Costs of capital raising (net of tax) 142,857,142 shares issued in a rights issue – 18 March 2009 Total (a). Movement in Share Capital 105,594 100,813 (8) - (219) 5,000 105,586 105,594 There has been no movement in share capital during the reporting period. During the comparative period, (18 March 2009) the Company raised $5 million through a 1.25 for 1 pro rata renounceable rights issue of 142,857,142 shares issued at 3.5 cents per share. (b). Share Based Payments The Group maintains option and performance rights schemes for certain staff and executives, including executive directors, as approved by shareholders at an annual general meeting. These schemes are designed to reward key personnel when the Group meets performance hurdles relating to: (cid:0) (cid:0) (cid:0) 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 nil. The number of unissued ordinary shares under the performance rights scheme at the reporting date is 11,000,000. 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 issued in accordance with the Group’s remuneration policy which: (cid:0) (cid:0) (cid:0) 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. The following share based payment arrangements were in existence during the current and comparative reporting periods. 58 | Gale Pacific Limited ABN 80 082 263 778 NOTE 17: CONTRIBUTED EQUITY (CONTINUED) Options Grant Date Expiry Date Exercise Price Balance Start of Year No. Granted During Year No. Exercised During Year No. Lapsed During Year No. Balance End of Year No. Exercisable End of Year No. Consolidated and Parent Entity - 2010 None Consolidated and Parent Entity - 2009 15 Dec 2004 1 Dec 2008 16 Nov 2005 1 Dec 2008 24 Oct 2006 31 Dec 2008 Total Weighted average exercise price Performance Rights Grant Date Expiry Date Consolidated and Parent Entity - 2010 2 Feb 2007 2 Feb 2017 16 Nov 2007 16 Nov 2017 30 Jun 2009 30 Jun 2019 1 Dec 2009 30 Jun 2019 Total Consolidated and Parent Entity - 2009 2 Feb 2007 2 Feb 2017 16 Nov 2007 16 Nov 2017 30 Jun 2009 30 Jun 2019 Total Performance Rights Valuation Assumptions Grant date share price Exercise price Expected volatility Expected Life Tranche 1 Tranche 2 Dividend yield Risk free interest rate $3.00 $1.52 $1.52 180,000 450,000 120,000 750,000 $1.88 - - - - - - (180,000) (450,000) (120,000) (750,000) - - - - - - - - Exercise Price Balance Start of Year No. Granted During Year No. Exercised During Year No. Lapsed During Year No. Balance End of Year No. Exercisable End of Year No. N/A N/A N/A N/A N/A N/A N/A 150,000 300,000 9,000,000 - - - - 3,000,000 9,450,000 3,000,000 150,000 700,000 - - - 9,000,000 850,000 9,000,000 - - - - - - - - - (150,000) (300,000) - - (1,000,000) 8,000,000 3,000,000 (1,450,000) 11,000,000 150,000 (400,000) 300,000 - 9,000,000 (400,000) 9,450,000 - - - - - - - - - Grant Date 1 December 2009 Grant Date 30 June 2009 Grant Date 16 November 2007 Grant Date 2 February 2007 $0.14 N/A N/A 2.6 years 2.6 years 0.0% N/A $0.061 N/A N/A 3 years 3 years 0.0% N/A $0.45 N/A N/A 0.9 years 1.9 years 5.0% N/A $0.83 N/A N/A 2.4 years - 1.8% N/A 2010 Annual Report | 59 NOTE 18: RESERVES Foreign currency translation reserve Share based payment reserve Hedging reserve Enterprise reserve fund Total (a). Foreign Currency Translation Reserve Balance at the beginning of the year Translation of foreign controlled entities for the year Movement arising from the reclassification of non current related party monetary items to net investments in foreign operations Balance at the end of the year Consolidated 2009 / 2010 ($000) (9,736) 743 242 852 (7,899) 2008 / 2009 ($000) (6,987) 486 (316) 852 (5,965) Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) (6,987) (3,308) 559 (9,736) (11,289) 2,968 1,334 (6,987) 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 Notes 1(d) and 1(e). (b). Employee Share Based Payment Reserve Balance at the beginning of the year Share based expenditure / (benefit) Balance at the end of the year (c). Hedging Reserve Balance at the beginning of the year Profit / (loss) on cash flow hedges Income tax related to cash flow hedges recognised Balance at the end of the year Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) 486 257 743 632 (146) 486 Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) (316) 796 (238) 242 - (451) 135 (316) The hedging reserve represents hedging gains and losses recognised on the effective portion of cash flow hedges. The cumulative gain or loss on the hedge is recognised as a profit or loss when the hedging instrument impacts the profit or loss, or is included as a basis adjustment to a non financial hedged item, consistent with the applicable accounting policy. 60 | Gale Pacific Limited ABN 80 082 263 778 NOTE 18: RESERVES (CONTINUED) (d). Enterprise Reserve Fund (Gale Pacific Special Textiles (Ningbo) Limited) Balance at the beginning of the year Statutory transfers from retained earnings Balance at the end of the year Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) 852 - 852 631 221 852 Gale Pacific Special Textiles (Ningbo) Limited (“GPST”) is required by Chinese Company Law to maintain this reserve in its accounts. This reserve is unavailable for distribution to shareholders but can be used by GPST to expand the business, make up losses or increase the registered capital. GPST is required to allocate 10% of its annual profit after tax to this reserve until it reaches 50% of GPST’s registered capital. NOTE 19: ACCUMULATED LOSSES Balance at the beginning of the year Net profit / (loss) attributable to members of the parent entity Transfers to reserves Balance at the end of the year NOTE 20: NON CONTROLLING INTERESTS Minority interest in controlled entities comprises: Balance at the beginning of the year Net profit attributable to minority interest Balance at the end of the year Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) (24,213) 6,022 - (18,191) (12,030) (11,962) (221) (24,213) Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) - - - (11) 11 - 2010 Annual Report | 61 NOTE 21: DIVIDENDS No dividends were declared or paid during the 2009 / 2010 or 2008 / 2009 financial periods. After 30 June 2010 the following dividends were proposed by the Board. These dividends have not been provided for in the financial statements. Fully Paid Ordinary Shares Final Dividend Fully franked at a 30% tax rate Special Dividend Fully franked at a 30% tax rate Total Dividend Payable on Friday 22 October 2010 Dividend Franking Account Franking credits at 30% available to shareholders at 30 June 2010 Franking credits that will be attributable to the above dividends total $2,397,000. NOTE 22: EARNINGS PER SHARE Consolidated Cents Per Share 1.0 1.0 2.0 2009 / 2010 ($000) 2,797 2,797 5,594 Consolidated 2009 / 2010 ($000) 2,701 2008 / 2009 ($000) 3,066 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 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 profit / (loss) Earnings Used in the Calculation of Basic 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 Weighted average number of shares deemed to be issued for no consideration in respect of: Employee options Performance rights Weighted average number of ordinary shares for the purposes of diluted earnings per share 62 | Gale Pacific Limited ABN 80 082 263 778 Consolidated 2009 / 2010 (Cents Per Share) 2008 / 2009 (Cents Per Share) 2.15 - 2.15 2.07 0.01 2.08 (0.28) (6.47) (6.75) (0.28) (6.47) (6.75) Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) 6,022 (11,951) (11) 6,011 11,461 (490) Consolidated 2009 / 2010 (000’s) 2008 / 2009 (000’s) 279,692 177,148 - 10,183 289,875 378 719 178,245 NOTE 23: CAPITAL AND LEASING COMMITMENTS (a). Finance Leasing Commitments Payable Not longer than one year Longer than one year and not longer than five years Minimum future lease payments 1 Less future finance charges Present value of minimum lease payments Disclosed in the Financial Statements As Current borrowings Non current borrowings Total (b). Hire Purchase Commitments Payable Not longer than one year Longer than one year and not longer than five years Minimum future hire purchase payments 2 Less future finance charges Present value of minimum hire purchase payments Disclosed in the Financial Statements As Current borrowings Non current borrowings Total (c). Operating Lease Commitments Non cancellable operating leases contracted for but not capitalised in the accounts Payable Not longer than one year Longer than one year and not longer than five years Total (d). Capital Expenditure Commitments Not longer than one year Total Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) 170 - 170 (61) 109 109 - 109 153 170 323 (145) 178 69 109 178 Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) 20 - 20 (2) 18 18 - 18 35 20 55 (8) 47 29 18 47 Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) 1,956 2,282 4,238 2,664 4,164 6,828 Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) 44 44 - - 1 Minimum future lease payments includes the aggregate of all lease payments and any guaranteed residual. 2 Minimum future hire purchase payments includes the aggregate of all hire purchase payments and any guaranteed residual. 2010 Annual Report | 63 NOTE 24: 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 Total (b). Reconciliation of Profit for the Period to Net Cash Provided by Operating Activities Profit / (loss) after income tax Non Cash Flows in Profit Loss on disposal of fixed assets Depreciation of fixed assets Amortisation / impairment of intangible assets Equity settled share based payments Changes in tax balances processed directly in equity Changes in tax balances due to foreign exchange movements Changes in Assets and Liabilities Decrease in receivables Decrease in inventories (Increase) / decrease in other assets (Decrease) in payables, accruals and other financial liabilities Increase in tax balances Net cash provided by operating activities 64 | Gale Pacific Limited ABN 80 082 263 778 Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) 12 8,486 6,641 15,139 8 4,647 2,486 7,141 Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) 6,022 (11,951) 147 6,589 626 257 558 51 84 2,900 (194) (1,869) 2,782 17,953 83 7,566 4,160 (146) (222) (9) 6,854 5,349 99 (1,690) 1,295 11,388 NOTE 24: CASH FLOW INFORMATION (CONTINUED) (c). Discontinued Operations In response to the worsening economic conditions and modified economic outlook, the operating and cost structure of the Group’s European business was reviewed in November / December 2008. The business operated as a full service business in a highly seasonal market and had under performed to expectations. To reduce costs and de-risk the business the decision was made to close the existing European full service operation and enter into a distribution agreement with an established European sales and distribution company to have it take over the inventory, sales and distribution of Gale products in key European markets as of 22 December 2008. The costs associated with this decision have been classified under discontinued operations in these financial statements. Financial information relating to discontinuing operations for the period 30 June 2010 is set out below. Further information is set out in Note 5 Operating Segments. Loss From Discontinued Operations Revenue Other income Expenses Loss before income tax Income tax benefit / (expense) Profit / (loss) after income tax from discontinued operations Cash Flows From Discontinued Operations Net cash inflow / (outflow) from operating activities Net cash outflow from investing activities Effect of exchange rate changes on items nominated in foreign currencies Net decrease in cash from discontinued operations Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) - - (12) (12) 23 11 11 - (16) (5) 2,219 327 (12,754) (10,208) (1,253) (11,461) (4,419) (146) 4,525 (40) 2010 Annual Report | 65 NOTE 25: DIRECTORS AND EXECUTIVES’ COMPENSATION Details of Directors and Key Executives remuneration is disclosed in the remuneration report. Directors’ and Executives’ Compensation by Category Short term employment benefits Post employment benefits Share based payments Termination benefits Total Directors’ and Executives’ Equity Holdings: Fully Paid Ordinary Shares Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) 2,503 106 257 - 2,866 2,749 120 64 232 3,165 2009 / 2010 Executive Directors P McDonald Non Executive Directors D Allman H Boon 1 J Murphy G Richards Executives J Cox Total 2008 / 2009 Executive Directors P McDonald Non Executive Directors H Boon J Murphy G Richards Executives J Cox Total Balance 30 June 209 No. Received as Remuneration No. Options Exercised No. Net Change No. Balance 30 June 2010 No. 978,105 - 607,500 - 491,899 500,000 2,577,504 - - - - - - - - - - - - - - - - (607,500) - - - 978,105 - - - 491,899 500,000 (607,500) 1,970,004 Balance 30 June 2008 No. Received as Remuneration No. Options Exercised No. Net Change No. Balance 30 June 2009 No. 434,714 263,513 - 128,851 158,923 986,001 - - - - - - - - - - - - 543,391 978,105 343,987 607,500 - - 363,048 491,899 341,077 500,000 1,591,503 2,577,504 1 Mr Boon retired from his role as a Non Executive Director on 17 November 2009. The net change above represents the number of fully paid ordinary shares Mr Boon held on the date of his retirement. 66 | Gale Pacific Limited ABN 80 082 263 778 NOTE 25: DIRECTORS AND EXECUTIVES’ COMPENSATION (CONTINUED) Directors’ and Executives’ Equity Holdings, Compensation Options and Performance Rights: Granted and Vested During the Year 2009 / 2010 Vested Number Granted Number Grant Date Value Per Option / Right at Grant Date Executive Directors (Performance Rights) Terms and Conditions for Each Grant Exercise Price Expiry Date First Exercise Date Last Exercise Date P McDonald - 3,000,000 01/12/2009 $0.14 Nil 30/06/2019 30/06/2012 30/06/2019 Non Executive Directors None Executives (Performance Rights) None Total 3,000,000 2008 / 2009 Vested Number Granted Number Grant Date Value Per Option / Right at Grant Date Terms and Conditions for Each Grant Exercise Price Expiry Date First Exercise Date Last Exercise Date Executive Directors None Non Executive Directors None Executives (Performance Rights) P Cacioli J Cox M Denney S McPherson B Wang Total - - - - - - 1,000,000 30/06/2009 $0.061 Nil 30/06/2019 30/06/2012 30/06/2019 2,000,000 30/06/2009 $0.061 Nil 30/06/2019 30/06/2012 30/06/2019 2,000,000 30/06/2009 $0.061 Nil 30/06/2019 30/06/2012 30/06/2019 2,000,000 30/06/2009 $0.061 Nil 30/06/2019 30/06/2012 30/06/2019 2,000,000 30/06/2009 $0.061 Nil 30/06/2019 30/06/2012 30/06/2019 9,000,000 The performance rights disclosed above are subject to hurdles based on improvements in the Group’s diluted earnings per share over the two year period 1 July 2009 to 30 June 2011. 2010 Annual Report | 67 NOTE 25: DIRECTORS AND EXECUTIVES’ COMPENSATION (CONTINUED) Directors’ and Executives’ Equity Holdings Compensation Options and Performance Rights: Movements During the Year 2009 / 2010 Balance 1 July 2009 No. Granted as Compensation No. Exercised Lapsed No. No. Net Other Change No. Balance 30 June 2010 No. Balance Held Nominally No. Value of Lapsed Options/Rights $ Executive Directors (Performance Rights) P McDonald 150,000 3,000,000 - (150,000) - 3,000,000 Non Executive Directors None Executives (Performance Rights) P Cacioli 1 J Cox M Denney P Ducray 2 S McPherson B Wang Total 1,075,000 2,075,000 2,075,000 75,000 2,000,000 2,000,000 9,450,000 - - - - - - 3,000,000 - - - - - - - (1,075,000) (75,000) (75,000) (75,000) - - (1,450,000) - - - - - - - - 2,000,000 2,000,000 - 2,000,000 2,000,000 11,000,000 - - - - - - - - (118,500) (91,750) (30,750) (30,750) (30,750) - - (302,500) 2008 / 2009 Balance 1 July 2008 No. Granted as Compensation No. Exercised Lapsed No. No. Net Other Change No. Balance 30 June 2009 No. Balance Held Nominally No. Value of Lapsed Options/Rights $ Executive Directors (Options) P McDonald 180,000 Executive Directors (Performance Rights) P McDonald 150,000 Non Executive Directors None Executives (Options) S Carroll 3 P Ducray Z Fakroddin 4 E Xu 5 40,000 20,000 40,000 40,000 Executives (Performance Rights) 100,000 100,000 100,000 100,000 100,000 100,000 - - F Albertsmeier 6 P Cacioli S Carroll J Cox M Denney P Ducray S McPherson B Wang E Xu Total - - - - - - - 1,000,000 - 2,000,000 2,000,000 - 2,000,000 2,000,000 100,000 - 1,170,000 9,000,000 - - - - - - - - - - - - - - - (180,000) - (40,000) (20,000) (40,000) (40,000) (100,000) (25,000) (100,000) (25,000) (25,000) (25,000) - - (100,000) (720,000) - - - - - - - - - - - - - - - - - 150,000 - - - - - 1,075,000 - 2,075,000 2,075,000 75,000 2,000,000 2,000,000 - 9,450,000 - - - - - - - - - - - - - - - - (137,250) - (18,400) (9,200) (18,400) (4,000) (41,500) (10,750) (41,500) (10,750) (10,750) (10,750) - - (41,500) (354,750) 1 Mr Cacioli departed his role as General Manager Research and Development and Technical Services on 9 October 2009. 2 Mr Ducray departed his role as Chief Manufacturing Officer on 30 September 2009. 3 Mr Carroll departed his role as Managing Director Australia on 1 August 2008. 4 Mr Fakroddin departed his role with Gale Europe on 30 June 2008. 5 Ms Xu departed her role as Managing Director Gale Pacific Special Textiles (Ningbo) Ltd on 12 December 2008. 6 Mr Albertsmeier departed his role as Managing Director Europe, Middle East, Africa on 1 April 2009 following the closure of the European full service operation. 68 | Gale Pacific Limited ABN 80 082 263 778 NOTE 26: RELATED PARTY TRANSACTIONS Transactions within the Wholly Owned Group The wholly owned group includes: (cid:0) (cid:0) 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. During the financial year, the following transactions occurred between entities in the wholly owned group: (cid:0) (cid:0) (cid:0) (cid:0) Sale and purchase of goods totalling $29,044,000 (2009 : $35,715,000) Gale Pacific Limited received interest income from its subsidiaries totalling $548,000 (2009 : $1,220,000) Gale Pacific Limited made interest payments to its subsidiaries totalling $132,000 (2009 : 135,000) Reimbursement of certain operating costs totalling $1,704,000 (2009 : $3,371,000) Transactions with Directors and Director Related Entities The following amounts were payable to Directors and their Director related entities as at the reporting date. Current – accrued bonus and Director fees Consolidated 2009 / 2010 ($000) 187 2008 / 2009 ($000) 73 NOTE 27: CONTROLLED ENTITIES Parent Entity Gale Pacific Limited Controlled Entities Gale Europe GmbH Vertriebsgesellschaft Gale Pacific (New Zealand) Limited Gale Pacific FZE Gale Pacific Special Textiles (Ningbo) Limited Gale Pacific USA Inc Controlled entities deregistered during the year Aquaspan Pty Ltd Gale Pacific Employees Superannuation Fund Pty Ltd Country of Incorporation Ownership Interest (%) 2009 / 2010 2008 / 2009 Australia Germany New Zealand United Arab Emirates China United States of America Australia Australia 100% 100% 100% 100% 100% - - 100% 100% 100% 100% 100% 50% 100% 2010 Annual Report | 69 NOTE 28: FINANCIAL INSTRUMENTS Financial Risk Management Overview The Group’s activities expose it to a variety of financial risks: credit risk; liquidity risk; and market risk (including foreign currency risk and interest rate risk). The Group’s financial risk management processes and procedures seek to minimise the potential adverse effects on the Group’s financial performance that may occur due to the unpredictability of financial markets. Risk management policies are reviewed regularly to reflect changes in market conditions and the Group’s activities. Financial Instruments Derivative financial instruments are used by the Group to limit exposure to exchange rate risk associated with foreign currency transactions. Derivative financial instruments are recognised in the financial statements. Transactions to reduce foreign currency and interest rate exposure are undertaken without the use of collateral as the Group only deals with reputable institutions with sound financial positions. The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. Net Fair Values The net fair value of assets and liabilities approximates their carrying value. No financial assets or financial liabilities are readily traded on organised markets in standardised form other than forward exchange contracts. (a). Credit Risk Exposure to credit risk The maximum exposure to credit risk, excluding the value of any collateral or other security, at the reporting date to recognised financial assets is the carrying amount of those assets, net of any provisions for doubtful debts of those assets. The maximum exposure to credit risk at the reporting date was: Loans and receivables Cash and cash equivalents Tradeable foreign currency forward contracts Total The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was: Note 7 6 9 Asia Pacific China Americas Middle East / Africa Discontinued operations Total The ageing of trade receivables not impaired at the reporting date was: Not outside credit terms Outside credit terms 0-30 days Outside credit terms 31-120 days Outside credit terms 121 days to one year More than one year Total The ageing of impaired receivables at the reporting date was: Outside credit terms 0-30 days Outside credit terms 31-120 days Outside credit terms 121 days to one year More than one year Total Consolidated As at 30 Jun 2010 ($000) As at 30 Jun 2009 ($000) 14,142 15,139 341 29,622 4,778 157 6,234 2,449 - 13,618 10,400 1,908 1,165 114 31 13,618 - 65 132 85 282 14,674 7,141 - 21,815 4,960 219 6,173 2,696 9 14,057 10,527 1,509 1,157 842 22 14,057 - 44 210 4 258 The Group’s most significant customer, an Australian retailer accounts for $1,405,000 of the trade receivables carrying balance at 30 June 2010 (2009 : $1,897,000). 70 | Gale Pacific Limited ABN 80 082 263 778 NOTE 28: FINANCIAL INSTRUMENTS (CONTINUED) (b). Liquidity Risk The following tables detail both the Group’s effective weighted average interest rates on classes of its financial liabilities at reporting date and the contractual maturity of these financial liabilities. Contractual cash flows include both interest and principal cash flows, are undiscounted and based on the earliest date on which the Group can be required to pay. Consolidated 30 June 2010 Non Derivative Financial Liabilities Bank loans Other loans Finance lease liabilities Hire purchase liabilities Total Consolidated 30 June 2009 Note Weighted Average Effective Interest Rate Carrying Amount Contractual Cash Flows Contractual Cash Flows Maturing In: Less Than 6 Months 6 To 12 Months 1 To 2 Years (%) ($000) ($000) ($000) ($000) ($000) 14 14 14 14 4.49% 10,233 10,421 7,706 9.07% 1,629 1,708 10.06% 9.25% 109 18 117 21 593 38 19 2,715 1,115 79 2 11,989 12,267 8,356 3,911 - - - - - Note Weighted Average Effective Interest Rate Carrying Amount Contractual Cash Flows Contractual Cash Flows Maturing In: Less Than 6 Months 6 To 12 Months 1 To 2 Years (%) ($000) ($000) ($000) ($000) ($000) Non Derivative Financial Liabilities Bank loans Other loans Finance lease liabilities Hire purchase liabilities Derivative Financial Liabilities 14 14 14 14 4.12% 18,123 18,340 11,765 6,575 - 8.89% 2,825 3,109 9.66% 9.25% 178 47 200 51 738 60 16 663 1,708 23 16 71 117 19 - Tradeable foreign currency forward contracts 15 459 459 388 Total 21,632 22,159 12,967 7,348 1,844 (c). Market Risk The Group’s activities expose it to the financial risks of changes in foreign currency exchange rates and interest rates. Foreign Exchange Risk The Group undertakes transactions denominated in foreign currencies that exposes it to fluctuations in foreign currency exchange rates. Foreign Exchange Contracts The Group enters into foreign exchange contracts to buy and sell specified amounts of foreign currency in the future at stipulated exchange rates. The objective of entering into forward exchange contracts is to protect the Group against unfavourable exchange rate movements for both contracted and anticipated future sales and purchases undertaken in foreign currencies. There was no cash flow hedge ineffectiveness during the reporting period. 2010 Annual Report | 71 NOTE 28: FINANCIAL INSTRUMENTS (CONTINUED) The Group has adopted hedge accounting and classifies forward exchange contracts as cash flow hedges where these contracts are hedging highly probably forecasted transactions and they are timed to mature when the cash flow from the underlying transaction is scheduled to occur. Cash flows are expected to occur during the next financial year. Changes in fair value on forward exchange contracts designated as cash flow hedges are taken directly to equity. Forward exchange contacts that are not designated as cash flow hedges have any changes in fair value recognised in profit or loss in the period the changes occur. The full amount of foreign currency the Group will be required to pay or purchase when settling forward exchange contracts should the counterparty not pay the currency it is committed to deliver to the Group has been recognised in the Group’s statement of financial position. At balance date the net amount receivable was $341,000 (2009: $459,000 payable). The accounting policy in regard to forward exchange contracts is detailed in Note 1(d). Average Exchange Rate Foreign Currency Contract Value Fair Value 2009 / 2010 2008 / 2009 2009 / 2010 2008 / 2009 2009 / 2010 2008 / 2009 2009 / 2010 2008 / 2009 (FC000) (FC000) ($000) ($000) ($000) ($000) Foreign Exchange Contracts Designated as Cash Flow Hedges Buy United States dollars / sell Australian dollars Less than 6 months 6 – 12 months 0.8602 0.7599 9,683 4,167 11,258 4,167 292 (326) 0.8771 0.7520 850 610 969 610 56 (56) Sell United States dollars / buy Australian dollars Less than 6 months - 0.8008 - 800 - 999 - 9 Buy United States dollars / sell New Zealand dollars Less than 6 months 6 – 12 months 0.6723 0.5869 460 - 0.5825 - Buy European euro / sell Australian dollars 0.6889 0.5720 0.6709 - 490 330 Less than 6 months 6 – 12 months Total Foreign Exchange Contracts Not Designated as Cash Flow Hedges Buy United States dollars / sell Australian dollars 445 96 59 - 562 - 711 492 614 133 103 - (12) - 3 2 (63) (15) - - 341 (451) Less than 6 months - 0.7160 - 54 - 75 Total Total - - (8) (8) 341 (459) 72 | Gale Pacific Limited ABN 80 082 263 778 NOTE 28: FINANCIAL INSTRUMENTS (CONTINUED) Foreign Exchange Risk Sensitivity The Group is mainly exposed to United States dollars, Euros and New Zealand dollars in its Australian operation and Australian dollars in its foreign operations. The following table details the Group’s sensitivity to a 10% (2009: 10%) increase or decrease in the Australian dollar against these currencies. This analysis includes only unhedged foreign currency denominated monetary items, including loans to foreign operations within the Group, as shown at the carrying value, and details the profit effect from each of these items of a 10% strengthening in the Australian dollar on the reporting date with all other variables held constant. For a weakening of the Australian dollar there would be an equal and opposite impact on profit to that shown below. 30 June 2010 Financial Assets Cash and cash equivalents United States dollars Euro Amounts receivable from related parties United States dollars New Zealand dollars Financial Liabilities Trade payables United States dollars Euro Profit or (loss) impact Currency Asset / (Liability) Breakdown United States dollars Euro New Zealand dollars Profit or (loss) impact 30 June 2009 Financial Assets Cash and cash equivalents United States dollars Euro Trade receivables Australian dollars Amounts receivable from related parties United States dollars New Zealand dollars Financial Liabilities Trade payables United States dollars Foreign currency forward contracts United States dollars Profit or (loss) impact Currency Asset / (Liability) Breakdown United States dollars Euro New Zealand dollars Australian dollars Profit or (loss) impact Consolidated Australian Dollar Carrying Value ($000) Profit / (Loss) AUD +10% ($000) 4,090 4 - - 297 125 3,793 (121) - (409) - 504 (14) 30 13 124 125 13 (14) 124 Consolidated Australian Dollar Carrying Value ($000) Profit / (Loss) AUD +10% ($000) 458 9 69 - - 304 67 87 9 - 69 (46) (1) 7 136 (29) 30 (7) 90 113 (1) (29) 7 90 2010 Annual Report | 73 NOTE 28: FINANCIAL INSTRUMENTS (CONTINUED) Interest Rate Risk The Group is exposed to interest rate risk as entities in the Group borrow and deposit funds at both fixed and variable interest rates. Effective weighted average interest rates on classes of financial liabilities are disclosed under liquidity risk. The following table details the Group’s sensitivity to every 1% increase in interest rates at the reporting date. The analysis is on its variable rate financial instruments shown in the carrying value and details the profit effect of a 1% increase in interest rates on these financial instruments with the change taking place at the beginning of the following financial year and held constant throughout the reporting period. All other variables remain constant. 30 June 2010 Financial Assets Cash and cash equivalents Financial Liabilities Borrowings (all fixed rates instruments) Profit or (loss) impact 30 June 2009 Financial Assets Cash and cash equivalents Financial Liabilities Borrowings (Loss) or profit impact Consolidated Carrying Value ($000) 15,127 - Consolidated Carrying Value ($000) 7,133 7,700 Profit / (Loss) +1% Movement ($000) 151 - 151 Profit / (Loss) +1% Movement ($000) 71 (77) (6) 74 | Gale Pacific Limited ABN 80 082 263 778 NOTE 29: PARENT ENTITY DISCLOSURES Results of the parent entity Profit / (loss) for the year Other comprehensive income Total Financial position of the parent entity at year end Current assets Total assets Current liabilities Total liabilities Net assets Total equity of the parent entity comprising of: Contributed equity Share based payment reserve Hedging reserve Retained earnings Total equity Parent Entity Commitments Finance leases Hire purchase Operating leases Capital expenditure Total NOTE 30: SUBSEQUENT EVENTS Consolidated 2009 / 2010 ($000) 2008 / 2009 ($000) 4,207 511 4,718 23,469 80,980 7,781 6,864 74,116 105,586 743 250 (32,463) 74,116 109 18 2,604 18 2,749 (26,886) (261) (27,147) 19,293 84,265 13,274 15,116 69,149 105,594 486 (261) (36,670) 69,149 178 47 3,754 - 3,979 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. NOTE 31: COMPANY DETAILS The registered office of the Company is: Gale Pacific Limited 145 Woodlands Drive Braeside, Vic, 3195 Australia 2010 Annual Report | 75 ADDITIONAL SECURITIES EXCHANGE INFORMATION NUMBER OF HOLDINGS OF EQUITY SECURITIES AS AT 17 AUGUST 2010 The fully paid issued capital of the Company consisted of 279,691,658 ordinary fully paid shares held by 812 shareholders. Each share entitles the holder to one vote. 8 holders have been granted 13,940,000 performance rights over ordinary shares. Performance rights do not carry a right to vote. DISTRIBUTION OF HOLDERS OF EQUITY SECURITIES Range 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 50,000 50,001 – 100,000 100,001 – 500,000 500,001 – 1,000,000 1,000,000 and over Rounding Total Ordinary Fully Paid Shares Total Holders Units % Issued Capital 118 234 129 189 48 64 8 22 812 42,019 660,485 988,661 4,420,689 3,635,116 16,394,318 6,005,085 247,545,285 279,691,658 0.02 0.24 0.35 1.58 1.30 5.86 2.15 88.51 -0.01 100.00 UNMARKETABLE PARCELS Unmarketable Parcels as at 17 August 2010 Minimum Parcel Size Minimum $500 parcel at $0.19 per unit 2,632 Holders 238 Units 262,641 76 | Gale Pacific Limited ABN 80 082 263 778 SUBSTANTIAL SHAREHOLDERS AS AT 17 AUGUST 2010 Shareholder Thorney Holdings Pty Ltd Investec Wentworth Private Equity Ltd Windhager Handelges Mbh Gale Australia Pty Ltd TWENTY LARGEST HOLDERS OF QUOTED EQUITY SECURITIES Shareholder ANZ Nominees Limited (Cash Income A/C) Windhager Handels Gesmbh IWPE Nominees Pty Ltd (IWPE Fund 2 A/C) IWPE Nominees Pty Ltd (MG Private Equity Fund A/C) Investec Bank (Australia) Limited Gale Australia Pty Ltd MGB Equity Growth Pty Limited (MGB Equity Growth Fund 2 A/C) ANZ Nominees Limited (Income Reinvest Plan A/C) Ruminator Pty Ltd Gernis Holdings Pty Limited Mr Geoffrey Duncan Nash (GDN Super Fund A/C) GFS Securities Pty Ltd (Glenfare Super Fund A/C) UBS Nominees Pty Ltd IWPE Nominees Pty Limited (MZL Opportunity Fund A/C) Venn Milner Superannuation Pty Ltd Atkone Pty Ltd Mr Simon Gautier Hannes (SGH Super Fund A/C) IWPE Nominees Pty Limited (MZL Opportunity Fund A/C) Citicorp Nominees Pty Limited Bell Potter Nominees Ltd (BB Nominees A/C) Top 20 Holders of Ordinary Fully Paid Shares as at 17 August 2010 Total Remaining Holders Balance OTHER INFORMATION No. 79,817,646 74,148,162 41,925,781 13,997,844 No. 79,859,523 41,925,781 28,365,369 18,234,879 14,182,685 13,927,844 10,130,490 8,821,373 6,691,433 3,800,000 3,327,428 2,447,935 2,113,135 2,058,824 2,000,000 1,919,796 1,732,003 1,395,577 1,323,347 1,304,934 245,562,356 34,129,302 % 28.54 26.51 14.99 5.00 % 28.55 14.99 10.14 6.52 5.07 4.98 3.62 3.15 2.39 1.36 1.19 0.88 0.76 0.74 0.72 0.69 0.62 0.50 0.47 0.47 87.80 12.20 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 Securities Exchange. The home exchange is Melbourne. Registers of securities are held by Computershare Investor Services Pty Limited, Yarra Falls, 452 Johnston Street, Abbotsford, 3067, Australia, local call is 1300 850 505, international call is + 613 9415 4000. 2010 Annual Report | 77 Gale Pacific Limited ABN 80 082 263 778 Australia PO Box 892, Braeside, Victoria 3195 Ph: +61 3 9518 3399 Toll Free: 1800 331 521 New Zealand PO Box 15 118 Aranui, Christchurch Ph: + 64 3 373 9500 Toll Free: 0800 555 171 78 | Gale Pacific Limited ABN 80 082 263 778 United States PO Box 951509, Lake Mary, Florida, 32795-1509 Phone +1 407 333 1038 Middle East PO Box 17696 Jebel Ali, Dubai, U.A.E. Ph: +971 4 881 7114 China No.777 Hengshan West Rd, Beilun, Ningbo 315800 Ph: +86 574 5626 8888 

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