GWA INTERNATIONAL LIMITED 2003/04 ANNUAL REPORT Built on strong brands GWA INTERNATIONAL LIMITED 2003/04 ANNUAL REPORT ABN 15 055 964 380 Built on Strong Brands Built on Strong Brands CONTENTS page # COMPANY PROFILE Performance Highlights Strategic Direction and Business Divisions Chairman’s Review Managing Director’s Review of Operations Board of Directors Corporate Governance Directors’ Report Financial Statements Other Statutory Information Shareholder Information 1 2 4 6 12 13 20 25 63 64 GWA International Limited listed on the Australian Stock Exchange in May 1993, and is one of Australia’s largest designers, manufacturers, importers and distributors of household consumer products. The company has more than 2,500 employees with manufacturing facilities throughout Australia and overseas. GWA International Limited currently comprises six business divisions, Caroma, Dorf Clark, Dux, Gainsborough, Rover and Sebel, all of which are well-established businesses with strong brand names and market positions. Caroma is Australia’s foremost designer, manufacturer, importer and distributor of domestic and commercial sanitaryware and bathroom products. Caroma is at the forefront of product innovation and is the market leader in reduced flush water efficient sanitaryware. Dorf Clark is Australia’s principal designer, manufacturer, importer and distributor of tapware and associated accessories, stainless steel sinks and laundry tubs for both domestic and commercial applications. Dux is a major Australian designer, manufacturer and distributor of a range of gas and electric mains pressure hot water storage units for domestic applications. Dux also imports and distributes domestic and commercial instantaneous hot water systems and solar heating products. Gainsborough is a leading Australian designer, manufacturer, importer and distributor of a comprehensive range of domestic and commercial door hardware and fittings, including security products. Corporate Directory Head Office Locations inside back cover inside back cover Rover is one of Australia’s leading designers, manufacturers and distributors of domestic and commercial lawn and garden care equipment. Sebel is at the forefront of Australian design, manufacture and distribution of quality commercial furniture and seating. GWA International Limited has grown significantly since listing as a result of the strong operating performance of the businesses and successful acquisitions. The company remains committed to growth through maximising business performance and the pursuit of further appropriate domestic acquisition opportunities. Performance Highlights Performance Highlights Earnings per share increased by 12.6% to 22.3 cents Fully franked dividend of 20.5 cents (including 2.5 cents special) Net operating profit after tax increased by 12.8% to $62.05 million Operating revenue increased by 1.6% to $677.3 million FIVE YEAR FINANCIAL SUMMARY Operating revenue 607,897 570,072 615,843 666,525 677,393 Earnings before depreciation, interest and tax (%) 109,448 18.0 103,137 18.1 108,527 17.6 118,978 17.9 130,025 19.2 1999/00 $’000 2000/01 $’000 2001/02 $’000 2002/03 $’000 2003/04 $’000 Depreciation and amortisation Earnings before interest and tax (%) Interest Operating profit before tax (%) Tax expense (%) Operating profit after tax Net cash flow provided from operating activities before debt cost and tax Capital expenditure Research and development Net debt Shareholders’ equity Other Ratios and Statistics Return on shareholders’ equity Interest cover Net debt/equity Earnings per share Ordinary dividend per share Special dividend per share Total dividend per share Franking Ordinary dividend payout ratio Share price (30 June) Dividend yield 26,450 82,998 13.7 12,042 70,956 11.7 29,555 41.7 41,401 26,924 76,213 13.4 13,305 62,908 11.0 21,457 34.1 41,451 28,812 79,715 12.9 13,070 66,645 10.8 19,995 30.0 46,650 28,034 90,944 13.6 12,368 78,576 11.8 23,569 30.0 55,007 30,549 99,476 14.7 11,075 88,401 13.1 26,348 29.8 62,053 98,569 78,719 116,807 128,200 162,104 30,144 5,558 201,571 24,550 5,228 237,759 32,976 5,064 229,435 24,392 5,770 207,678 20,579 5,485 159,451 387,473 386,058 387,849 413,787 428,178 % times % cents cents cents cents % % $ % 10.7 6.9 52.0 15.1 13.0 5.0 18.0 100 86.1 2.20 8.2 10.7 5.7 61.6 15.0 13.5 2.5 16.0 100 90.0 2.35 6.8 12.0 6.1 59.2 16.8 14.5 2.5 17.0 100 86.3 2.35 7.2 13.3 7.4 50.2 19.8 15.5 2.5 18.0 100 78.3 2.70 6.7 14.5 9.0 37.2 22.3 18.0 2.5 20.5 100 80.7 2.95 6.9 P E R F O R M A N C E H I G H L I G H T S 1 Built on strong brands Strategic Direction and Strategic Direction and Business Divisions Business Divisions GWA International Limited is committed to growing shareholder value over time. This objective will be achieved by continuing to invest in our people, products and technology to maximise the company’s performance and to create value building opportunities for our businesses. Business Divisions Main Products and Services Brand Names Operating Locations Vitreous china suites, urinals, bidets and basins. Plastic cisterns, Caroma, Fowler, Australia, New basins, bathroom accessories and fittings. Acrylic and pressed Stylus, Wisa, Zealand, North steel spas, baths and shower trays Starion America, Europe Tapware, stainless steel sinks and laundry tubs Clark, Myttons, Australia, overseas Radiant, Dorf, distributors Irwell, Epure, Caroma Taps Dux is an Australian designer, manufacturer and distributor of Dux a range of gas and electric mains pressure hot water storage units ranging in size from 25 litres to 400 litres. The range also includes temperature controlled gas instantaneous hot water systems and solar heating products Australia, overseas distributors A comprehensive range of door hardware comprising door Gainsborough, Australia, New handles (knobs and levers), door locks, door closers, hinges and Trilock, Zealand, export other metal door accessories Homecraft, markets In-Style Sebel produces a broad range of commercial furniture suited Sebel to its target markets. The range includes dining seating and tables, outdoor furniture, mass seating for stadia and public areas, casual corporate markets, and tables, desks and chairs for the education market Range of walk-behind and ride-on mower equipment, grass Rover trimmers, garden chip and shred products and spare parts Australia, New Zealand, Singapore, Hong Kong, United Kingdom Australia, New Zealand, overseas distributors 2 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 The company’s priority is to acquire another major domestic business division, and to also pursue bolt-on acquisition opportunities that add value to our existing businesses and support our expansion into new markets. Major Markets Strategic Direction New dwellings, renovation and commercial markets in Australia Maintain leadership in the domestic market through design, and selected markets internationally service and innovation, and develop an international business through brand development Domestic commercial and renovation construction markets, and Dorf Clark’s primary focus is to expand its product range and export markets primarily in New Zealand and the United States improve operational effectiveness and productivity Dux’s primary market is the replacement of domestic hot water Dux will continue to focus on improving business performance heaters, while its secondary market is new home construction. by strengthening key customer relationships and improving plant performance through investment in manufacturing technologies to reduce costs Domestic home builders, DIY and building projects, commercial Gainsborough’s strategic direction encompasses the development buildings and multi-dwelling developments of additional door hardware products to suit domestic buildings, continued development of commercial markets and development of export growth Entertainment, hospitality, healthcare, public seating, sports As well as its strong emphasis on new product development, stadia, corporate and educational markets. Sells direct to builders, Sebel will continue to pursue traditional markets using its strong developers, clubs and hotels brand name and good customer service to drive sales through increased market share. Current export markets will also be expanded, with the division pursuing opportunities in education and stadia markets overseas Domestic, commercial, lawn care and garden products and Targeting market growth segments in Australia and overseas equipment, marketed in five continents S T R A T E G I C D I R E C T I O N & B U S I N E S S D I V I S I O N S 3 Built on strong brands Chairman’s Chairman’s Review Review 2003/04 Year Result I am pleased to report that the 2003/04 year net profit after tax for GWA International Limited was another record for the company, following on from the previous year’s record performance. In favourable domestic market conditions for most of the company’s businesses, sales revenue rose 1.3% to $667.9 million, and the company achieved net profit after tax of $62.05 million, a 12.8% increase from the previous year. I congratulate the company’s management team and staff on this outstanding financial performance. The result inspires confidence in the underlying strength of the company’s businesses and lays a solid platform for further growth in shareholder value. The 2003/04 year was the first full financial year under the stewardship of the new Managing Director, Mr Peter Crowley, who succeeded the former Managing Director, Mr Geoff McGrath on 6 May 2003. As demonstrated by the record result, Mr Crowley has continued to grow the profitability of the company’s businesses through improved business performance. In July 2004, the Board appointed the very experienced Mr Geoff McGrath as a director. In the Board’s view, the decision to appoint Mr McGrath as a director is in the best interests of the company’s shareholders. Mr McGrath brings to the Board an outstanding knowledge of the company’s businesses and will immediately add value to the company. I welcome Mr McGrath to the Board. Dividends Last year, I flagged to shareholders that the 2.5 cents special dividend would be Barry Thornton Chairman “I am pleased to report that the 2003/04 year net profit after tax was another record for the company – sales revenue rose 1.3% to $667.9 million, and the company achieved net profit after tax of $62.05 million, a 12.8% increase from the previous year.” incorporated into the ordinary dividend in the coming year. This year, an interim fully franked dividend of 10.0 cents per share was paid on 1 April 2004 to put this into effect. Our excellent trading results and cash flow have increased both our cash assets and franking credits at year end. As the amount of cash and the balance of franking credits are in excess of the company’s requirements, the directors have decided to pay a further special dividend of 2.5 cents per share fully franked, with the final ordinary dividend of 8.0 cents per share payable on 1 October 2004. This brings the total dividend per share for the 2003/04 year to 20.5 cents per share fully franked, representing a 13.9% increase on the previous year’s total dividend paid (including the special dividend). Directors will give consideration to a further special dividend of 2.5 cents per share fully franked, to be paid with the next interim dividend payable in April 2005. The Board’s aim is to continue to grow total dividends in line with company profits, and to distribute to shareholders cash and franking credits excess to the company’s needs. We recognise that dividends are very important to our shareholders. We are cognisant however, that our shareholders expect the company to maintain a strong financial position, and to that end we are delighted that our track record of paying increased dividends has been achieved against a background of growing financial strength. We expect that the company’s level of domestic tax payments and franking credit balance will ensure that future dividends will continue to be fully franked. The Dividend Reinvestment Plan and Share Purchase Plan remain suspended. However, the Board will consider the re-opening of these Plans when a major acquisition is undertaken. Corporate Governance Since listing in May 1993, the company has been successful in growing shareholder value through improved business performance and acquisitions. Another critical factor in the success of the company has been the sound corporate governance practices which have been in place since listing. This has ensured that the company conducts its business with the utmost integrity in every aspect of its operations. The corporate governance practices were implemented by the Board, who are long serving members (excluding Mr Crowley, who was appointed on 6 May 2003) with complementary skills and experience, and have an in-depth knowledge of the company’s businesses. The Board has developed succession plans for the future retirement of individual directors, whilst recognising the importance of maintaining an efficient and effective Board with the appropriate balance of skills and experience. The Board supports the Principles of Good Corporate Governance and Best Practice 4 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 Recommendations of the ASX Corporate Governance Council. I confirm to shareholders that the corporate governance practices of the company are in accordance with the best practice recommendations, and that there are no departures to be disclosed to shareholders. The Board is committed to the continual review and updating of the company’s corporate governance practices to ensure best practice is maintained. For more detailed information on the company’s corporate governance practices, I refer you to our Corporate Governance Statement. Directors’ Remuneration At last year’s Annual General Meeting, shareholders approved the termination of the Directors’ Retirement Scheme for the non-executive directors, which is in accordance with the best practice recommendations of the ASX Corporate Governance Council. As the Scheme has been terminated, the Board will put to shareholders at the next Annual General Meeting that the accrued benefits under the former Scheme of in total $1,214,700 be paid out to the directors on their request. The Board will also put to shareholders at the next Annual General Meeting that the upper limit of directors’ fees be increased by $250,000 to $1 million (excluding statutory superannuation). This is necessary for possible new director appointments in future years in accordance with the succession plans of the Board, including the appointment of Mr Geoff McGrath to the Board. For further information on these proposed resolutions, I refer you to the Notice of Annual General Meeting which you will have received with the Annual Report. Audit Tender Following on from my announcement at last year’s Annual General Meeting, the Board conducted an audit tender during the year. After a comprehensive audit tender process, the Board selected KPMG as the new external auditor, commencing for the financial year beginning 1 July 2004, subject to shareholder approval at the next Annual General Meeting. I would like to thank the company’s current long serving external auditor, Ernst & Young, for their services and support over the last 10 years. Strategic Direction The outstanding financial performance of the company’s businesses, as demonstrated by the 2003/04 year record result, has ensured that a solid platform has been laid for further growth in shareholder value. Growth will continue to be achieved through improved business performance and through appropriate domestic acquisitions. Consistent with the company’s mission statement, the company continues to invest in its people, products and technology to improve business performance and create value building opportunities for its businesses. During the year, the company has continued the search for appropriate domestic acquisition opportunities, but none to date have met the company’s acquisition criteria, and we make no apologies for adhering to the strict financial discipline which has delivered so handsomely for shareholders. The Board re-affirms its commitment of acquiring another major domestic business division and to also pursue bolt-on acquisition opportunities to add value to existing businesses and to pursue growth in new markets. The company has substantial cash flows from its businesses, growing cash assets and access to significant additional borrowings to fund new acquisition opportunities as they arise. Future Your Board is committed to growing shareholder value over time. The company will continue to focus on generating growth through maximising the performance and profitability of our current businesses, and through the pursuit of appropriate domestic acquisition opportunities that fit within the company’s strategic plans. B Thornton Chairman C H A I R M A N ’ S R E V I E W 5 Built on strong brands Peter Crowley Managing Director Managing Director’s Managing Director’s Review of Operations Review of Operations The primary objective of GWA International Limited is to create and sustain shareholder wealth in the long term through continuing our investment in, and sound management of the Group’s business units. Each of these businesses play significant roles in their respective markets and supply products and services which meet clearly defined customer needs. The Group makes a significant contribution to the Australian community through the supply of high quality, innovative products with many of these products offering water saving, energy conservation and other tangible benefits. The Group currently employs approximately 2,600 staff, in Australia and overseas, and remitted Australian company tax payments of $34.6 million in the 2003/04 year. GWA International Limited, since floating in 1993, has built a diversified portfolio of strong business units, which operate principally in Australia. The major business segment is Building Fixtures and Fittings where Caroma, Dorf Clark, Gainsborough and Dux have long established and strong market positions. This segment contributed a further profit increase in the 2003/04 year benefiting from the high level of domestic construction and renovations and the growing general economy. We believe that demand from domestic construction reached the peak of the current cycle in the 2003/04 year. The Building Fixtures and Fittings segment contributed 82.7% of the Group’s total sales revenue in the 2003/04 year. The Group’s other business segments, Commercial Furniture and Domestic and Ride-on mowers, contributed 10.2% and 7.1% of the Group sales revenue. “GWA International Limited makes a significant contribution to the Australian community through the supply of high quality, innovative products with many of these products offering water saving, energy conservation and other tangible benefits.” 2003/04 CASH PAYMENTS (EXCLUDING GST) 61% Payments to suppliers 1% Interest payments Employment 23% costs Income tax 5% Dividends 7% Capital 3% expenditure PROFIT AFTER TAX $ million 70 60 50 40 30 20 10 0 1999/00 2000/01 2001/02 2002/03 2003/04 Record Profit in 2003/04 Operating Cash Flow For the 2003/04 year, the company achieved a Profit after Tax of $62.05 million, an increase of 12.8% over the prior year. This excellent result is the third consecutive record profit for GWA International Limited. Cash flow management is a key driver of shareholder wealth and is a major area of the Group’s focus. The 2003/04 profit result, together with improved working capital management across the Group’s business units, 6 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 produced an Operating Cash Flow of $114.7 million a 25.4% increase on the previous year. Largely as a result of this focus on cash flow management our cash assets increased to $138.4 million at year end. The Operating Cash Flow is after the payment of $37.5 million in income taxes. Of this amount $34.6 million was Australian income tax and, consequently, the balance of franking credits has increased during the 2003/04 year to $33.2 million ensuring that the company can maintain its strong track record of paying fully franked dividends. Included in these Australian tax payments were $21 million of company PAYG instalments for the 2003/04 year. Earnings Per Share Earnings per share for the 2003/04 year was 22.3 cents per share, an increase of 12.6% over the prior year’s 19.8 cents per share. Ordinary dividends paid and payable to shareholders from these earnings will be 18 cents per share fully franked. This compares with the previous year’s ordinary dividend of 15.5 cents per share. During the previous year the company also paid a 2.5 cent per share special dividend and a further special dividend of 2.5 cents per share will be paid with the October 2004 final dividend bringing the total dividend paid out of 2003/04 year profits to 20.5 cents per share fully franked. OPERATING CASH FLOW AND CASH ASSETS $ million 150 125 100 75 50 25 0 1999/00 2000/01 2001/02 2002/03 2003/04 Operating cash flow Cash assets EARNINGS PER SHARE Cents per share Insert Graph 3 Operating Cash Flow and Cash Assets Insert Graph 4 - EPS Insert Graph 5 – Dividends 2001/02 2002/03 2003/04 25 20 15 10 5 0 DIVIDENDS Cents per share 25 20 15 10 5 0 2001/02 2002/03 2003/04 Ordinary dividend Special dividend M A N A G I N G D I R E C T O R ’ S R E V I E W O F O P E R A T I O N S 7 Built on strong brands Managing Director’s Managing Director’s Review of Operations CONTINUED Review of Operations CONTINUED Operating Performance The Group’s largest activity segment, Building Fixtures and Fittings, realised the opportunities of peak demand from the domestic construction market to achieve a further increase in segment profit to $102.2 million an increase of 6.7% over the prior year. The segment sales revenue and profit for each of the Group’s business segments are set out in the table right: The Group’s Building Fixtures and Fittings segment is comprised of Caroma sanitaryware, Dorf Clark taps and sinks, Gainsborough door furniture and Dux water heaters. Each business has a strong market position with Caroma and Dorf Clark being market leaders. Each division’s principal markets are Australia and New Zealand. The businesses have an expanding group of overseas distributors in Asia, North America and Europe. In the 2003/04 year, the Australian construction market reached the peak of the current domestic construction cycle with the Group’s businesses experiencing strong domestic demand from the dwelling, non-dwelling, renovation and replacement sectors. The continuing growth in the general economy underpinned this high level of construction activity during the year and in particular the ongoing growth in renovation and replacement spending. Caroma was the major contributor of profit growth in the Building Fixtures and Fittings segment on sales revenue above the prior year. The excellent profit result was generated from improved performance across the operations of this business coupled with the sustained high domestic demand. Caroma’s export sales to Asia and North America were adversely impacted by the exchange rate which was volatile during the year. Caroma generated an excellent operating cash flow boosted by a reduction in stocks. “The Group’s largest activity segment, Building Fixtures and Fittings, increased their segment profit to $102.2 million an increase of 6.7% over the prior year.” SEGMENT SALES REVENUE AND PROFIT Business Segment Segment Results Segment Sales 2002/03 $’000 2003/04 $’000 2002/03 $’000 2003/04 $’000 Building fixtures and fittings 95,801 102,176 546,614 552,504 Commercial furniture 6,246 6,832 70,146 68,148 Other (23,471) (20,607) 42,829 47,274 Total business segments 78,576 88,401 659,589 667,926 Income tax expense (23,569) (26,348) Profit after tax 55,007 62,053 Caroma’s European business, Wisa, contributed an improved profit also on a marginal increase in sales revenue. Dorf Clark performed below expectations, particularly in the first half, with both sales and profit below the level of the prior year. Business performance, under new management, has progressively improved in the second half resulting in a higher operating cash flow assisted by a reduction in stock. The Gainsborough door furniture business recorded an increase in sales and contributed a sound profit result in line with the prior year. Additional stock provisioning during the year reduced the profit result. The USA export market contribution was reduced by the higher average exchange rate. The Dux water heaters business produced a good underlying sales and profit performance, however, the final profit result was reduced by the $2.3 million writedown of plant. Overall in the 2003/04 year the Building Fixtures and Fittings segment contributed growth in profitability through sound operating performance, an excellent operating cash flow and an improved return on segment net assets. The Commercial Furniture business, Sebel, is the Group’s largest exporter, and the higher Australian dollar exchange rate with the US dollar adversely impacted sales and margins in its North American and Asian markets. The domestic business continues to improve performance and sales of the Postura seat have grown further in the United Kingdom and other European markets. Overall Sebel contributed an increased profit on sales 3% below the prior year, a pleasing result in a difficult year for the business. 8 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 In 2003/04, Dux released the award winning SunPro solar gas continuous system heater. The SunPro product is a highly efficient water heater combining state of the art solar panel technology boosted by a continuous flow natural gas heater. This product has won the BPN/Environ Design Build environmentally sustainable design award for 2004. Caroma’s Smartflush® range of 4A rated toilet suites will be released in the new year. These new toilet suites utilise the technology and precision of matched performance which allows Caroma Smartflush® to dramatically reduce in- house water consumption. The new 4A rated toilets will save 38,000 litres of water per annum in a normal household. Dorf Clark have developed a new range of water efficient tapware (WET) that studies show can save up to 25% on household water consumption. These taps also introduce new styling including the Motif range which provides flexible and versatile options to complement the modern bathroom. The launch of these products coincides with water efficiency regulations governing taps introduced by the Victorian Government with effect from 1 July 2004. The Group’s businesses have incurred significant research, development and design costs with respect to these new products. The tooling and other plant related costs have been capitalised and the research and development costs have been expensed as incurred. The Group will commence a replacement program for its range of operating business systems in the 2004/05 year. and pricing can rapidly impact the type and mix of product sold in a market, creating both risk and opportunity. Caroma and Dorf Clark are well placed to realise market opportunities with the release of new water efficient products in the 2004/05 year. In summary, the 2003/04 year has been excellent for the Group with strong operating performance realising the opportunities of the buoyant domestic market. A third successive record profit and outstanding operating cash flow gives us confidence going forward. Investments in Future Performance The Group’s businesses are continuing to invest in new products and technologies, our brands, markets, business systems, our people and plant and equipment. Expenditures on new property, plant and equipment are shown in the table below. The Caroma, Dorf and Dux businesses are continuing to develop new water and energy efficient technologies with a range of new products released in 2003/04 and scheduled for release in 2004/05. PROPERTY, PLANT AND EQUIPMENT EXPENDITURE Payments for property, plant and equipment 32,976 24,392 20,579 2001/02 $’000 2002/03 $’000 2003/04 $’000 M A N A G I N G D I R E C T O R ’ S R E V I E W O F O P E R A T I O N S 9 Rover Mowers enjoyed strong mid to late season demand from its domestic market with export sales below the high level of the prior year. Profit increased significantly on a 10% increase in overall sales. The higher exchange rate to the US dollar contributed a net benefit to Rover for the year. The trading performance of the Group’s businesses in the 2003/04 year is very pleasing and our continuing focus on new products and operating performance can yield further improvement. Stock provisioning during the year of $6.5 million, whilst less than the prior year as expected, reflects supply control issues in addition to the increasing business risks of shorter product life cycles and broader product ranges. Improved stocking and supply outcomes are a continuing priority for operating management. The Group’s businesses continue to pursue new and improved products which conserve water and energy, two critical resources for Australia and with increasing importance in the Group’s international markets. New legislation and regulation with respect to energy and water usage “Caroma and Dorf Clark are well placed to realise market opportunities with the release of new water efficient products in the 2004/05 year.” Built on strong brands Managing Director’s Managing Director’s Review of Operations CONTINUED Review of Operations CONTINUED This diverse range of systems is the outcome of the Group’s business acquisitions over time and a number of these systems are not sustainable and are increasingly expensive to maintain in the short term. The Group has negotiated an agreement with Intentia for the progressive replacement of current systems with the Movex Enterprise Resource Planning system across the Group, commencing with the Dux business. This move will provide sustainable business systems and establish a framework for systems development into the future. We expect that all businesses will be converted to Movex within five years. This stepped roll out of the Movex system will mitigate any significant systems risk for the company. Outlook for 2004/05 Year The general industry view is that construction of new dwellings is likely to decline in the 2004/05 year reducing demand for the Group’s products with potentially the greater impact in the second half of the year. This fall in activity in the new dwelling sector is expected to be partially offset by ongoing growth in renovations which is a key source of demand for the company’s products. Against this background domestic demand for the products of the Group’s Building Fixtures and Fittings segment, may decline by 4% to 5% in the 2004/05 year. Further volatility in exchange rates would add risk to the trading results from the Group’s overseas and export operations, including Sebel, and it should be noted that seasonal conditions are the principal factor in Rover’s year to year profit contribution. Whilst domestic demand will decline in the 2004/05 year, this year’s performance demonstrates that the Group’s businesses have opportunities to improve performance and reduce the impact of the lower demand on results. Subject to domestic demand declining as forecast, and assuming a continuing strong general economy, we expect that profit after tax for the 2004/05 year will be near the 2003/04 performance on lower sales revenue. Longer Term Outlook GWA International’s portfolio of strong businesses provide a diversified earnings base from well established market positions. Caroma and Dorf Clark are domestic market leaders and operate across all product sectors. Gainsborough and Dux have significant market shares and are number two in size in their industries. The longer term outlook for these four businesses, which constitute the Group’s Building Fixtures and Fittings segment, remains strong within the Australian market. Population growth coupled with continuing trends to lower family sizes and larger houses are expected to further drive the construction of new dwellings over time. Housing renovations are also expected to continue to grow at a rate above the growth of the general economy. In last year’s report, I addressed the principal factors in renovations growth and these factors are expected to continue to drive activity in this sector. Our businesses are also well placed to build on their overseas and export sales subject to cost competitive sourcing. Sustained movements in Australian dollar exchange rates impact on the cost competitiveness of domestic manufactured goods both in overseas markets and in the domestic market which is open to imports and is highly competitive. The Group’s businesses are significant domestic manufacturers and are also major importers of components and 10 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 finished goods and will continue to develop strategic sourcing options to ensure product cost competitiveness over time. Over the longer term GWA International will continue to focus on innovative new products, market leading brands and low cost supply. This, in conjunction with underlying growth in domestic construction and overseas sales, is expected to provide ongoing opportunities for growth in our shareholders’ wealth. Financial Condition The company’s shares on issue increased to 278.3 million with the allotment of 500,000 employee shares during the year and Shareholder Funds increased over the year to $428.2 million, inclusive of this employee share issue. The company has not issued share options and the Dividend Reinvestment and Share Purchase Plans were suspended in February 2000. The Operating Cash flow of the Group’s businesses is expected to continue to comfortably exceed the operational funding requirements of the company. Debt funding and other facilities are provided to the company by major banks under a Master Financing Agreement. At balance date, bank loans were made up of: • Australian Currency $285.0 million • Euro 7.3 million The loans and other facilities are extended annually under 2 year and 3 year evergreen arrangements. The Euro loan is a currency hedge with respect to the Group’s investment in the Wisa business. The company has entered into interest rate swaps to manage the interest rate risk on Australian currency borrowings as detailed in Note 33(a) (iv) as set out in the table below. The future commitments for lease payments are set out in Note 24. The Group’s businesses lease factory premises, distribution warehouses and sales offices. GWA International and specific controlled entities, incorporating the Group’s Australian operating businesses, are parties to a Deed of Cross Guarantee under which the parties to the Deed guarantee the debts of each other. The company has not given any securities over its assets. The Group’s businesses undertake hedges with respect to material foreign currency transactions and the position at balance date is set out in Note 33 (a) (iv). The hedges are with respect to imported components and products for resale. The company’s cash flow from operating activities for the 2003/04 year of $114.7 million has funded the Group’s capital expenditures and dividends for the year, and cash at the end of the year has increased by $49.4 million. The Group’s cash is held predominantly in Australian dollars and is liquid with funds placed on deposit for periods up to 90 days. with net debt to equity ratio of 37% and interest cover, as defined in the Master Financing Agreement of 10 times. An indicative debt rating is near BBB, however the company has not undertaken a formal debt rating process. All of the Group’s debt funding and facilities are negotiated and reported centrally. Individual businesses operate their currency hedging and other requirements, including bank guarantees under these central facilities. Sources of further equity include future retained earnings and include reinstatement of the Dividend Reinvestment and Share Purchase Plans. These Plans have been well supported by shareholders in the past and the Group expects a similar level of support should the Plans be reinstated. With respect to the Employee Share Plan, at balance date, there were 2.785 million shares on issue under this Plan, with the loan of $3.852 million. Dividends and repayments for the year have been $1.8 million. Exchange rates with the US dollar and Euro have fluctuated during the year as set out in the table below. GWA International is well placed to increase its borrowings to fund new acquisition opportunities as they arise, The rapid appreciation of A$ to US$ exchange rates in 2003/04 reduced the cost competitiveness of the Group’s AUSTRALIAN CURRENCY BORROWINGS Amount $200 million $100 million $50 million Period To October 2004 October 2004 to March 2005 March 2005 to May 2006 EXCHANGE RATES Rate 4.98% 4.84% 4.63% domestic manufacturing operations. Export earnings from the Group’s markets in Asia and North America were reduced, while our competitiveness in the domestic market in the face of US$ denominated imports was also affected. Cost competitiveness relative to manufactured products subject to the Euro improved marginally during the 2003/04 year. Summary GWA International Limited performed strongly during the 2003/04 financial year. This year’s result of $62.05 million is the third consecutive record profit and has underpinned the increase in ordinary dividend to 18 cents per share fully franked. Our focus on improving business performance and working capital management will ensure the company remains well positioned to pursue growth opportunities as and when they occur while maintaining a strong dividend yield for our shareholders. Whilst we expect a slowing in domestic demand in 2004/05, we are confident in the underlying strength of our domestic businesses and our longer term international opportunities. The company is in sound financial shape and we are confident that further profit growth is achievable over time. In closing, I recommit management to our primary objective of creating sustainable shareholder wealth while ensuring our various businesses continue to add value to our customers and the broader community through high quality innovative products and a talented and committed workforce. Jun 03 Sep 03 Dec 03 Mar 04 Jun 04 USA Euro 0.6680 0.6798 0.7375 0.7556 0.6889 0.5902 0.5985 0.5851 0.6270 0.5702 P C Crowley Managing Director M A N A G I N G D I R E C T O R ’ S R E V I E W O F O P E R A T I O N S 11 Built on strong brands Board of Directors Board of Directors B Thornton KSJ FCA FAICD FAIM FCIS Chairman – Elected to the Board 1992 P C Crowley BA BEcon FAICD Managing Director – Elected to the Board 2003 M D E Kriewaldt BA LLB FAICD Non-Executive Director – Elected to the Board 1992 Expertise: Chartered accountant, corporate and financial management Expertise: Broad manufacturing experience in Australia and overseas Expertise: Lawyer and director of a number of public and other corporations Special Responsibilities: Chairman of the Board, Chairman of Nomination Committee and member of Audit Committee Mr Thornton joined GWA Limited in 1974 as Finance Director and was appointed Chief Executive in 1981. In 1986, he was appointed Executive Chairman and, following the privatisation of GWA Limited in 1989 and the public float of the Manufacturing Division as GWA International Limited in 1993, he became Non-Executive Chairman. He is also Chairman of the Brisbane Airport Corporation Limited, a director of Stockland Trust Group and a member of the Brisbane Advisory Board of the Salvation Army. Previous appointments include: Director – Suncorp Metway Limited, Queensland Cement & Lime Limited, Power Brewing Limited, and Ports Corporation of Queensland Commissioner – Queensland Commission of Audit J J Kennedy AO CBE DUniv (QUT) FCA FCPA Deputy Chairman – Elected to the Board 1992 Expertise: Chairman and director of a number of public and statutory corporations Special Responsibilities: Deputy Chairman of the Board, Chairman of Audit Committee and member of Nomination Committee Mr Kennedy is a director of Qantas Airways Limited, Suncorp Metway Limited and Australian Stock Exchange Limited. Special Responsibilities: Chairman of Remuneration Committee, member of Audit Committee and member of Nomination Committee Mr Kriewaldt provides advice to the law firm Allens Arthur Robinson and to Aon, insurance brokers. He formerly practised in a wide range of areas including banking and finance, insurance, insolvency and receivership and intellectual property. Mr Kriewaldt is Chairman of Opera Queensland Limited and a director of Campbell Brothers Limited, Oil Search Limited, Suncorp Metway Limited and Peptech Limited. G J McGrath MIIE Non-Executive Director – Appointed to the Board 6 July 2004 Expertise: Manufacturing and general management Special Responsibilities: Appointed member of the Remuneration Committee on 3 August 2004 2003: Mr McGrath retired as Managing Director of GWA International Limited on 6 May 2003, and continued his involvement with the Group as an adviser to the Board; 1992: Mr McGrath was appointed Managing Director of GWA International Limited; 1982: After the takeover of UPL Group by GWA Limited, Mr McGrath was appointed Managing Director of the GWA Manufacturing Group companies comprising Caroma, Sebel and Rover Mowers; 1980: General Manager, Caroma Industries; 1978: Group Manager Fibreboard Division; 1960: Joined United Packages Limited. Mr McGrath is also Chairman of Campbell Brothers Limited and a director of Fletcher Building Limited. 2001: Managing Director and Chief Executive, Austrim Nylex Limited, a diversified industrial company; 1999: Executive Director, Cement and Lime, The Rugby Group PLC, a UK Public Company with extensive international cement operations. During this period, also served as a director of Adelaide Brighton Limited; 1997: Chief Executive, Cockburn Cement Limited (a subsidiary of The Rugby Group PLC), Western Australia’s largest cement producer and Australia’s largest lime producer; 1982: Various roles with Queensland Cement Limited and its parent company Holderbank culminating in General Management responsibilities within Australia and South-East Asia. D R Barry FAIM Non-Executive Director – Elected to the Board 1992 Expertise: Importation, distribution and retailing Special Responsibilities: Member of the Remuneration Committee Mr Barry joined GWA Limited as director in 1979 and for much of his 33 year involvement with the Group was responsible for importation, wholesaling and retailing. In 1992, Mr Barry was appointed a Non-Executive Director of GWA International Limited. R M Anderson Non-Executive Director – Elected to the Board 1992 Expertise: Property investment and transport logistics Mr Anderson has more than 49 years’ experience with the Group, having joined the organisation in 1955. His expertise covers management, transport logistics, investment and property matters. Mr Anderson was appointed a director of GWA Limited in 1979, and joined the Board of GWA International Limited as Non-Executive Director in 1992. 12 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 Corporate Governance Corporate Governance Statement FOR THE YEAR ENDED 30 JUNE 2004 Statement FOR THE YEAR ENDED 30 JUNE 2004 The Board of Directors is responsible for the corporate governance of GWA International Limited which is an essential part of the role of the Board. Corporate governance is about the Board undertaking an active monitoring of the company’s activities and ensuring that integrity prevails within the company. The governance principles adopted by the Board are designed to achieve this outcome. The corporate governance practices of the company have been in place since listing and are constantly reassessed in the light of experience (within the company and in other organisations), contemporary views and best practice guidelines on good corporate governance practices. The Board adopts practices it considers to be superior and which will lead to better outcomes for the company’s shareholders, whilst endeavouring to avoid those which are based on unsound principles or represent temporary fads. The Board supports the Principles of Good Corporate Governance and Best Practice Recommendations (“the Recommendations”) released by the ASX Corporate Governance Council on 31 March 2003. The Board confirms that the current corporate governance practices of the company are in accordance with the Recommendations, and that there are no departures from the Recommendations to be disclosed to shareholders. In addition, as part of its on-going review and monitoring role, the Board has implemented a number of enhancements to the corporate governance practices of the company, particularly in the area of Risk Management and Internal Controls. These are outlined in more detail below – refer Risk Management and Internal Controls. For further information on the corporate governance practices of the company, please refer to our corporate website at www.gwail.com.au in the Corporate Governance section. 1. Role of the Board The Board is responsible for the long-term growth and profitability of the company. The Board charts the strategic direction of the company and monitors Executive and Senior Management performance on behalf of shareholders. To achieve this, the Board is engaged in the following activities: • Final approval of corporate strategies and performance objectives developed by Senior Management, with Board input • Approval and monitoring of financial and other reporting • Monitoring of Executive and Senior Management performance, including the implementation of corporate strategies, and ensuring appropriate resources are available • Appointment and monitoring of the performance of the Managing Director • Liaison with the company auditor through the Audit Committee • Ensuring that the company has appropriate systems of risk management and internal control, reporting mechanisms and delegation authority limits in place • Approval and monitoring of the progress of major capital expenditure, capital management, and acquisitions and divestments • Any other matters required to be dealt with by the Board from time to time depending upon circumstances of the company • Other matters referred to in the Board Committee charters The Board operates under a charter that details the functions and responsibilities of the Board. The charter is regularly reviewed to ensure it remains consistent with the Board’s objectives and responsibilities and is in accordance with the best practice recommendations of the ASX Corporate Governance Council. The Board charter has been posted on the company’s website in the Corporate Governance section. 2. Board Meetings The Board meets at least 10 times each year for scheduled meetings and may, on other occasions, meet to deal with specific matters that require attention between scheduled meetings. Together with the Board Committees, the directors use the Board meetings to challenge and fully understand the business and operational issues. The General Managers of the business divisions are required to regularly attend and present at the Board meetings on corporate strategies and performance. The Board regularly visits the company’s business operations to enhance their understanding of operations and strategies. During the current year, the directors held Board Meetings at the Wetherill Park and Norwood factories of the Caroma Division, followed by management presentations and factory tours. C O R P O R A T E G O V E R N A N C E S T A T E M E N T 13 Built on strong brands Corporate Governance Corporate Governance Statement CONTINUED Statement CONTINUED 3. Composition of the 4. Independence of the Board Board The Board presently comprises 7 directors, 6 of whom, including the Chairman and Deputy Chairman, are non-executive directors and 1, the Managing Director, is an executive director. Profiles of the directors are set out on page 12 of the Annual Report. The profiles outline the skills, experience and expertise of each Board member. The composition of the Board is determined by the Nomination Committee and, where appropriate, external advice is sought. The following principles and guidelines are adhered to: • The Board should maintain a majority of non-executive directors • The Board should maintain a majority of independent directors • The Chairperson should be an independent non-executive director • The role of Chairperson and Managing Director should not be exercised by the same individual • Non-executive directors should not be involved in management of the day to day operations of the company • All Board members should have financial expertise and relevant experience in the industries in which the company operates The Board has developed a comprehensive induction program for new directors and key executives. The Board views the induction program as critical in introducing new directors and key executives to the company and the markets in which it operates. The induction program is regularly reviewed to ensure its effectiveness. The Board considers that directors must be independent from management and free of any business or other relationship that could interfere, or reasonably be perceived to interfere, with the exercise of their unfettered and independent judgment. In applying the definition of independence as outlined in the best practice recommendations of the ASX Corporate Governance Council, it has been determined that the majority of the Board members of GWA International Limited are independent. This is in accordance with Recommendation 2.1 of the best practice recommendations of the ASX Corporate Governance Council. The Board is responsible for ensuring that the actions of individual directors in the Boardroom is that of independent persons. The Board distinguishes between the concept of independence and issues of conflict of interest or material personal interest which may arise from time to time – refer Conflicts of Interest on page 15. In recognising the importance of the independence of directors and the immediate disclosure of conflicts of interest, the Board has included both matters as permanent items on the agenda at each Board meeting. Any independence or conflict of interest issues arising during the relevant period must be disclosed to the Chairman prior to each Board meeting. The disclosure is recorded in the register of directors’ interests and in the Board minutes. (i) New Director Appointment On 6 July 2004, Mr Geoff McGrath was appointed a non-executive director of GWA International Limited. Mr McGrath was the former Managing Director of the company and retired on 6 May 2003 after 14 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 43 years’ service in various capacities with the company’s businesses, the last 10 as Managing Director. In appointing Mr McGrath as a director, the Board acknowledges that Mr McGrath does not meet the definition of an independent director as outlined in the best practice recommendations of the ASX Corporate Governance Council, due to his executive position with the company within the last three years. In the Board’s view, this will in no way impact on Mr McGrath’s effectiveness and performance as a director, nor affect Mr McGrath’s ability to exercise independent judgment in carrying out his duties as a director. Mr McGrath is well-known to shareholders of GWA International Limited, and the company prospered under Mr McGrath’s stewardship. In appointing Mr McGrath as a director, the Board is of the view that the appointment is in the best interest of the company’s shareholders. Mr McGrath brings extensive skills and experience to the Board, and his detailed knowledge of the company’s businesses will ensure that the company’s shareholders will be well served by Mr McGrath’s appointment. Mr McGrath will hold office until the next Annual General Meeting on 28 October 2004, where he will be eligible for re-election. (ii) Director Tenure The current Board members have been in office for many years, as disclosed on page 12 of the Annual Report (excluding Mr Crowley who was appointed in the 2002/03 year). The Board does not consider that the independence of a director can be assessed by reference to an arbitrary and set period of time. The Board has overseen the growth and development of the company since listing and in the Board’s view the company derives benefits from having long serving directors with detailed knowledge of the company’s operations. The Board considers this a significant factor in their effectiveness and performance in their roles as directors of the company. The Board is developing succession plans for the future retirement of individual directors. In formulating the succession plans, the Board recognises the importance of maintaining corporate memory and ensuring the appropriate balance of skills required to maintain an efficient and effective Board. 5. Conflicts of Interest The directors are required to disclose to the Board any relationships from which a conflict of interest might arise. A director who has an actual or potential conflict of interest or a material personal interest in a matter is required to absent himself from any meeting of the Board or Board Committee, whenever the matter is considered. In addition, the director does not receive any Board papers or other documents in which there is a reference to the matter. This process is applied to business and trading relationships, dealings with the directors, dealings with companies with common directors and dealings with any significant shareholders of the company. The materiality thresholds used for the determination of independence and issues of conflict of interest have been considered from the point of view of the company and directors. For the company, a relationship which accounts for 5% or more of its revenue is considered material. For a director, a relationship which accounts for 5% or more of the total income of a director is considered material. Directors’ fees are not subject to this test. During the current year, Mr McGrath advised the Chairman prior to his appointment as a director that a potential conflict of interest exists with respect to Mr McGrath’s position as a director of Fletcher Building Limited, which owns the Oliveri business. The Chairman agreed strict procedures to deal with this potential conflict of interest. During the year, there were no other conflict of interest issues or independence issues advised to the Chairman. 6. Access to Independent Advice Directors and the Board Committees have the right in connection with their duties and responsibilities to seek independent advice at the company’s expense. Prior written approval of the Chairman is required, but this will not be unreasonably withheld. Where appropriate, directors share such advice with the other directors. 7. Board Committees The Board has a number of standing Board Committees to assist in carrying out its duties and responsibilities. All members of Board Committees are non-executive directors. The standing Board Committees are: Audit Committee The Audit Committee consists of the following non-executive directors: J J Kennedy (Chairman) AO CBE DUniv (QUT) FCA FCPA M D E Kriewaldt BA LLB FAICD B Thornton KSJ FCA FAICD FAIM FCIS The Audit Committee meets as required and on several occasions throughout the year. For attendance details of the Audit Committee, refer to page 24 of the Annual Report. The composition of the Audit Committee is based on the following principles: • The Audit Committee should consist of non-executive directors only • The Audit Committee should maintain a majority of independent directors • The Chairperson must be independent, and not Chairperson of the Board • The Audit Committee should consist of at least three members • The Audit Committee should include members who are financially literate with at least one member who has financial expertise The Audit Committee was established in 1993 and is governed by a charter which outlines the Committee’s role and responsibilities, composition, structure and membership requirements. The charter is regularly reviewed to ensure it remains consistent with the Board’s objectives and responsibilities and is in accordance with the best practice recommendations of the ASX Corporate Governance Council. The Audit Committee charter has been posted on the company’s website in the Corporate Governance section. The external auditors, Managing Director, Chief Financial Officer, Company Secretary, Risk Management and Internal Audit Manager and other company Executives (as required) attend Audit Committee meetings, by invitation, to present the relevant statutory information, financial statements, reports, and to answer the questions of the Audit Committee members. The external auditors meet with the Audit Committee members without management present. C O R P O R A T E G O V E R N A N C E S T A T E M E N T 15 Built on strong brands Corporate Governance Corporate Governance Statement CONTINUED Statement CONTINUED The main responsibilities of the Audit Committee include: • Review of financial statements and external financial reporting • Assess the management processes supporting external reporting • Assess whether the external reporting is adequate to meet the information needs for shareholders • Recommendations on the appointment and removal of the external auditor • Review and monitor the performance and independence of the external audit • Review of tax planning and tax compliance systems and processes • Review and monitor risk management and internal compliance and control systems • Assess the performance and objectivity of the internal audit function • Reporting to the Board on the Committee’s role and responsibilities covering all the functions in its charter During the year, the Audit Committee conducted an evaluation of the performance of Audit Committee members to determine whether it is functioning effectively by reference to best practice. Each member was required to complete a detailed performance questionnaire, the results of which were collated and analysed by the Chairman of the Committee. There were no issues to report to the Board from the exercise. Certification of Financial Reports The Managing Director and Chief Financial Officer state in writing to the Board each reporting period that the company’s financial reports present a true and fair view, in all material respects, of the company’s financial position and performance, and are in accordance with relevant accounting standards. The statements from the Managing Director and Chief Financial Officer are based on a formal sign-off framework established throughout the company and reviewed by the Audit Committee as part of the financial reporting process. Nomination Committee The Nomination Committee consists of the following non-executive directors: B Thornton (Chairman) KSJ FCA FAICD FAIM FCIS J J Kennedy AO CBE DUniv (QUT) FCA FCPA M D E Kriewaldt BA LLB FAICD The Nomination Committee meets as required and on several occasions throughout the year. For attendance details of the Nomination Committee, refer to page 24 of the Annual Report. The composition of the Nomination Committee is based on the following principles: • The Nomination Committee should consist of non-executive directors only • The Nomination Committee should maintain a majority of independent directors • The Nomination Committee should consist of a minimum of three members • The Chairperson should be the Chairperson of the Board or another independent director The Nomination Committee operates under a charter that details the Committee’s role and responsibilities, composition, structure and membership requirements. The charter is regularly reviewed to ensure it remains consistent with the Board’s objectives and responsibilities and is in accordance with the best practice recommendations of the ASX Corporate Governance Council. The Nomination Committee charter has been posted on the company’s website in the Corporate Governance section. The main responsibilities of the Committee include: • Assessment of the necessary and desirable competencies of Board members • Review of the Board succession plans • Evaluation of the performance and contributions of Board members • Recommendations for the appointment and removal of directors • Review of the remuneration framework for directors • Reporting to the Board on the Committee’s role and responsibilities covering all the functions in its charter In performing its responsibilities, the Nomination Committee receives appropriate advice from external consultants and other advisers as required. During the year, the Nomination Committee conducted an evaluation of the performance of Board members to determine whether it is functioning effectively by reference to best practice. Each Board member was required to complete a detailed performance questionnaire, the results of which were collated and analysed by the Chairman of the Committee. There were no issues to report to the Board from the exercise. Remuneration Committee The Remuneration Committee consists of the following non-executive directors: M D E Kriewaldt (Chairman) BA LLB FAICD G J McGrath MIIE D R Barry FAIM Mr G J McGrath was appointed a member of the Remuneration Committee on 3 August 2004, on the retirement of Mr B Thornton as a member of the Committee. 16 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 The Remuneration Committee meets as required and on several occasions throughout the year. For attendance details of the Remuneration Committee, refer to page 24 of the Annual Report. The composition of the Remuneration Committee is based on the following principles: • The Remuneration Committee should consist of non-executive directors only • The Remuneration Committee should maintain a majority of independent directors • The Remuneration Committee should consist of a minimum of three members • The Chairperson of the Remuneration Committee should be an independent non-executive director The Remuneration Committee operates under a charter that details the Committee’s role and responsibilities, composition, structure and membership requirements. The charter is regularly reviewed to ensure it remains consistent with the Board’s objectives and responsibilities and is in accordance with the best practice recommendations of the ASX Corporate Governance Council. The Remuneration Committee charter has been posted on the company’s website in the Corporate Governance section. The main responsibilities of the Committee include: • Review of the company’s remuneration and incentive policies • Review of Executive and Senior Management remuneration packages • Review of the company’s recruitment, retention and termination policies and procedures for Senior Management • Review of the company’s superannuation arrangements • Reporting to the Board on the Committee’s role and responsibilities covering all the functions in its charter In performing its responsibilities, the Remuneration Committee receives appropriate advice from external consultants and other advisers as required. 8. Code of Conduct The company conducts its business with the highest standards of personal and corporate integrity. To assist our employees in achieving this objective, the company has developed a comprehensive code of conduct which directors, officers and employees of the company are required to strictly adhere to. The code of conduct is incorporated as part of all new employees’ induction training and an acceptance form is signed by all new employees acknowledging their understanding and on-going compliance. The code of conduct states the values and policies of the company and complements the company’s risk management practices. The code of conduct is regularly reviewed to ensure it is in accordance with the best practice recommendations of the ASX Corporate Governance Council and to promote the ethical behaviour of all employees. The code of conduct has been posted on the company’s website in the About GWA section. 9. Share Trading The company has developed a share trading policy which prohibits directors, officers and other “potential insiders” from trading in GWA International Limited shares during designated periods. Outside of the designated periods, there are no trading restrictions where the directors, officers and other “potential insiders” are not in the possession of unpublished insider information. At all times, if an individual possesses unpublished insider information about the company, that person is prohibited from trading. As an additional restriction, the directors must advise the Chairman prior to trading outside the designated periods and confirm to the Chairman that they do not possess unpublished insider information. The Board is currently reviewing its policies and practices in this area, as it does regularly, and will publish the revised policy on the company’s website when this review is concluded. 10. Risk Management and Internal Control The Board is responsible for ensuring that adequate policies and procedures are in place on risk oversight and management. The Board recognises that effective corporate governance is critical to sound risk management practices. In carrying out its risk oversight and management duties, the Board is assisted by the Audit Committee which reports regularly to the Board on all risk management and internal control matters. The company has a comprehensive, company-wide risk management system incorporating processes which have been in place for many years. The risk management model adopted for the company is based on the Australian NZ Standard AS/NZS 4360:1999 – Risk Management, which specifies the key elements of the risk management process. Each of the key elements identified in the Standard are reflected in the current business risk management practices and procedures of the company. The Risk Management and Internal Audit Manager reports directly to the Board on all risk management and internal control matters. All internal audit activities are planned and coordinated by the Risk Management and Internal Audit Manager, with actual internal audit activities either performed internally or through qualified external consultants. The Board has approved an annual risk management and internal audit program C O R P O R A T E G O V E R N A N C E S T A T E M E N T 17 Built on strong brands Corporate Governance Corporate Governance Statement CONTINUED Statement CONTINUED for the company, and together with the following activities have achieved the strengthening of the control environment at the company: • Preparation of a comprehensive risk management policy for the company • Formal education program on risk management for Executive and Senior Management • Formalisation and enhancement of reporting to the Board on business risks • Formalisation of the risk management and accountability framework • Expansion of monthly corporate monitoring of financial and non-financial performance indicators • Review and updating of the Code of Conduct and Employment Policies and Procedures to ensure they reflect best practice and comply with statutory requirements Risk management is embedded in the company’s people, processes, culture and technology, and this ensures that a sound system of risk oversight and management exists within the company. During the year, the Board reviewed the risk management practices of the company in light of the best practice recommendations of the ASX Corporate Governance Council. The Board aims to continually evaluate and re-assess the risk management and internal control practices of the company to ensure that best practice is maintained, and to preserve and create value within the organisation. Certification of Risk Management Controls In conjunction with the certification of financial reports (refer page 16), the Managing Director and Chief Financial Officer state in writing to the Board each reporting period that: • the statement is founded on a sound system of risk management and internal compliance and control which implements the policies adopted by the Board • the company’s risk management and internal compliance and control system is operating efficiently and effectively in all material respects The statements from the Managing Director and Chief Financial Officer are based on a formal sign-off framework established throughout the company and reviewed by the Audit Committee as part of the financial reporting process. 11. Remuneration Policies The Nomination Committee is responsible for determining the remuneration for the non-executive directors, with the maximum aggregate amount approved by shareholders. The directors receive their remuneration by way of directors’ fees only (including superannuation), and are not able to participate in the Executive incentive arrangements. The Remuneration Committee is responsible for reviewing and determining the remuneration and incentive arrangements of Executives and Senior Management of the company. The remuneration and incentive arrangements have been structured to ensure that performance is fairly rewarded and to retain a high quality Executive and Senior Management team. For details of the company’s remuneration policies and disclosures, refer to page 22 of the Annual Report. At the Annual General Meeting on 23 October 1998, shareholders approved total aggregate maximum directors’ fees of $750,000 per annum (excluding statutory superannuation). As the Board has not sought an increase in directors’ fees since 1998, and to allow for possible new director appointments in future years, including the appointment of Mr Geoff McGrath as a director, the Board proposes to put to shareholders at the next Annual General Meeting on 28 October 2004 that the upper limit of directors’ fees be increased by $250,000 to $1 million (excluding statutory superannuation). At the Annual General Meeting on 30 October 2003, shareholders approved the termination of the Directors’ Retirement Scheme for non-executive directors. This means that retirement benefits will not be available for any new non-executive directors of the company, other than statutory superannuation. This is in accordance with the guidelines for non-executive director remuneration, as outlined in the best practice recommendations of the ASX Corporate Governance Council. As the Directors’ Retirement Scheme has been terminated, the Board will put to shareholders at the next Annual General Meeting on 28 October 2004 that the accrued benefits under the former Scheme be paid out to the directors, when each director requests the payment to be made. At 30 June 2004, the total accrued benefits to the non-executive directors of the company were $1,214,700. 12. Employee Share Plan The company has not issued share options at any time. The company has operated an Employee Share Plan since listing as part of the remuneration and incentive arrangements for Executives and Senior Management. Full details of the operation of the Employee Share Plan are described in Note 19 of the Financial Statements. 18 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 13. Audit and Auditor Independence The Board recognises the importance of a truly independent audit firm to ensure that the audit function delivers, for the benefit of the Board and all other stakeholders, an unbiased confirmation of both the financial statements and the state of affairs of the company. Consistent with the Board’s commitment to an independent audit firm, a policy has been prepared and approved by the Board on the Role of the External Auditor, which is designed to ensure the independence of the external audit function. The Board is currently reviewing its policies and practices in this area, as it does regularly, and will publish the revised policy on the company’s website when this review is concluded. During each year, the Audit Committee examines the non-audit roles performed by the audit firm and other potential audit service providers to satisfy itself that the auditor’s independence will not be compromised and that alternate providers are available if considered desirable. Whilst the value of the non-audit services could, in extreme cases, compromise audit independence, more important is to ensure that the auditor is not passing an audit opinion on the non-audit work of its own firm. Both the Audit Committee and the auditor confirm to the Board the continuing independence of the audit function. The company’s current external auditor, Ernst & Young, were appointed as a result of a comprehensive tender conducted for the year ended 30 June 1995 for audit and other services. As announced by the Chairman at the Annual General Meeting on 30 October 2003, a comprehensive tender for the external audit services was conducted during the year, which included tenders from KPMG, Deloitte and Ernst & Young. After a competitive tender process, KPMG was selected as the external auditor for the financial year commencing 1 July 2004, subject to shareholder approval of the appointment at the next Annual General Meeting on 28 October 2004. 14. Communication with Shareholders The company is committed to ensuring shareholders and the financial markets are provided with full, open and timely information about its activities. This is achieved by the following: • Complying with continuous disclosure obligations contained in the ASX Listing Rules and the Corporations Act 2001. The company has for many years included continuous disclosure as a permanent item on the agenda for Board meetings. The Board has approved a continuous disclosure policy to ensure that the company is complying with the ASX Listing Rule disclosure requirements and to ensure accountability at the Executive and Senior Management level for that compliance. • Ensuring that all shareholder communications (including annual reports, half-year reports and notices of Annual General Meetings) satisfy relevant statutory requirements and the best practice guidelines of the ASX Corporate Governance Council and other professional bodies. The company is committed to producing shareholder communications in plain English with full and open disclosure about the company’s policies and procedures, operations and performance. • Ensuring that all shareholders have the opportunity to receive externally available information issued by the company. The company has a corporate website (www.gwail.com.au) for the purpose of enhancing communication with shareholders and other parties. All company announcements and information released to the market are located on the website and may be accessed by shareholders. There is also a Corporate Governance section on the website which outlines the practices of the company and other company information. • The Board is committed to the continued development and enhancement of electronic communications to shareholders. This is a developing area for all publicly listed companies and the Board will continue to monitor what is happening in the market place, particularly regarding cost savings, take-up rates and service features. The Board will then decide on an appropriate electronic communication service to offer to shareholders. • The attendance at the Annual General Meeting by the external auditor to answer questions from shareholders about the conduct of the audit and the preparation and content of the Independent Audit Report. C O R P O R A T E G O V E R N A N C E S T A T E M E N T 19 Built on strong brands Directors’ Report AS AT 30 JUNE 2004 Directors’ Report AS AT 30 JUNE 2004 Your directors present their report on the consolidated entity of GWA International Limited and the entities it controlled during the year ended 30 June 2004. Directors Directors’ Interests The following persons were directors of the company during the whole of the financial year and up to the date of this report: • B Thornton, Chairman and Independent Non-Executive Director • J J Kennedy, Deputy Chairman and Independent Non-Executive Director • D R Barry, Independent Non-Executive Director • R M Anderson, Independent Non- Executive Director • M D E Kriewaldt, Independent Non- Executive Director • P C Crowley, Managing Director Mr Geoff J McGrath was appointed a non-executive director of GWA International Limited on 6 July 2004. Details of the directors’ qualifications, experience and responsibilities are located on page 12 of the Annual Report. At the date of this report, the relevant interest (as defined in the Corporations Act 2001) of the directors in shares of the company were: Director B Thornton J J Kennedy D R Barry R M Anderson M D E Kriewaldt P C Crowley G J McGrath Ordinary Shares Interest (see notes below) Nil 50,000 3,126,061 Nil 100,000 500,000 754,276 Note 4 Notes 1 and 4 Notes 2 and 4 Note 4 Notes 2 and 4 Notes 3 and 4 Notes 1 and 4 Note 1: Beneficially and legally owned. Note 2: The relevant interest is the power to exercise control over the disposal of the shares and the power to control the right to vote. Note 3: In accordance with a resolution of shareholders at the Annual General Meeting on 30 October 2003, Mr Crowley was issued 500,000 shares on 14 November 2003 under the terms and conditions of the GWA International Employee Share Plan. Note 4: Note 21 to the Financial Statements sets out the number of shares held directly, indirectly or beneficially by directors or their related entities at balance date as prescribed in Accounting Standard AASB 1046, this being 47,235,883 shares (last year 46,705,306 shares). Corporate Structure Principal Activities Employees GWA International Limited is a company limited by shares that is incorporated and domiciled in Australia. GWA International Limited has prepared a consolidated financial report incorporating the entities that it controlled during the financial year, which are outlined in Note 27 of the Financial Statements. The principal activities during the year within the consolidated entity were the research, design, manufacturing, importing, and marketing of household consumer products as well as the distribution of these various products through a range of distribution channels in Australia and overseas. There have been no significant changes in the nature of these activities during the year. The consolidated entity employed 2,565 employees as at 30 June 2004 (last year 2,646 employees). The company recognises the productivity benefits to be gained from investing in its employees to improve motivation and individual skills. The company remains committed to ensuring that staff are provided access to appropriate training and development programs. All companies in the consolidated entity are active equal opportunity employers. 20 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 Consolidated Results Consolidated results of the economic entity for the financial year were as follows: Business Segment Segment Revenues Segment Results 2002/03 $’000 2003/04 $’000 2002/03 $’000 2003/04 $’000 Buildings, fixtures and fittings 549,716 556,331 95,801 102,176 Commercial furniture 73,427 71,509 6,246 6,832 Unallocated Eliminations Total 45,637 51,649 (23,471) (20,607) (2,255) (2,096) - - 666,525 677,393 78,576 88,401 Consolidated results after tax 55,007 62,053 Earnings Per Share Basic earnings per share Review of Operations and State of Affairs A review of the consolidated entities’ operations and the results of those operations for the financial year is provided in the Managing Director’s Review of Operations which is located on pages 6-11 of the Annual Report. In the opinion of the directors, there were no significant changes in the state of affairs of the consolidated entity during the financial year, other than that referred to in the financial statements or notes thereto. Dividends In respect of the financial year ended 30 June 2003, as detailed in the Directors’ Report for that financial year, a final dividend of 8.0 cents per share franked 2002/03 cents 2003/04 cents 19.8 22.3 to 100% at 30% corporate income tax rate was paid to the holders of fully paid ordinary shares on 1 October 2003. In respect of the financial year ended 30 June 2004, an interim dividend of 10.0 cents per share franked to 100% at 30% corporate income tax rate was paid to the holders of fully paid ordinary shares on 1 April 2004. In respect of the financial year ended 30 June 2004, the directors recommend the payment to the holders of fully paid ordinary shares on 1 October 2004 of a final ordinary dividend of 8.0 cents per share, and a special dividend of 2.5 cents per share franked to 100% at 30% corporate income tax rate. Significant Events after Balance Date On 31 August 2004, the directors of GWA International Limited declared a final ordinary dividend and a special dividend on ordinary shares in respect of the financial year ended 30 June 2004. The total amount of the dividend is $29.222 million (last year $22.224 million), which represents a fully franked ordinary dividend of 8.0 cents per share and a fully franked special dividend of 2.5 cents per share. The dividends have not been provided for in the 30 June 2004 financial statements. There has not been any other matter or circumstance, other than that referred to in the financial statements or notes thereto, that has arisen since the end of the financial year, that has significantly affected, or may significantly affect, the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity in future financial years. Likely Developments and Expected Results Likely developments and expected results of the operations of the consolidated entity is provided in the Managing Director’s Review of Operations which is located on pages 6-11 of the Annual Report. In the next financial year, the consolidated entity will continue to pursue its policies of increasing profitability and market share of all its businesses. Strategies have been formulated which focus on maintaining growth and ensuring that the consolidated entity generates the best possible returns from its businesses. Further information on likely developments and expected results of the operations of the consolidated entity have not been included in this Report because the directors believe it would be likely to result in unreasonable prejudice to the company. D I R E C T O R S ’ R E P O R T 21 Built on strong brands Directors’ Report CONTINUED Directors’ Report CONTINUED Environmental Regulation and Performance The consolidated entity holds licences issued by Environmental Protection Authorities which specify limits for discharges to the environment which arise from the operations of entities which it controls. These licences regulate the management of discharge to air, storm water run-off, transport of waste and removal associated with the manufacturing operations in factories throughout Australia and the Netherlands. Where appropriate, an independent review of compliance with licence conditions is made by external advisors. Storage and treatment of hazardous materials within particular operations are monitored by the company in conjunction with external advisors. Prior to any discharge to sewers, effluent is treated and monitored to ensure strict observance with licence conditions. The directors are not aware of any breaches of the consolidated entity’s licence conditions during the financial year. Indemnification and Insurance of Directors and Officers Indemnification The company’s Constitution provides that, to the extent permitted by the law, every current (and former) director or secretary of the company shall be indemnified out of the assets of the company against all costs, expenses and liabilities which results directly or indirectly from facts or circumstances relating to the person serving (or having served) in their capacity as director or secretary of the company, but excluding any liability arising out of conduct involving a lack of good faith or conduct known to the person to be wrongful or any liability to the company or related body corporate. Insurance Premiums company, other than statutory superannuation. Executives’ Remuneration Policy The company has paid premiums in respect of insurance contracts which provide cover against certain liabilities of every current (and former) director and officer of the company and its controlled entities. The contracts of insurance prohibit disclosure of the total amount of the premiums paid, or the nature of the liabilities covered under the policies. Premiums were paid in respect of every current (and former) director and officer of the company and controlled entities, including the directors named on page 12 of this Report, the Chief Financial Officer, the Company Secretary and all persons concerned or taking part in the management of the company and its controlled entities. Directors’ and Other Officers’ Emoluments Directors’ Remuneration Policy The Nomination Committee is responsible for determining the remuneration for the non-executive directors, with the maximum aggregate amount approved by shareholders. The non-executive directors are remunerated by way of directors’ fees only (including statutory superannuation) and are not able to participate in the Executive Performance Plan or GWA International Employee Share Plan (refer below). In setting directors’ fees, the Nomination Committee receives advice from external consultants to determine market remuneration levels. As a result of the termination of the Directors’ Retirement Scheme for non-executive directors at the Annual General Meeting on 30 October 2003, retirement benefits are not available for any new non-executive directors of the The Remuneration Committee is responsible for determining and reviewing the remuneration arrangements for the Managing Director and the executive team. The Remuneration Committee assesses the appropriateness of the nature and amount of emoluments of such officers on a periodic basis by reference to the relevant employment conditions, with the overall objective of ensuring maximum stakeholder benefits from the retention of the high quality executive team. Such officers receive their emoluments in a variety of forms including cash and fringe benefits including motor vehicles. To assist in achieving these objectives, the Remuneration Committee links the nature and amount of the Managing Director and officers emoluments to the company’s financial and operating performance. Executives have the opportunity to qualify for participation in the Executive Performance Plan which specifies criteria to be met relating to profitability, return on assets and earnings per share. Under the Plan there are two incentives, one based on yearly performance and one based on discrete three year periods. All performance plan payments are subject to maximum amounts. As a further incentive measure, employees of the company may be invited to participate in the GWA International Employee Share Plan (“Share Plan”). Under the Share Plan, employees are provided with a non-interest bearing loan from the company to acquire shares in the company at market value. The loan is repaid through dividends, or in full upon an employee ceasing employment with the company. Further details regarding the Share Plan are provided in Note 19 to the Financial Statements. 22 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 Details of the nature and amount of the emoluments of each director of the company and each of the five executive officers of the company and the consolidated entity receiving the highest emoluments for the financial year are as follows: EMOLUMENTS OF THE DIRECTORS OF GWA INTERNATIONAL LIMTED Non-Executive Directors B Thornton J J Kennedy D R Barry R M Anderson M D E Kriewaldt Executive Director P C Crowley Directors Fees $ 214,500 108,810 75,790 71,500 85,800 Salary and Leave Entitlements $ Bonuses $ Other Benefits $ - Super annuation $ Termination Payments $ - - - - - 250 250 250 250 250 19,305 9,793 6,821 6,435 7,722 - - - - - Bonuses $ Other Benefits $ Super annuation $ Termination Payments $ Total $ 234,055 118,853 82,861 78,185 93,772 Total $ 815,079 412,500 68,807 36,000 - 1,332,386 EMOLUMENTS OF THE FIVE MOST HIGHLY PAID EXECUTIVES OF THE COMPANY AND THE CONTROLLED ENTITIES Salary and Leave Entitlements $ Bonuses 1 Year 3 Year Plan $ Plan $ Other Benefits $ - Super annuation $ Termination Payments $ 369,534 88,200 58,800 66,435 29,512 390,300 90,000 60,000 63,407 - - - Total $ 612,481 603,707 126,493 - - 40,831 12,849 300,000 480,173 276,309 75,600 35,280 57,299 25,040 246,530 69,600 46,400 65,778 23,200 - - 469,528 451,508 S Wright Group Operations Manager E Harrison Chief Financial Officer J Pearce General Manager, Dorf Clark R Watkins General Manager, Rover J Measroch General Manager, Sebel Notes: Bonuses: The bonuses for the Executives are based on their entitlements under the yearly and three yearly Executive Performance Plan. The bonus for the Executive Director, Mr Peter Crowley, is based on earning targets as outlined in his letter of appointment. Effective from 1 July 2004, Mr Crowley will be included in the yearly and three yearly Executive Performance Plan. Other Benefits: Other benefits for the Executive Director and Executives include the provision of fringe benefits including motor vehicles, loans under the Share Plan, insurances and applicable fringe benefits tax. D I R E C T O R S ’ R E P O R T 23 Built on strong brands Directors’ Report CONTINUED Directors’ Report CONTINUED Directors’ Meetings The number of meetings of directors (including meetings of committees of directors) held during the year and the number of meetings attended by each director were as follows: Directors’ Meetings Meetings of Committes Audit Remuneration Nomination Number of Meetings held: Number of Meetings attended: B Thornton J J Kennedy P C Crowley D R Barry R M Anderson M D E Kriewaldt 11 11 11 11 10 11 10 3 3 3 - - - 3 3 3 - - 3 - 3 1 1 1 - - - 1 Note: Mr B Thornton retired as a member of the Remuneration Committee on 3 August 2004. The Board appointed Mr G J McGrath as the replacement member on the Committee. As at the date of this Report, the company had an Audit Committee, a Remuneration Committee and Nomination Committee of the board of directors. The members of the Audit Committee are Mr J J Kennedy (Chairman), Mr B Thornton and Mr M D E Kriewaldt. The members of the Remuneration Committee are Mr M D E Kriewaldt (Chairman), Mr G J McGrath and Mr D R Barry. The members of the Nomination Committee are Mr B Thornton (Chairman), Mr J J Kennedy and Mr M D E Kriewaldt. 24 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 Rounding The company is of a kind referred to in Class Order 98/0100 issued by the Australian Securities Investment Commission relating to the rounding of amounts in the Directors’ Report. Amounts in the Directors’ Report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, to the nearest dollar. Corporate Governance In recognising the need for the highest standards of corporate behaviour and accountability, the directors confirm that the current corporate governance practices of the company are in accordance with the Principles of Good Corporate Governance and Best Practice Recommendations released by the ASX Corporate Governance Council on 31 March 2003. The company’s Corporate Governance Statement is located on pages 13-19 of the Annual Report. Auditor Independence Ernst & Young have confirmed to the directors that their independence as auditor of the consolidated entity for the year ended 30 June 2004 has not been compromised. Signed in accordance with a resolution of the directors. B Thornton Chairman P C Crowley Managing Director Brisbane 31 August 2004 Financial Statements As at 30 June 2004 GWA INTERNATIONAL LIMITED and Controlled Entities CONTENTS STATEMENTS OF FINANCIAL PERFORMANCE STATEMENTS OF FINANCIAL POSITION STATEMENTS OF CASH FLOWS NOTES TO THE FINANCIAL STATEMENTS 1 2 3 4 5 6 7 8 9 10 11 12 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REVENUES FROM ORDINARY ACTIVITIES EXPENSES FROM ORDINARY ACTIVITIES INCOME TAX DIVIDENDS CASH ASSETS RECEIVABLES (CURRENT) INVENTORIES RECEIVABLES (NON-CURRENT) INVESTMENTS PROPERTY, PLANT AND EQUIPMENT BRAND NAMES AND OTHER INTELLECTUAL PROPERTY 13 GOODWILL 14 15 16 PAYABLES (CURRENT) INTEREST BEARING LIABILITIES (CURRENT) PROVISIONS (CURRENT) 17 NON-CURRENT LIABILITIES 18 PROVISIONS (NON-CURRENT) 19 CONTRIBUTED EQUITY 20 RESERVES AND RETAINED PROFITS 21 DIRECTOR AND EXECUTIVE DISCLOSURES 22 REMUNERATION OF AUDITORS 23 CONTINGENT LIABILITIES 24 COMMITMENTS FOR EXPENDITURE 25 26 27 SUPERANNUATION COMMITMENTS RELATED PARTIES INVESTMENT IN CONTROLLED ENTITIES 28 DEED OF CROSS GUARANTEE 29 30 31 32 33 34 SEGMENT REPORTING RECONCILIATION OF PROFIT FROM ORDINARY ACTIVITIES AFTER INCOME TAX TO NET CASH FROM OPERATING ACTIVITIES EARNINGS PER SHARE EVENTS OCCURRING AFTER BALANCE DATE FINANCIAL INSTRUMENTS IMPACT OF ADOPTING AASB EQUIVALENTS TO IASB STANDARDS DIRECTORS’ DECLARATION INDEPENDENT AUDIT REPORT OTHER STATUTORY INFORMATION SHAREHOLDER INFORMATION page # 26 27 28 29 32 32 33 34 35 35 36 36 36 36 38 38 38 38 38 39 40 41 42 42 47 47 47 48 48 49 50 52 54 54 54 55 60 61 62 63 64 F I N A N C I A L S T A T E M E N T S 25 Statements of Financial Performance For the year ended 30 June 2004 Consolidated Chief Entity Note 2004 $’000 2003 $’000 2004 $’000 2003 $’000 Revenues from Ordinary Activities 2 677,393 666,525 52,315 29,974 Expenses related to ordinary activities Borrowing costs related to ordinary activities 3(a) 3(b) (574,160) (573,093) (14,832) (14,856) (7) - (6) (684) Profi t from Ordinary Activities before Income Tax Expense 88,401 78,576 52,308 29,284 Income tax expense relating to ordinary activities 4(a) (26,348) (23,569) (595) (377) Net Profi t Attributable to Members of GWA International Limited Net exchange difference on translation of fi nancial statements of foreign controlled entities Total Revenues, Expenses and Valuation Adjustments Attributable to Members of GWA International Limited and recognised directly in Equity Total Changes in Equity other than those resulting from Transactions with Owners as Owners Basic earnings per share (cents per share) Franked dividends per share - Ordinary (cents per share) - Special (cents per share) 20 20 31 5 5 62,053 55,007 51,713 28,907 1,032 (1,646) 1,032 (1,646) - - - - 63,085 53,361 51,713 28,907 22.3 18.0 2.5 19.8 15.5 2.5 26 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 Statements of Financial Position As at 30 June 2004 Consolidated Chief Entity Note 2004 $’000 2003 $’000 2004 $’000 2003 $’000 Current Assets Cash assets Receivables Inventories Other - Prepayments Total Current Assets Non-current Assets Receivables Investments Property, plant and equipment Brand names and other intellectual property Goodwill Deferred tax assets 6 7 8 9 10 11 12 13 138,352 66,625 96,380 1,594 88,505 72,439 117,638 2,884 302,951 281,466 - 501 - - 501 - 495 - - 495 4,288 - 153,122 356,952 875 4,367 - 166,152 356,212 1,775 22,105 461,471 325,646 400,541 325,646 - - - 24,780 - - - - 4(b) 25,258 Total Non-current Assets 540,495 550,611 811,897 726,187 Total Assets Current Liabilities Payables Interest bearing liabilities Current tax liabilities Provisions Total Current Liabilities Non-current Liabilities Interest bearing liabilities Non-interest bearing liabilities Deferred tax liabilities Provisions 843,446 832,077 812,398 726,682 14 15 4(b) 16 17 17 4(b) 18 57,552 58,827 - 8,448 31,975 - 16,127 30,742 97,975 105,696 - 52 8,774 - 8,826 - 28 377 - 405 297,803 296,183 - - 818 18,672 - 453,024 1,179 15,232 665 - 11,750 367,663 - - Total Non-current Liabilities 317,293 312,594 453,689 379,413 Total Liabilities Net Assets Equity Contributed equity Reserves Retained profi ts Total Equity 415,268 418,290 462,515 379,818 428,178 413,787 349,883 346,864 19(a) 20(a) 20(b) 346,853 345,493 346,853 345,493 918 80,407 (114) 68,408 - 3,030 - 1,371 428,178 413,787 349,883 346,864 F I N A N C I A L S T A T E M E N T S 27 Statements of Cash Flows For the year ended 30 June 2004 Cash Flows from Operating Activities Receipts from customers Payments to suppliers and employees Dividends received Interest received Borrowing costs Income tax paid Consolidated Chief Entity Note 2004 $’000 2003 $’000 830,292 806,110 (668,188) (677,910) 2004 $’000 1,915 - 2003 $’000 1,874 - 2(b) 2(b) - 3,757 (13,667) (37,541) - 50,400 28,100 2,488 (13,281) (26,000) - (7) (376) - (690) (395) Net Cash from Operating Activities 30 114,653 91,407 51,932 28,889 Cash Flows from Investing Activities Payments for property, plant and equipment (20,579) (24,392) Proceeds from sale of property, plant and equipment 2(b) 2,781 1,849 Net Cash used in Investing Activities (17,798) (22,543) - - - - 1,360 (1,360) 1,813 - - - - 370 (370) 1,067 (48,615) 18,643 - - - 1,186 1,360 (1,360) 1,813 508 370 (370) 1,067 (50,054) (48,615) (50,054) - - 1,456 (1,837) - - 778 - - (3,715) - - Cash Flows from Financing Activities Proceeds from borrowings Proceeds from issue of shares Employee share plan loans Repayment of employee share plan loans Dividends paid Proceeds from loans from related parties Loans to related parties Loan repaid by other parties Loans to other parties Net Cash used in Financing Activities (47,436) (46,262) (51,956) (28,905) Net Increase/(Decrease) in Cash Held Cash/(overdraft) at the beginning of the fi nancial period Effects of exchange rate changes on cash 49,419 88,505 428 22,602 66,817 (914) Cash/(Overdraft) at the End of the Financial Period 6, 15 138,352 88,505 (24) (28) - (52) (16) (12) - (28) 28 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 Notes to the Financial Statements As at 30 June 2004 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The fi nancial report is a general purpose fi nancial report which has been prepared in accordance with the requirements of the Corporations Act 2001 which includes applicable Accounting Standards. Other mandatory professional reporting requirements (Urgent Issues Group Consensus Views) have also been complied with. The fi nancial statements have been prepared in accordance with the historical cost convention. (a) Changes in Accounting Policy The accounting policies adopted are consistent with those of the previous year. (b) Principles of Consolidation The consolidated fi nancial statements incorporate the assets and liabilities of all entities controlled by GWA International Limited (‘the chief entity’) as at 30 June 2004 and the results of all controlled entities for the year then ended. GWA International Limited and its controlled entities together are referred to in this fi nancial report as the economic entity. The effects of all transactions between entities in the economic entity are eliminated in full. Where control of an entity is obtained during a fi nancial year, its results are included in the consolidated statement of fi nancial performance from the date on which control commences. Where control of an entity ceases during a fi nancial year its results are included for that part of the year during which control existed. (c) Income Tax Tax effect accounting procedures are followed whereby the income tax expense in the net profi t is matched with the accounting profi t after allowing for permanent differences. The future income tax benefi t relating to tax losses is not carried forward as an asset unless the benefi t can be regarded as being virtually certain of realisation. Income tax on net cumulative timing differences is set aside to the deferred income tax and future income tax benefi t accounts at the rates which are expected to apply when those timing differences reverse. No provision is made for additional taxes which could become payable if certain reserves of the foreign controlled entities were to be distributed as it is not expected that any substantial amount will be distributed from those reserves in the foreseeable future. The income tax expense for the year is calculated using the 30% tax rate (2003: 30%). (d) Foreign Currency Translation Foreign currency transactions are initially translated into Australian currency at the rate of exchange at the date of the transaction. At balance date amounts payable and receivable in foreign currencies are translated to Australian currency at rates of exchange current at that date. Resulting exchange differences are recognised in determining the profi t and loss for the year. Specifi c commitment Forward exchange contracts of generally less than 12 months are entered into to hedge the purchase of components, trading stock and major plant and equipment. Gains or costs arising on entry into a hedge transaction and subsequent exchange gains and losses resulting from those transactions up to the date of purchase are deferred and included in the measurement of the purchase cost. Foreign controlled entities As the foreign controlled entities are all self-sustaining, fi nancial data at balance date is translated into Australian currency at rates of exchange current at balance date. Exchange differences arising on translation are taken directly to the foreign currency translation reserve. (e) Acquisition of Assets The cost method of accounting is used for all acquisitions of assets regardless of whether shares or other assets are acquired. Cost is determined as the fair value of the assets given up at the date of acquisition plus costs incidental to the acquisition. (f) Receivables Trade debtors are reported net of trade discounts and volume rebates. This is consistent with the reporting and measurement of revenue from sale of goods (see Note 1 (w)). (g) Inventories Inventories are valued at the lower of cost and net realisable value. Cost comprises direct materials, direct labour and an appropriate proportion of variable and fi xed manufacturing overhead expenditure for work in progress and fi nished goods. Costs are assigned to individual items of stock, mainly on the basis of weighted average costs. (h) Recoverable Amount Non-current assets are not carried at an amount above their recoverable amount and where carrying values exceed this recoverable amount assets are written-down. In determining recoverable amount, the expected net cash fl ows have been discounted to their present value using a market determined risk adjusted discount rate. (i) Investments Interests in companies, other than controlled entities and investments in listed companies, are shown as investments at cost, and dividend income is recognised in the statement of fi nancial performance when received. (j) Leasehold Improvements The cost of improvements to or on leasehold properties is capitalised and amortised over the unexpired period of the lease or the estimated useful life of the improvement, whichever is the shorter. F I N A N C I A L S T A T E M E N T S 29 Notes to the Financial Statements As at 30 June 2004 (o) Maintenance and Repairs Maintenance, repair costs and minor renewals are recognised as expenses as incurred. (p) Service Warranties Provision is made, out of revenue, for the estimated liability on all products still under warranty at balance date. This provision is estimated having regard to service warranty experience on each class of products. (q) Cash For the purposes of the statements of cash fl ows, cash includes cash on hand, in transit and in banks and money market investments readily convertible to cash, net of outstanding bank overdrafts. Goods and Services Tax received from customers is included in receipts from customers while Goods and Services Tax paid on supplies, acquisitions and plant and equipment is included in payments to suppliers and employees. Goods and Services Tax is not included in revenue or expenses and is included in receivables and payables. (r) Employee Benefi ts Provision is made for employee benefi ts accumulated as a result of employees rendering services up to the reporting date. These benefi ts include wages and salaries, annual leave, sick leave and long service leave. Liabilities arising in respect of wages and salaries, annual leave, sick leave and any other employee benefi ts expected to be settled within 12 months of the reporting date are measured at their nominal amounts based on remuneration rates which are expected to be paid when the liability is settled. All other employee benefi t liabilities are measured at the present value of the estimated future cash outfl ows to be made in respect of services provided by employees up to the reporting date. In determining the present value of future outfl ows, the interest rates attaching to government guaranteed securities which have terms to maturity approximating the terms of the related liability are used. Employee benefi t expenses and revenues arising in respect of the following categories: (cid:127) (cid:127) wages and salaries, annual leave, long service leave, sick leave and other leave entitlements; and other types of employee benefi ts, are recognised against profi ts in their respective categories. (s) Earnings per Share Basic earnings per share is determined by dividing the profi t from ordinary activities by the weighted average number of ordinary shares outstanding during the fi nancial year. (t) Financial Instruments The economic entity has non-current borrowings and operates internationally, giving rise to signifi cant exposure to market risks from changes in interest rates and foreign exchange rates. Derivative fi nancial instruments are utilised by the economic entity to reduce those risks, as explained in this note. 1. (k) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Leased Non-current Assets A distinction is made between fi nance leases which effectively transfer from the lessor to the lessee substantially all the risks and benefi ts incidental to the ownership of non-current assets (fi nance leases), and operating leases under which the lessor effectively retains substantially all such risks and benefi ts of ownership. Where a non-current asset is acquired by means of a fi nance lease, the asset is established at its fair value at the inception of the lease. The liability is established at the same amount. Lease payments are allocated between the principal component and the interest expense. Operating lease payments are representative of the pattern of benefi ts derived from the leased assets and accordingly are recognised in profi t from ordinary activities in equal instalments over the lease term. (l) Non-current Assets Constructed by the Economic Entity The cost of non-current assets constructed by the economic entity includes the cost of all materials used in the construction, direct labour on the project and an appropriate proportion of variable and fi xed overhead including borrowing costs. (m) Depreciation Depreciation is calculated on a straight line basis to write off the cost of each item of property, plant and equipment over its expected useful life. Estimates of remaining useful lives are made on a regular basis for all assets. Major depreciation periods are: Freehold buildings Plant and equipment Motor vehicles 2004 40 years 2003 40 years 3 – 10 years 3 – 10 years 5 years 5 years Major spares purchased specifi cally for particular plant are included in the cost of plant and are depreciated accordingly. (n) Brand Names and Other Intellectual Property Brand names and other intellectual property include brand names, trademarks, patents and registered designs. Expenditure incurred in developing, maintaining or enhancing brand names is written-off against profi t from ordinary activities in the year in which it is incurred. The brand names are not amortised as the directors believe that their useful lives are of such duration that the amortisation charge, if any, would not be material. The carrying value of these brand names and other intellectual property is reviewed each year to ensure that it is not in excess of their recoverable amount. 30 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 Notes to the Financial Statements As at 30 June 2004 (v) Revenue Recognition Revenue is recognised to the extent that it is probable that the economic benefi ts will fl ow to the entity and the revenue can be reliably measured. The following specifi c recognition criteria must also be met before revenue is recognised: Sale of goods Control of the goods has passed to the buyer. Interest Control of a right to receive consideration for the provision of, or investment in, assets has been attained. Dividends Control of a right to receive consideration for the investment in assets is attained, and dividend income is recognised in the statement of fi nancial performance when received. (w) Revenue Measurement The measurement of revenue from the sale of goods is sales revenue net of trade discounts and volume rebates. (x) Provision for Dividends A provision for dividends is not recognised as a liability unless the dividends are declared, determined or publicly recommended on or before the reporting date. 1. (t) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Financial Instruments (continued) Interest rate related derivatives Entities within the economic entity enter into various types of interest rate contracts with the major banks in managing its fl oating interest rate risk on a portion of its non-current borrowings. Gains and losses on these contracts are accounted for on the same basis as the underlying borrowing they are hedging. Exchange rate related derivatives Entities within the economic entity enter into various types of foreign exchange contracts with the major banks in managing its foreign exchange risk with purchases of raw materials and fi nished goods for resale. Gains or costs arising on entry into a hedge transaction are included in the measurement of the purchase cost. Subsequent exchange gains and losses resulting from those transactions up to the date of purchase are deferred and included in the measurement of the purchase cost, where the hedge is of a specifi ed commitment. Where the hedge is general in nature, exchange gains and losses are included in the statement of fi nancial performance when they arise. (u) Goodwill Goodwill represents the excess of the purchase consideration over the fair value of the identifi able net assets acquired at the time of acquisition of shares in the controlled entity. Goodwill is amortised on a straight line basis over the shorter of 20 years and the minimum period during which the benefi ts are expected to arise. The goodwill purchased with the Gainsborough Hardware Industries Limited acquisition was fi rst amortised in the 1995/96 year on a straight line basis over a period of 10 years. The goodwill purchased with the acquisition of the exclusive import and distribution rights to Hansa tapware products has been fully amortised on a straight line basis over a period of 5 years. Amortisation periods are reviewed at each balance date. No goodwill was acquired during the year ended 30 June 2004. F I N A N C I A L S T A T E M E N T S 31 Notes to the Financial Statements As at 30 June 2004 Consolidated Chief Entity Note 2004 $’000 2003 $’000 2004 $’000 2003 $’000 2. REVENUES FROM ORDINARY ACTIVITIES (a) Revenues from Operating Activities - Sale of goods 1(w) 667,926 659,589 - - (b) Revenues from Non-operating Activities - Dividends received/receivable – Controlled entities - Interest received/receivable – Other corporations - Proceeds from the sale of property, plant and equipment - Foreign exchange gains - Unit Trust distribution - Other Total revenues from non-operating activities - 3,757 2,781 2,446 - 483 9,467 - 2,488 1,849 1,220 - 1,379 6,936 50,400 28,100 - - - - - - 1,915 - 1,874 - 52,315 29,974 Total revenues from ordinary activities 677,393 666,525 52,315 29,974 3. EXPENSES FROM ORDINARY ACTIVITIES (a) Expenses related to Ordinary Activities (excluding borrowing costs) - Cost of Sales - Selling and distribution - Administration - Other Total expenses related to ordinary activities (excluding borrowing costs) (b) Borrowing Costs Interest expense - Controlled entities - Other corporations Total borrowing costs expensed 358,802 129,075 76,514 9,769 368,211 125,408 72,986 6,488 574,160 573,093 - - 14,832 14,856 14,832 14,856 - - 7 - 7 - - - - - 6 - 6 684 - 684 Profi t from ordinary activities before income tax expense Income tax expense relating to ordinary activities 4(a) 88,401 (26,348) 78,576 (23,569) 52,308 (595) 29,284 (377) Net profi t attributable to members of GWA International Limited 62,053 55,007 51,713 28,907 Retained earnings at beginning of year 20(b) 68,408 41,193 1,371 256 Adjustment arising from the adoption of revised Accounting Standard AASB 1044 ‘Provisions, Contingent Liabilities and Contingent Assets’ - 20,823 - 20,823 Total available for appropriation 130,461 117,023 53,084 49,986 Dividends paid Retained earnings 20(b) (50,054) (48,615) (50,054) (48,615) 80,407 68,408 3,030 1,371 Employer contributions to a defi ned benefi t fund 162 70 - - 32 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 Notes to the Financial Statements As at 30 June 2004 Consolidated Chief Entity 2004 $’000 2003 $’000 2004 $’000 2003 $’000 3. EXPENSES FROM ORDINARY ACTIVITIES (continued) Losses/(Gains) (c) Net loss/(gain) on sale of property, plant and equipment 1,265 1,059 Net foreign exchange (gain)/loss - Other - Realised - Unrealised (d) Other Expenses Amortisation – Goodwill Depreciation of non-current assets - Freehold buildings - Plant and equipment: depreciation - Plant and equipment: write-down to net realisable value - Motor vehicles (1,208) 33 (355) 221 900 900 1,135 23,648 2,291 2,575 1,137 23,255 - 2,742 Total depreciation and amortisation expense 30,549 28,034 Other charges against assets - Write-down of inventories - Provision for doubtful debts and bad debts written-off Total other charges against assets Other provisions - Service warranties - Employee benefi ts and on costs - Other Total other provisions Rental expense relating to operating leases - Properties - Plant Research and development INCOME TAX 4. (a) Reconciliation of Income Tax Expense 6,496 33 6,529 5,877 15,904 5,820 8,766 472 9,238 3,587 15,583 4,853 27,601 24,023 8,473 369 5,485 7,446 688 5,770 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Profi t from ordinary activities before income tax 88,401 78,576 52,308 29,284 Prima facie tax on profi t from ordinary activities (30%, 2003 – 30%) Tax effect of permanent differences: - Non-deductible building depreciation and allowances - Non-allowable expenditure - Goodwill amortisation - Research and development allowance - Rebateable dividends Income tax adjusted for permanent differences Effect of different rates of tax on overseas income Under/(over) provision in previous year Income tax expense attributable to ordinary activities 26,348 23,569 26,520 23,573 15,693 8,785 141 578 270 (128) - 27,381 226 (1,259) 134 1,246 270 (34) - 25,189 96 (1,716) 22 - - - 22 - - - (15,120) (8,430) 595 - - 595 377 - - 377 F I N A N C I A L S T A T E M E N T S 33 Notes to the Financial Statements As at 30 June 2004 INCOME TAX (continued) 4. (b) Deferred Tax Assets and Liabilities Current tax payable Provision for deferred income tax – Non-current Future income tax benefi t – Non-current Consolidated Chief Entity 2004 $’000 2003 $’000 2004 $’000 2003 $’000 8,448 818 25,258 16,127 1,179 22,105 8,774 665 24,780 377 - - (c) No Part of the Future Income Tax Benefi t shown in (b) is Attributable to Tax Losses (d) Tax Consolidation For the purposes of income tax, GWA International Limited and its wholly owned Australian subsidiaries propose to form a tax consolidated group, effective 1 July 2003. The company is not required to formally notify the Australian Taxation Offi ce of its election to form a tax consolidated group, until the lodgement of the 2004 income tax return. The income tax calculation in Note 4 of the Financial Statements has been prepared on the basis that a tax consolidated group was formed, effective 1 July 2003. The Head Entity of the tax consolidated group will be GWA International Limited. It is further proposed that the members of the tax consolidated group will enter into a tax sharing agreement in order to allocate the income tax liabilities between the entities in the tax consolidated group. In forming a tax consolidated group, there will be no material impact on the deferred tax balances of the subsidiaries as a result of the resetting of tax values of certain assets of the subsidiaries. 5. DIVIDENDS Ordinary Franked dividends paid: - Final dividend 2002 under provided - Final dividend 2003 (8c per share) - Interim (10c per share, 2003: 7.5c) - Special (nil, 2003: 2.5c) Consolidated Chief Entity 2004 $’000 2003 $’000 2004 $’000 2003 $’000 - 22,224 27,830 - 12 - 20,835 6,945 - 22,224 27,830 - 12 - 20,835 6,945 Total dividends paid 50,054 27,792 50,054 27,792 Dividends proposed and not recognised as a liability: Final dividend (8 cents per share, 2003: 8 cents) – 100% franked Special divided (2.5 cents per share, 2003: nil) – 100% franked 22,264 6,958 22,224 - 22,264 6,958 22,224 - Total dividends proposed 29,222 22,224 29,222 22,224 The franked portions of the proposed dividends will be franked out of existing franking credits. The amount of franking credits available for the subsequent fi nancial year are: - Franking account balance as at the end of the fi nancial year 33,190 19,987 - Franking credits that will arise from the payment of the income tax payable after the end of the fi nancial year 8,700 14,550 41,890 34,537 The tax rate at which paid dividends have been franked is 30% (2003: 30%). The proposed fi nal and special dividends will be franked at 30% when paid in October 2004. 34 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 Notes to the Financial Statements As at 30 June 2004 6. CASH ASSETS Cash at bank and on hand Deposits at call 7. RECEIVABLES (CURRENT) Trade debtors Provision for doubtful debts Other debtors Unsecured other loans - Employee share plan Included in unsecured other loans - employee share plan, are loans to Specifi ed Directors and Specifi ed Executives (refer Note 21). Movement in provision for doubtful debts Balance at beginning of the year - Net foreign currency movements arising from self-sustaining foreign operations - Bad debts previously provided for written-off during the year - Bad and doubtful debts provided for during the year Balance at the end of the year Reconciliation of prior year trade debtors Trade debtors Adjustment for rebates Adjustment for credit claims Trade debtors Reconciliation of prior year provision for doubtful debts Provision for doubtful debts Adjustment for credit claims Provision for doubtful debts Consolidated Chief Entity 2004 $’000 2003 $’000 2004 $’000 2003 $’000 51,482 86,870 41,889 46,616 138,352 88,505 65,848 (2,523) 63,325 2,799 73,108 (2,703) 70,405 1,539 - - - - - - - - - - - - - - 501 495 66,625 72,439 501 501 495 495 2,703 2,488 14 (127) (67) (21) (202) 438 2,523 2,703 - - - - - 85,851 (11,538) (1,205) 73,108 (3,908) 1,205 (2,703) - - - - - - - - - - - - F I N A N C I A L S T A T E M E N T S 35 Notes to the Financial Statements As at 30 June 2004 Consolidated Chief Entity 2004 $’000 2003 $’000 2004 $’000 2003 $’000 INVENTORIES 8. Raw materials – At cost Provision for diminution in value Finished goods – At cost Provision for diminution in value Work in progress – At cost 25,906 (3,808) 26,793 (3,832) 22,098 22,961 77,455 (14,043) 91,093 (9,357) 63,412 81,736 10,870 12,941 Total inventories at lower of cost and net realisable value 96,380 117,638 - - - - - - - - - - - - - - - - - - - - - - - - - - 13,189 7,489 (16) 7,296 (2,618) (33) 8,766 (3,033) 17,851 13,189 - - 458,120 396,730 3,351 937 4,288 3,811 556 4,367 3,351 - 3,811 - 461,471 400,541 - - - - 325,646 325,646 325,646 325,646 29,122 29,119 41,966 (8,915) 41,471 (7,675) 33,051 33,796 226,245 225,461 (144,906) (131,158) 81,339 94,303 14,070 (4,460) 13,999 (5,065) 9,610 8,934 - - - - - - - - - - - - - - - - - - - - - - Movement in inventory provisions Opening balance Net foreign currency movements arising from self-sustaining foreign operations Additional provisions Stock written-off against provision Closing balance 9. RECEIVABLES (NON-CURRENT) Amount owing by controlled entities Unsecured other loans - Employee share plan - Other Included in unsecured other loans – employee share plan, are loans to specifi ed directors and specifi ed executives (refer Note 21). 10. INVESTMENTS Unlisted investments - Shares in controlled entities – At cost (refer Note 27). 11. PROPERTY, PLANT AND EQUIPMENT Freehold land – At cost Freehold buildings – At cost Less accumulated depreciation Plant and equipment – At cost Less accumulated depreciation Motor vehicles – At cost Less accumulated depreciation Total written-down amount 153,122 166,152 36 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 Notes to the Financial Statements As at 30 June 2004 11. PROPERTY, PLANT AND EQUIPMENT (continued) Recent valuations Land and buildings are progressively, and independently assessed over a 3-year period. During the fi nancial year ended 30 June 2004, two properties received independent valuations as follows: Date of Valuation Base of Valuation Amount of Valuation 15 April 2004 Market value for existing use 15 April 2004 Market value for existing use $3.6 million $0.5 million Consolidated Chief Entity 2004 $’000 2003 $’000 2004 $’000 2003 $’000 The most recent valuations for all land and buildings are as follows (note valuations have not been recognised): - Freehold land - Buildings Reconciliations Freehold land 47,240 38,510 47,550 37,220 Carrying amount at beginning 29,119 29,124 Additions Disposals Depreciation Net foreign currency movements arising from self-sustaining foreign operations Freehold buildings Carrying amount at beginning Additions/improvements Disposals Depreciation Net foreign currency movements arising from self-sustaining foreign operations Plant and equipment Carrying amount at beginning Additions Disposals Depreciation (incl. write-down to net realisable value) Net foreign currency movements arising from self-sustaining foreign operations Motor vehicles Carrying amount at beginning Additions Disposals Depreciation Net foreign currency movements arising from self-sustaining foreign operations - - - 3 - - - (5) 29,122 29,119 33,796 34,920 372 (7) 75 - (1,135) (1,137) 25 (62) 33,051 33,796 94,303 14,652 (1,594) (25,939) 98,662 20,437 (1,304) (23,255) (83) (237) 81,339 94,303 8,934 5,555 (2,479) (2,575) 175 9,610 9,468 3,880 (1,664) (2,742) (8) 8,934 Total written-down amount 153,122 166,152 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - F I N A N C I A L S T A T E M E N T S 37 Notes to the Financial Statements As at 30 June 2004 12. BRAND NAMES AND OTHER INTELLECTUAL PROPERTY As at 30 June 2004 Brand Names and Other Intellectual Property of $357 million (2003: $356.2 million) are being carried at cost (2003: at cost). PricewaterhouseCoopers Securities Limited provided GWA International Limited with an opinion dated 25 August 2004 that the fair market value of the Brand Names and Other Intellectual Property was not less than its carrying value of $357 million as at 30 June 2004 (2003: $356.2 million) and the directors would be justifi ed in continuing to carry it at that amount. The directors are of the opinion that no events have occurred that would diminish the above carrying value. 13. GOODWILL Goodwill Accumulated amortisation 14. PAYABLES (CURRENT) Trade creditors Other creditors Reconciliation of prior year trade creditors Trade creditors Adjustment for rebates Reclassifi cation from provisions Trade creditors 15. INTEREST BEARING LIABILITIES (CURRENT) Unsecured bank overdraft 16. PROVISIONS (CURRENT) Employee benefi ts and on costs Warranty Other Consolidated Chief Entity 2004 $’000 2003 $’000 2004 $’000 2003 $’000 8,975 (8,100) 8,975 (7,200) 875 1,775 51,118 6,434 50,971 7,856 57,552 58,827 59,516 (11,538) 2,993 50,971 - - - - - - - - - - - - - - - - - - 52 28 17,784 4,561 9,630 18,632 4,633 7,477 31,975 30,742 - - - - - - - - 38 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 Notes to the Financial Statements As at 30 June 2004 17. NON-CURRENT LIABILITIES Interest bearing liabilities Unsecured - Bank loans - Loans from controlled entities Total interest bearing liabilities Non-interest bearing liabilities - Unsecured loans from controlled entities Total non-interest bearing liabilities Financing arrangements GWA International Limited, GWA Finance Pty Limited, a wholly owned controlled entity of GWA International Limited and each other controlled entity of GWA International Limited have entered into a Master Financing Agreement with a number of banks. This document provides for the following: (i) (ii) GWA Finance Pty Limited and certain other operating controlled entities to borrow and enter into certain risk and hedging facilities; Individual banks to provide facilities direct to GWA Finance Pty Limited and certain other operating controlled entities of GWA International Limited by joining the Master Financing Agreement and being bound by the common covenants and conditions contained therein. Unrestricted access was available at balance date to the following lines of credit : Total facilities - Bank overdrafts - Other bank facilities Used at balance date - Bank overdrafts - Other bank facilities Unused at balance date - Bank overdrafts - Other bank facilities Consolidated Chief Entity 2004 $’000 2003 $’000 2004 $’000 2003 $’000 297,803 296,183 - - 297,803 296,183 - - - - 11,750 11,750 - - - - 453,024 367,663 453,024 367,663 6,410 6,000 312,803 312,542 319,213 318,542 - - 297,803 296,183 297,803 296,183 6,410 15,000 6,000 16,359 21,410 22,359 - - - - - - - - - - - - - - - - - - F I N A N C I A L S T A T E M E N T S 39 Notes to the Financial Statements AS AT 30 June 2004 18. PROVISIONS (NON-CURRENT) Employee benefi ts and on costs Warranty Other Total employee benefi ts and on costs Movement in total provisions (current and non-current) (i) Employee benefi ts and on costs Opening balance Net foreign currency movements arising from self-sustaining foreign operations Additional provisions Provisions utilised Closing balance (ii) Warranty Opening balance Net foreign currency movements arising from self-sustaining foreign operations Additional provisions Provisions utilised Closing balance (iii) Other Opening balance Net foreign currency movements arising from self-sustaining foreign operations Additional provisions Provisions utilised Closing balance Consolidated Chief Entity 2004 $’000 2003 $’000 2004 $’000 2003 $’000 10,937 4,701 3,034 10,446 2,424 2,362 18,672 15,232 28,721 29,078 29,078 25,713 (54) 15,904 (16,207) (36) 15,583 (12,182) 28,721 29,078 7,057 6,723 (13) 5,877 (3,659) (1) 3,587 (3,252) 9,262 7,057 9,839 8,800 (6) 5,820 (2,989) 73 4,853 (3,887) 12,664 9,839 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 40 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 Notes to the Financial Statements As at 30 June 2004 Consolidated Chief Entity 2004 $’000 2003 $’000 2004 $’000 2003 $’000 19. CONTRIBUTED EQUITY (a) Issued and Fully Paid Up Capital 278,302,995 (2003: 277,802,995) ordinary shares fully paid 346,853 345,493 346,853 345,493 Movements in issued paid up capital Ordinary shares Balance at 1 July 2003 2004 Number 2004 $’000 2003 Number 2003 $’000 277,802,995 345,493 277,642,995 345,124 Issue of shares to employees at $2.72 per share (2003: $2.31) 500,000 1,360 160,000 369 Balance at 30 June 2004 278,302,995 346,853 277,802,995 345,493 Terms and conditions of contributed equity Ordinary shares have the right to receive dividends as declared and, in the event of winding up the company, to participate in the proceeds from the sale of all surplus assets in proportion to the number of and amounts paid up on shares held. Ordinary shares entitle their holder to 1 vote, either in person or by proxy, at a meeting of the company. (b) Dividend Reinvestment Plan and Share Purchase Plan Suspended On the 8 February 2000 the directors suspended the Dividend Reinvestment Plan and the Share Purchase Plan. (c) Employee Share Plan The employee share plan was established to assist in the retention and motivation of employees. All permanent employees of the company, who are invited to participate, may participate in the Plan. The maximum number of shares subject to the plan at any time may not exceed 5% of the nominal amount of all Ordinary Shares on issue. The Plan does not provide for the issue of options and no options have been issued by the company. The prices of shares issued under the Plan are the market price at the time of issue. During the 2003/04 year, 500,000 (2003: 160,000) ordinary shares were issued at a price of $2.72 (2003: $2.31), a total market value of $1,360,000 (2003: $369,600). As at 30 June 2004, loans are issued for 2,785,000 (2003: 3,300,000) shares and the remaining balances of these loans were $3,852,370 (2003: $4,305,865). During the 2003/04 year, dividends of $541,650 (2003: $607,187) were paid against the loans and a further $1,271,845 (2003: $459,637) was paid by employees against these loans. Under the three year incentive plan for specifi ed executives for the period ended 30 June 2004, there are entitlements to further allotments of up to 980,000 shares which will be issued in the 2004/05 year subject to acceptance of the allotments by the respective employees. (d) Options No options have been issued at any time. F I N A N C I A L S T A T E M E N T S 41 Notes to the Financial Statements As at 30 June 2004 Consolidated Chief Entity 2004 $’000 2003 $’000 2004 $’000 2003 $’000 (114) 1,532 1,032 (1,646) 918 (114) - - - - - - 68,408 62,053 41,193 55,007 1,371 51,713 256 28,907 - 20,823 - 20,823 130,461 (50,054) 117,023 (48,615) 53,084 (50,054) 49,986 (48,615) 80,407 68,408 3,030 1,371 20. RESERVES AND RETAINED PROFITS Foreign Currency Translation Reserve (a) (i) Nature and purpose of reserve The foreign currency translation reserve is used to record exchange differences arising from the translation of the fi nancial statements of self-sustaining foreign operations. (ii) Movements in reserve Balance at beginning of year Net exchange gain/(loss) on translation of foreign controlled entities Balance at end of year (b) Retained Profi ts Balance at beginning of year Net profi t attributable to members Adjustment arising from adoption of revised Accounting Standard AASB1044 ‘Provisions, Contingent Liabilities and Contingent Assets’ Total available for appropriation Dividends paid Balance at end of year 21. DIRECTOR AND EXECUTIVE DISCLOSURES (a) Details of Specifi ed Directors and Specifi ed Executives (i) Specifi ed directors Non-executive B Thornton – Chairman J J Kennedy – Deputy Chairman D R Barry R M Anderson M D E Kriewaldt Executive P C Crowley – Managing Director (ii) Specifi ed executives E Harrison – Chief Financial Offi cer S Wright – Group Operations Manager C Bizon – General Manager – Caroma – appointed 1 May 2004 (previously General Manager – Dux) D Duncan – General Manager – Dorf Clark – appointed 1 January 2004 (previously Group Marketing Manager) G Oliver – General Manager – Gainsborough L Patterson – General Manager – Dux – joined 19 January 2004 R Watkins – General Manager – Rover J Measroch – General Manager – Sebel J Pearce – General Manager – Dorf Clark – to 31 December 2003 42 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 Notes to the Financial Statements As at 30 June 2004 21. DIRECTOR AND EXECUTIVE DISCLOSURES (continued) (b) Remuneration of Specifi ed Directors and Specifi ed Executives (i) Remuneration policy Nature and amount of remuneration The Remuneration Committee has determined that the Group’s executive remuneration will consist of: - Salary and Leave - Executive Performance Plan - Employee Share Scheme - Other benefi ts Salary levels are regularly benchmarked against the relevant market rates and reviewed yearly. The Executive Performance Plan has been structured into 2 bonus schemes based on performance targets, which are set at the beginning of the bonus period, and subject to maximum amounts. Under the Employee Share Scheme, executives are granted an interest free loan to fund the purchase of shares in the company. Executives purchase the shares at the market price at time of issue. Executives receive share allocations up to maximum numbers determined by position in the company and by further entitlements on the achievement of 3 year bonus scheme targets. The loans provided by the company are repaid from dividends paid and are repayable on termination. Other benefi ts, which include statutory leave, the provision of motor vehicles, medical benefi ts membership, and life and disability insurance, are all regularly benchmarked with salaries and reviewed yearly. Relationship between remuneration and company performance The yearly and 3 year bonus schemes, together with the Employee Share Scheme, establish relationships between the short, medium and long term performance of the company and each executive’s remuneration. Cash bonuses The grant date of the yearly bonus scheme operating in this reporting period was 1 July 2003 and the nature of the remuneration granted is cash. Performance criteria were divisional operating profi t for divisional executives and group earnings before interest and tax for corporate executives. There were no alterations of the terms and conditions after the grant date. The grant date for the 3 year bonus scheme was 1 July 2001 and the nature of the remuneration is cash and additional loans with respect to further allocations of employee shares. The benefi ts of this scheme are subject to employment throughout the performance period and the performance criteria were divisional profi ts for divisional executives and earnings per share for corporate executives. There were no alterations of terms and conditions after the grant date. Contract for services The employment contract with Mr P Crowley provides for 12 months notice of termination by the company. All other executives have a legal entitlement to reasonable notice of termination by the company. 3 Year Bonus The 3 year bonus will be paid in 2004/05. The amounts accrued in prior periods for the 3 year bonus, and not shown in Note 21 (b) (ii) regarding current fi nancial year remuneration, and that will be paid in 2004/05 are: E Harrison S Wright C Bizon G Oliver R Watkins J Measroch # Refer to Note 21 (b) (ii) Accrued 2001/02 Accrued 2002/03 53,600 51,000 36,000 39,600 32,550 42,000 56,400 53,600 40,000 42,000 33,880 44,400 254,750 270,280# F I N A N C I A L S T A T E M E N T S 43 Notes to the Financial Statements As at 30 June 2004 21. DIRECTOR AND EXECUTIVE DISCLOSURES (continued) (b) Remuneration of Specifi ed Directors and Specifi ed Executives (continued) (ii) Remuneration of specifi ed directors and specifi ed executives Primary Post Employment Other Total 1 Year bonus Non 3 Year bonus# monetary Super- Retirement Termination benefi ts benefi ts annuation Benefi ts $ Salary fees and leave 214,500 108,810 85,800 75,790 71,500 - - - - - 815,079 412,500 Specifi ed directors Non- executive B Thornton J Kennedy M Kriewaldt D Barry R Anderson Executive P Crowley Total remuneration: Specifi ed directors 2004 1,371,479 412,500 2003* 1,508,908 960,000 - - - - - - - - - - - - - 19,305 9,793 7,722 6,821 6,435 59,772 36,000 59,772 86,076 190,018 133,532 390,300 90,000 369,534 88,200 276,309 75,600 287,583 126,493 - - 188,029 60,000 60,000 58,800 35,280 44,000 - - 246,530 69,600 46,400 99,285 30,000 - 217,266 66,900 44,600 59,519 62,863 54,236 67,906 38,629 27,089 62,911 11,461 42,250 - 29,512 25,040 26,375 12,849 19,936 23,200 9,102 40,883 Specifi ed executives E Harrison S Wright R Watkins C Bizon J Pearce D Duncan J Measroch L Patterson G Oliver Total remuneration: Specifi ed executives 2004 2,201,329 480,300 289,080 426,864 2003* 2,121,121 425,100 270,280 556,221 186,897 195,705 - - - - - - - - - - - - - - - - - - - - - - - - - 250 250 250 250 250 234,055 118,853 93,772 82,861 78,185 9,035 1,332,386 - 10,285 1,940,112 1,317,000 16,287 4,125,745 - - - - 300,000 - - - - 3,888 3,572 3,063 3,225 2,202 2,348 2,867 1,277 2,326 603,707 612,481 469,528 429,089 480,173 297,402 451,508 151,125 414,225 300,000 24,768 3,909,238 - 29,613 3,598,040 * Group totals in respect of the fi nancial year ended 2003 do not necessarily equal the sums of amounts disclosed for 2003 for individuals specifi ed in 2004, as different individuals were specifi ed in 2003. 44 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 Notes to the Financial Statements As at 30 June 2004 21. DIRECTOR AND EXECUTIVE DISCLOSURES (continued) (b) Remuneration of Specifi ed Directors and Specifi ed Executives (continued) (iii) Shareholdings of specifi ed directors and specifi ed executives Shares held in GWA International Limited (number) Balance 1 July 03 remuneration Ord Received as On exercise of options Ord Ord Net change other Ord Balance 30 June 04 Ord Specifi ed directors Non-executive B Thornton J Kennedy M Kriewaldt D Barry R Anderson Executive P Crowley Specifi ed executives E Harrison S Wright R Watkins C Bizon J Measroch G Oliver D Duncan Total 14,368,075 5,000 100,000 11,537,149 20,695,082 - 443,728 268,750 268,750 210,000 150,000 156,250 2,000 48,204,784 - - - - - - - - - - - - - - - - - - - - - - - - - - - - (12,173) 14,355,902 45,000 - - 50,000 100,000 11,537,149 (2,250) 20,692,832 500,000 500,000 27,247 7,000 - - - - - 470,975 275,750 268,750 210,000 150,000 156,250 2,000 564,824 48,769,608 All equity transactions with specifi ed directors and specifi ed executives have been entered into under terms and conditions no more favourable than those the entity would have adopted if dealing at arm’s length. The directors’ shareholdings shown above differ to those listed in the Directors’ Report. This is due to the wider scope of the AASB 1046 defi nition where shareholdings comprise those of the individual and their “personally-related entities” which includes their spouse, relatives and the spouses of the relatives. Also included are the shareholdings of any other entity under the control or signifi cant infl uence of the individual, their spouse, relatives and the spouses of the relatives. F I N A N C I A L S T A T E M E N T S 45 Notes to the Financial Statements As at 30 June 2004 21. DIRECTOR AND EXECUTIVE DISCLOSURES (continued) (b) Remuneration of Specifi ed Directors and Specifi ed Executives (continued) (iv) Loans to specifi ed directors and specifi ed executives (a) Details of aggregates of loans to specifi ed directors and specifi ed executives are as follows: Specifi ed directors Specifi ed executives Total specifi ed directors and specifi ed executives Balance 1 July 2003 $ Interest charged Interest not charged Number in group Balance Write-off 30 June 2004 30 June 2004 $ 2004 2003 NIL 267,962 2004 2,284,268 2003 3,277,264 2004 2,284,268 2003 3,545,226 - - - - - - 43,721 16,713 165,921 182,158 209,642 198,871 - - - - - - 1,310,000 242,369 2,167,837 2,284,782 3,477,837 2,527,151 1 1 8 7 9 8 (b) Details of individuals with loans above $100,000 in the reporting period are as follows: Balance 1 July 2003 $ Interest charged Interest not charged Balance Write-off 30 June 2004 $ Highest owing in period NIL 319,206 244,206 226,706 530,750 425,181 290,750 247,469 NIL - - - - - - - - - 43,721 19,913 15,001 13,265 70,369 13,925 18,160 15,288 NIL - - - - - - - - - 1,310,000 1,360,000 288,831 213,831 178,331 503,750 NIL 263,750 219,344 500,000 319,206 244,206 226,706 1,867,750 425,181 290,750 247,469 500,000 Specifi ed directors P Crowley Specifi ed executives E Harrison S Wright R Watkins C Bizon J Pearce J Measroch G Oliver D Duncan Mr C Bizon has an unsecured housing loan of $240,000 and received a bridging loan during the year relating to his relocation from New South Wales to Queensland and this loan was repaid during the year. Mr D Duncan has received a housing loan of $500,000 secured by a registered second mortgage on his relocation from Queensland to New South Wales. Mr J Pearce repaid an unsecured housing loan of $76,000 during the year. Mr E Harrison has an unsecured housing loan of $75,000. Each of these loans is interest free and repayable on termination. All other loans are with respect to the Employee Share Scheme. Reductions in the loan balance during the year were due to dividends paid and for Mr J Pearce, repayment on termination. The Employee Share Plans are interest free and repayable over 15 years or earlier in certain circumstances. Dividends paid on the shares acquired under the Plan are applied against the balance of the loan outstanding. (v) Other transactions and balances with specifi ed directors and specifi ed executives Transactions with specifi ed directors Mr B Thornton is a director of Great Western Corporation Pty Ltd. Certain entities in the economic entity have purchased and sold components and tooling from and to Great Western Corporation Pty Ltd on normal commercial terms and conditions during the year for a net purchase consideration of $297,393 (2003: $485,197). At reporting date $14,278 (2003: $99,471) formed part of trade creditors. 46 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 Notes to the Financial Statements As at 30 June 2004 22. REMUNERATION OF AUDITORS Amounts received or due and receivable by the auditors of GWA International Limited for: - an audit or review of the fi nancial report of the entity and any other entity in the economic entity - other services in relation to the entity and any other entity in the economic entity Tax advisory and compliance Acquisition due diligence services Superannuation advice and assistance Other Amounts received or due and receivable by auditors other than the auditors of GWA International Limited for: Consolidated Chief Entity 2004 $ 2003 $ 2004 $ 2003 $ 300,400 258,100 8,400 8,400 72,370 4,400 8,650 72,809 68,420 66,000 11,500 28,150 - - - - - - - - 458,629 432,170 8,400 8,400 - an audit or review of the fi nancial report of subsidiary entities 54,369 90,424 - - 512,998 522,594 8,400 8,400 23. CONTINGENT LIABILITIES Details and estimates of maximum amounts of contingent liabilities, classifi ed in accordance with the party from whom the liability could arise and for which no provisions are included in the accounts, are as follows: Bank guarantees 1,078 618 - Cross guarantee by GWA International Limited as described in Note 28. All these companies have assets in excess of liabilities. The previous freight carrier for Dux has lodged an action in the Industrial Relations Commission of NSW with claims totaling $3.6 million. Dux is defending the claim. No provision has been made in the fi nancial report for the claimed compensation. 24. COMMITMENTS FOR EXPENDITURE (a) Capital Expenditure Commitments Total capital expenditure contracted for at balance date but not provided for in the accounts payable: Not later than 1 year 2,768 3,886 (b) Lease Expenditure Commitments Operating lease (non-cancelable) expenditure contracted for at balance date: Not later than 1 year Later than 1 year but not later than 5 years Later than 5 years 6,894 14,575 2,237 6,830 15,382 1,080 Aggregate lease expenditure contracted for at balance date 23,706 23,292 Aggregate expenditure commitments comprise: Amounts not provided for: - Rental commitments Total not provided for 23,706 23,292 23,706 23,292 Aggregate lease expenditure contracted for at balance date 23,706 23,292 - - - - - - - - - - - - - - - - - F I N A N C I A L S T A T E M E N T S 47 Notes to the Financial Statements As at 30 June 2004 25. SUPERANNUATION COMMITMENTS GWAIL Group Retirement Fund The Defi ned Benefi ts categories of the GWAIL Group Retirement Fund were discontinued effective 30 June 2002. Members have transferred their benefi ts to other superannuation funds. As at 30 June 2004 all members had transferred from the fund. During the 2003/04 year, additional company contributions of $161,500 were paid into the fund to meet a higher assessment of contributions surcharge than expected. Following payment of these liabilities, the fund had no remaining assets or liabilities at 30 June 2004 and will now be wound up. 26. RELATED PARTIES Transactions concerning wholly owned group The wholly owned group consists of GWA International Limited and its wholly owned controlled entities. Transactions between GWA International Limited and wholly owned controlled entities during the year ended 30 June 2004 consisted of: (i) (ii) loans advanced by and to GWA International Limited; loans repaid to and by GWA International Limited; and (iii) the payment of dividends to GWA International Limited. Aggregate amounts included in the determination of profi t from ordinary activities before income tax that resulted from transactions with wholly owned controlled entities were as follows: Dividend revenue Trust revenue Interest expense Aggregate amounts receivable from and payable to wholly owned controlled entities at balance date were as follows: Non-current receivables Non-current borrowings Controlling entities The ultimate controlling entity and the ultimate Australian controlling entity in the wholly owned group is GWA International Limited. Ownership interests in related parties Interests held in controlled entities are set out in Note 27. Chief Entity 2004 $’000 50,400 1,915 - 2003 $’000 28,100 1,874 684 458,120 453,024 396,730 379,413 48 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 Notes to the Financial Statements As at 30 June 2004 Country of Incorporation Class of Shares 2004 % 2003 Parties to Cross % Guarantee 27. INVESTMENT IN CONTROLLED ENTITIES (a) Name of Entity Chief Entity GWA International Limited Controlled Entities GWA Group Limited Gainsborough Hardware Industries Limited Gainsborough Hardware Limited Caroma Holdings Limited GWA (North America) Pty Ltd Sebel Furniture Inc Caroma Industries Limited G Subs Pty Ltd Sebel Furniture (Hong Kong) Ltd GWA International (Hong Kong) Limited Stylus Pty Ltd Stylus Industries Pty Limited Fowler Manufacturing Pty Ltd Starion Tapware Pty Ltd Dorf Clark Industries Ltd Dorf Industries (NZ) Ltd McIlwraith Davey Pty Ltd Stylus Sales Limited Caroma Industries Europe BV Wisa Beheer BV Wisa BV Wisa Systems BV Wisa GmbH Stokis Kon Fav. Van Metaalwerken NV Wisa France SA Caroma International Pty Ltd Caroma USA Inc Caroma Canada Industries Ltd Caroma Industries (UK) Ltd Canereb Pty Ltd Dux Manufacturing Limited GWA Taps Manufacturing Limited Lake Nakara Pty Ltd Mainrule Pty Ltd Warapave Pty Ltd Rover Mowers (NZ) Limited Caroma Industries (NZ) Limited GWAIL (NZ) Ltd Rover Mowers Limited Industrial Mowers (Australia) Limited Olliveri Pty Ltd Sebel Service & Installations Pty Ltd Aust Aust Aust UK Aust Aust USA Aust Aust HK HK Aust Aust Aust Aust Aust NZ Aust NZ Netherlands Netherlands Netherlands Netherlands Germany Netherlands France Aust USA Canada UK Aust Aust Aust Aust Aust Aust NZ NZ NZ Aust Aust Aust Aust (ii) (ii) (iii) (ii) (ii) (iii) (ii) (ii) (i) (i) (ii) (ii) (ii) (ii) (ii) (ii) (i) (i) (i) (i) (i) (i) (i) (ii) (iii) (iii) (i) (iv) (ii) (ii) (iv) (iv) (iv) (ii) (ii) (ii) (ii) Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord Ord 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Y Y Y N Y Y N Y Y N N Y Y Y Y Y N Y N N N N N N N N Y N N N N Y Y N N N N N N Y Y Y Y F I N A N C I A L S T A T E M E N T S 49 Notes to the Financial Statements As at 30 June 2004 Country of Incorporation Class of Shares 2004 % 2003 Parties to Cross % Guarantee 27. INVESTMENT IN CONTROLLED ENTITIES (continued) (a) Name of Entity (continued) Sebel Properties Pty Ltd Sebel Furniture Limited (NZ) Sebel Furniture Limited Sebel Furniture (SEA) Pte Ltd Sebel Sales Pty Limited Caroma Singapore Pte Limited GWA Finance Pty Limited Hetset (No. 5) Pty Ltd Bankstown Unit Trust (ii) (ii) (i) (ii) (i) (ii) (ii) Aust NZ Aust Sing Aust Sing Aust Aust Aust Ord Ord Ord Ord Ord Ord Ord Ord Units 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Y N Y N Y N Y Y Y All controlled entities are controlled by GWA International Limited. (i) (ii) (iii) (iv) Controlled entities which are audited by other member fi rms of Ernst & Young International. Pursuant to Class Order 98/1418, relief has been granted to these controlled entities of GWA International Limited from the Corporations Act 2001 requirements for preparation, audit and publication of a fi nancial report. There is no requirement to prepare a fi nancial report for these overseas companies and accordingly separate audits were not performed. In accordance with the Corporations Act 2001 the directors have elected not to prepare or have audited a fi nancial report for the controlled entity as the entity meets the defi nition of a small proprietary company. (b) Controlled Entities GW Nominees Pty Ltd and GWAIL ESF Nominees Pty Ltd which are the trustee companies of the GWA International Limited Group Retirement Fund and the GWA International Limited Superannuation Fund respectively, are wholly owned by a controlled entity of GWA International Limited. These trusteeships are the sole activities of the companies, which do not trade in their own right. As superannuation trustees, these entities are not controlled entities for the purpose of Accounting Standard AASB 1024 ‘Consolidated Accounts’ and are therefore not consolidated with the group of companies comprising GWA International Limited and its controlled entities. 28. DEED OF CROSS GUARANTEE GWA International Limited, and specifi c controlled entities (as set out in Note 27) having their place of incorporation in Australia, are parties to a deed of cross guarantee which has been lodged with and approved by the Australian Securities and Investments Commission. Under the deed of cross guarantee each of the parties to the deed guarantees the debts of the other. Pursuant to Class Order 98/1418, relief has been granted to the companies in the closed group from the Corporations Act 2001 requirements for preparation, audit and lodgement of their fi nancial reports. The consolidated statement of fi nancial performance and statement of fi nancial position of the entities which are parties to the Deed of Cross Guarantee (Closed Group) are as follows: Consolidated Statements of Financial Performance Profi t from ordinary activities before income tax Income tax attributable to ordinary activities Profi t from ordinary activities after income tax Retained profi ts at the beginning of the fi nancial year Adjustment arising from the adoption of revised Accounting Standard AASB 1044 ‘Provisions, Contingent Liabilities and Contingent Assets’ Total available for appropriation Dividends paid Retained profi ts at the end of the fi nancial year 2004 $’000 2003 $’000 82,619 (23,829) 58,790 56,051 79,733 (23,070) 56,663 27,180 - 20,823 114,841 (50,054) 104,666 (48,615) 64,787 56,051 50 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 Notes to the Financial Statements As at 30 June 2004 28. DEED OF CROSS GUARANTEE (continued) Consolidated Statements of Financial Position Current assets Cash assets Receivables Inventories Other Total current assets Non-current assets Receivables Investments Property, plant and equipment Inter-company Brand names and other intellectual property Goodwill Deferred tax assets Total non-current assets Total assets Current liabilities Payables Current tax liabilities Provisions Total current liabilities Non-current liabilities Interest bearing liabilities Deferred tax liability Provisions Inter-company Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained profi ts Total equity 2004 $’000 2003 $’000 117,044 60,777 87,243 1,452 77,086 75,786 109,074 2,719 266,516 264,665 4,288 16,280 123,624 52,110 331,685 875 24,780 4,367 16,280 135,462 47,720 331,685 1,775 20,919 553,642 558,208 820,158 822,873 53,630 8,774 30,289 64,283 14,321 31,225 92,693 109,829 297,803 296,183 665 18,671 - 1,028 15,230 - 317,139 312,441 409,832 422,270 410,326 400,603 346,853 345,493 (1,314) 64,787 (941) 56,051 410,326 400,603 F I N A N C I A L S T A T E M E N T S 51 Notes to the Financial Statements As at 30 June 2004 29. SEGMENT REPORTING (a) Primary Reporting – Business Segments Building Fixtures and Fittings Commercial Furniture Unallocated Intersegment Total Eliminations Consolidated 2004 $’000 2004 $’000 2004 $’000 2004 $’000 2004 $’000 Revenue External sales Intersegment sales Total sales revenue Other revenue Total segment revenue Segment result Income tax expense Net profi t Total assets Total liabilities Other segment information: Acquisition of property, plant and equipment, intangible assets and other non-current assets Depreciation and amortisation expenses Non-cash expenses other than depreciation and amortisation 552,504 31 552,535 3,796 556,331 102,176 68,148 2,065 70,213 1,296 71,509 47,274 - 47,274 4,375 51,649 6,832 (20,607) 596,224 57,011 190,986 79,358 7,536 329,150 16,641 25,504 2,615 3,505 1,324 1,540 - - - - 667,926 (2,096) (2,096) - - 667,926 9,467 (2,096) 677,393 - - - - - - 88,401 (26,348) 62,053 844,221 416,044 20,580 30,549 - 2003 $’000 2003 $’000 2003 $’000 2003 $’000 2003 $’000 Revenue External sales Intersegment sales Total sales revenue Other revenue Total segment revenue Segment result Income tax expense Net profi t Total assets Total liabilities Other segment information: Acquisition of property, plant and equipment, intangible assets and other non-current assets Depreciation and amortisation expense Non-cash expenses other than depreciation and amortisation 546,614 - 546,614 3,102 549,716 95,801 70,146 2,255 72,401 1,026 73,427 42,829 - 42,829 2,808 45,637 6,246 (23,471) 645,877 56,927 140,811 90,037 7,113 332,678 19,454 22,962 3,942 3,344 996 1,728 - - - - 659,589 (2,255) (2,255) - - 659,589 6,936 (2,255) 666,525 - - - - - - 78,576 (23,569) 55,007 843,615 429,828 24,392 28,034 - 52 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 Notes to the Financial Statements As at 30 June 2004 29. SEGMENT REPORTING (continued) (a) Primary Reporting – Business Segments (continued) Notes to and forming part of Segment Reporting: (i) The above industry segments derive revenue from sales of the following products: Building fi xtures and fi ttings Sanitary ware Building hardware products Baths, shower screens and spas Household accessories, sinks and tap ware Hot water products Commercial furniture Education products Hospitality products Stadia seating Unallocated Domestic and ride-on mowers Corporate administration and treasury (ii) Intersegment pricing is on an arms’ length basis (b) Secondary Reporting - Geographical Segments Segment revenue from sales to external customers Other revenue Segment assets Acquisition of property plant and equipment, intangibles and other non-current segment assets Segment revenue from sales to external customers Other revenue Segment assets Acquisition of property plant and equipment, intangibles and other non-current segment assets Australia 2004 $’000 578,546 8,882 786,261 Total Unallocated Consolidated 2004 $’000 89,380 585 57,960 2004 $’000 667,926 9,467 844,221 19,490 1,090 20,580 2003 $’000 568,560 5,339 782,157 2003 $’000 91,029 1,597 61,458 2003 $’000 659,589 6,936 843,615 23,017 1,375 24,392 F I N A N C I A L S T A T E M E N T S 53 Notes to the Financial Statements As at 30 June 2004 30. RECONCILIATION OF PROFIT FROM ORDINARY ACTIVITIES AFTER INCOME TAX TO NET CASH FROM OPERATING ACTIVITIES Profi t from ordinary activities after income tax Depreciation and amortisation Net loss/(profi t) on sale of non-current assets Net exchange differences Provisions Decrease/(increase) in assets Decrease/(increase) in inventories Decrease/(increase) in trade debtors Decrease/(increase) in future income tax benefi t Decrease/(increase) in other assets Increase/(decrease) in liabilities Increase/(decrease) in accounts payable and bills payable Increase/(decrease) in provision for income tax payable Increase/(decrease) in provision for deferred tax Consolidated Chief Entity 2004 $’000 2003 $’000 2004 $’000 2003 $’000 62,053 30,549 1,265 213 1,681 21,258 18,617 (3,153) 56 (9,845) (7,679) (362) 55,007 28,034 1,059 177 5,883 (3,330) (3,284) (5,314) 2,233 8,616 2,679 (353) 51,714 28,907 - - - - - - (24,780) 15,934 - 8,399 665 - - - - - - - - - (18) - Net cash fl ow from operating activities 114,653 91,407 51,932 28,889 31. EARNINGS PER SHARE Basic earnings per share Profi t used to determine earnings per share Weighted average number of ordinary shares outstanding during the year used in the calculation of basic earnings per share The company has only ordinary shares on issue and there is no other class of securities that could dilute earnings per share. 32. EVENTS OCCURRING AFTER BALANCE DATE 2004 2003 22.3c 19.8c 62,053,000 55,007,000 278,023,543 277,778,009 On 31st August 2004, the directors of GWA International Limited declared a fi nal dividend on ordinary shares in respect of the 2004 fi nancial year. The total amount of the dividend is $29,221,814, which represents a fully franked ordinary dividend of 8.0 cents per share and a fully franked special dividend of 2.5 cents per share. The dividend has not been provided for in the 30 June 2004 fi nancial statements. To the best of our knowledge, since balance date, no other matters have arisen which will, or may, signifi cantly affect the operation or results of the economic entity in later years. 54 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 Notes to the Financial Statements As at 30 June 2004 33. FINANCIAL INSTRUMENTS (a) Terms, Conditions and Accounting Policies The economic entity’s accounting policies, including the terms and conditions of each class of fi nancial asset, fi nancial liability and equity instrument, both recognised and unrecognised at the balance date, are as follows: Recognised Financial Instruments (i) Financial assets Note Accounting Policies Terms and Conditions Receivables - trade 7 Trade receivables are carried at nominal amounts due less any provision for doubtful debts. A provision for doubtful debts is recognised when collection of the full nominal amount is no longer probable. Credit sales are predominantly on 30 day terms. Short-term deposits 6 Short-term deposits are stated at face value. Interest is recognised in the profi t and loss when earned. Short-term deposits have an average maturities from 24 hours to 60 days and effective interest rates of 4.2% to 5.4% (2003: 4.2% to 4.7%). (ii) Financial liabilities Bank overdrafts 15 Bank loans 17 The bank overdrafts are carried at the principal amount. Interest is recognised as an expense as it accrues. Interest is charged at the bank’s benchmark rate plus a margin. No security has been given for bank overdrafts. The bank loans are carried at the principal amount. Interest is recognised as an expense as it accrues. The bank loans have a maximum 3-year rolling maturity. Interest is charged at the market rate plus a margin. No security has been given for bank loans. Trade creditors and accruals 14 Liabilities are recognised for amounts to be paid Trade liabilities are normally settled on in the future for goods and services received, whether or not billed to the economic entity. 30 day terms. Dividends payable 5 Dividends payable are recognised when declared In accordance with Accounting Standard AASB by the company. 1044 ‘Provisions, Contingent Liabilities and Contingent Assets’ no dividend has been recognised at 30 June 2004 (2003: nil cents per ordinary share). The extent to which the dividends are franked, details of the franking account balance at the balance date and franking credits available for the subsequent fi nancial year are disclosed in Note 5. (iii) Equity Ordinary shares 19 Ordinary share capital is recognised at the fair value of the consideration received by the company. F I N A N C I A L S T A T E M E N T S 55 Notes to the Financial Statements As at 30 June 2004 33. FINANCIAL INSTRUMENTS (continued) (a) Terms, Conditions and Accounting Policies (continued) Recognised Financial Instruments (iv) Derivatives Forward exchange contracts Note Accounting Policies Terms and Conditions The economic entity enters into forward exchange contracts where it agrees to buy or sell specifi ed amounts of foreign currencies in the future at a predetermined exchange rate. The objective is to match the contract with anticipated future cash fl ows from sales and purchases in foreign currencies, to protect the company against the possibility of loss from future exchange rate fl uctuations. The forward exchange contracts are usually for no longer than 12 months. Exchange gains or losses on forward exchange contracts are recognised to the profi t and loss except those relating to hedges of specifi ed commitments which are deferred and included in the measurement of the sale or purchase. At balance date the company had entered into the following forward exchange contracts relating to specifi ed commitments and agreed to: Foreign Currency Amount Effective Rate CHF 0.04 million USD 3.30 million NZD 11.60 million USD 1.20 million YEN 31 million CHF 0.04 million EURO 0.50 million USD 4.03 million NZD 13.70 million EURO 0.03 million USD 1.99 million 0.8615 0.6974 1.1517 0.6926 77.0 0.795 0.5568 0.6143 1.091 0.577 0.6167 Buy/Sell 2004 Buy CHF Buy USD Sell NZD Sell USD 2003 Buy YEN Buy CHF Buy EURO Buy USD Sell NZD Sell EURO Sell USD (v) Unrecognised fi nancial instruments Interest rate swaps GWA International Limited enters into interest rate swap agreements that are used to convert the variable interest rate of its short-term borrowing to medium-term fi xed interest rates. The swaps are entered into with the objective of reducing the risk of rising interest rates. It is the company’s policy not to recognise interest rate swaps in the fi nancial statements. Net receipts and payments are recognised as an adjustment to interest expense. At balance date, the company had the following interest rate swap agreements: Swap Term Remaining 2004 Oct 04 Mar 05# May 06* 2003 Aug 03 Oct 04 Mar 05# May 06* Notional Amount Effective Rate A$100 million A$ 50 million A$ 50 million A$ 50 million A$100 million A$ 50 million A$ 50 million 5.13% 5.04% 4.63% 5.31% 5.13% 5.04% 4.63% # Bank has an option for a further 18 months * Bank has an option for a further 12 months 56 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 Notes to the Financial Statements As at 30 June 2004 33. FINANCIAL INSTRUMENTS (continued) (b) Interest Rate Risk The economic entity’s exposure to interest rate risks and the effective interest rates of fi nancial assets and fi nancial liabilities, both recognised and unrecognised at the balance date, are as follows: Fixed Financial Instruments Maturing in Floating Interest Rate 1 Year or Less 2004 $’000 2004 $’000 Over 1-5 Years 2004 $’000 More than 5 Years 2004 $’000 Total Carrying Amount as Per Statement of Financial Position Non- Interest Bearing Weighted Average Effective Interest rate 2004 $’000 2004 $’000 2004 % 138,352 - 138,352 297,803 - - - - - - - - - - - - - 100,000 100,000 16,997 - 297,803 116,997 100,000 - - - - - - - - - 65,848 138,352 65,848 65,848 204,200 - 51,118 - 478 297,803 51,118 - 478 51,596 349,399 5.12 N/A N/A 5.45 N/A 5.00 N/A N/A Fixed Financial Instruments Maturing in Floating Interest Rate 1 Year or Less 2003 $’000 2003 $’000 Over 1-5 Years 2003 $’000 More than 5 Years 2003 $’000 Total Carrying Amount as Per Statement of Financial Position Non- Interest Bearing Weighted Average Effective Interest Rate 2003 $’000 2003 $’000 2003 % 88,505 - 88,505 296,183 - - - - - - - - - - - - - 50,000 200,000 22,421 - 296,183 72,421 200,000 - - - - - - - - - 84,646 88,505 84,646 84,646 173,151 - 62,509 296,183 62,509 - - - - 62,509 358,692 4.68 N/A N/A 5.02 N/A 5.14 N/A N/A Financial Instruments Financial assets Cash and deposits at call Trade receivables Total fi nancial assets Financial liabilities Bank loans Trade creditors Interest rate swaps Forward exchange contracts Total fi nancial liabilities Financial Instruments Financial assets Cash and deposits at call Trade receivables Total fi nancial assets Financial liabilities Bank loans Trade creditors Interest rate swaps Forward exchange contracts Total fi nancial liabilities F I N A N C I A L S T A T E M E N T S 57 Notes to the Financial Statements As at 30 June 2004 33. FINANCIAL INSTRUMENTS (continued) (c) Net Fair Values The aggregate net fair values of fi nancial assets and fi nancial liabilities, both recognised and unrecognised, at the balance date, are as follows: Financial assets Cash and deposits at call Receivables - Trade Total fi nancial assets Financial liabilities Bank loans Trade creditors Interest rate swaps - (Gain)/loss Forward exchange contracts - (Gain)/loss Total Carrying Amount as Per the Statement of Financial Position Aggregate Net Fair Value (i) 2004 $’000 2003 $’000 2004 $’000 2003 $’000 138,352 65,848 88,505 84,646 138,352 65,848 88,505 84,646 204,200 173,151 204,200 173,151 297,803 51,118 - 478 296,183 62,509 - - 297,803 51,118 (677) 454 296,183 62,509 703 (429) Total fi nancial liabilities 349,399 358,692 348,698 358,966 (i) The following methods and assumptions are used to determine the net fair values of fi nancial assets and liabilities Recognised fi nancial instruments Cash and deposits at call: The carrying amount approximates fair value because of their short-term to maturity. Trade receivables and creditors: The carrying amount approximates fair value. Long-term borrowings: The carrying amount of long-term borrowings approximates fair value because their incremental borrowing rates were rolled over no later than 30 August 2004. The current rate would be the same as the current incremental rate applicable to the borrowings. Forward exchange contracts: The carrying amount of forward exchange contracts is determined as the recognised gain or loss at balance date calculated by reference to current forward exchange rates for contracts with similar maturity profi les. Unrecognised fi nancial instruments Interest rate swap agreements: The fair values of interest rate swap contracts are determined as the difference in present value of the future interest cash fl ows. 58 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 Notes to the Financial Statements As at 30 June 2004 33. FINANCIAL INSTRUMENTS (continued) (d) Credit Risk Exposures The economic entity’s maximum exposure to credit risk at balance date in relation to each class of recognised fi nancial assets, other than derivatives, is the carrying amount of those assets as indicated in the Statement of Financial Position. In relation to derivative fi nancial instruments, whether recognised or unrecognised, credit risk arises from the potential failure of counterparties to meet their obligations under the contract or arrangement. The economic entity’s maximum credit risk exposure in relation to these is as follows: (i) forward exchange contracts - the full amount of the foreign currency it will be required to pay or purchase when settling the forward exchange contract, should the counterparty not pay the currency it is committed to deliver to the company. At balance date the net loss amount was $454,000 (2003 net gain: $429,000); (ii) interest rate swap contract - which is limited to the net fair value of the swap agreement at balance date, being a net gain of $677,000 (2003 net loss: $703,000). Concentrations of credit risk The entity minimises concentrations of credit risk in relation to trade receivables by undertaking transactions with a large number of customers within the specifi ed industries. However, the majority of customers are concentrated in Australia. Refer also to Note 29 – Segment Reporting. Concentrations of credit risk on trade receivables arise in the following industries: Maximum Credit Risk Exposure* for Each Concentration Consolidated Percentage of Total Trade Debtors (%) $’000 2004 2003 2004 2003 78 15 7 100 80 11 9 51,147 9,900 4,801 100 65,848 58,526 7,951 6,631 73,108 Industry Buildings, fi xtures and fi ttings Commercial furniture Unallocated Total Credit risk in trade receivables is managed in the following ways: - payment terms are predominantly 30 days; - a risk assessment process is used for customers over $50,000; and - credit insurance is obtained for major customers. *The maximum credit risk exposure does not take into account the value of any collateral or other security held, in the event other entities/parties fail to perform their obligations under the fi nancial instruments in question. (e) Hedging Instruments (i) Interest rate swaps GWA International Limited has entered into interest rate swap contracts to hedge against fl uctuations in interest rates on its borrowing facilities. (ii) Forward exchange contracts GWA International Limited has entered into forward exchange contracts to hedge against fl uctuations in foreign currencies on purchases and sale of goods. F I N A N C I A L S T A T E M E N T S 59 Notes to the Financial Statements As at 30 June 2004 34. IMPACT OF ADOPTING AASB EQUIVALENTS TO IASB STANDARDS For reporting periods beginning on or after 1 January 2005, GWA International Limited must comply with International Financial Reporting Standards (IFRS) as issued by the AASB. The fi rst Financial Report to be completed under IFRS will be for the year ended 30 June 2006. GWA International Limited has commenced transitioning its accounting policies and fi nancial reporting from current Australian Standards to Australian equivalents of IFRS. The company has allocated internal resources and engaged expert consultants to conduct impact assessments to isolate key areas that will be impacted by the transition to IFRS. As GWA International Limited has a 30 June year end, priority has been given to considering the preparation of an opening balance sheet in accordance with AASB equivalents to IFRS as at 1 July 2004. This will form the basis of accounting for Australian equivalents of IFRS in the future, and is required when GWA International Limited prepare its fi rst fully IFRS compliant fi nancial report for the year ended 30 June 2006. Set out below are the key areas where accounting policies will change and may have an impact on the fi nancial report of GWA International Limited. At this stage the company has not been able to reliably quantify the impacts on the fi nancial report. Classifi cation of Financial Instruments Under AASB 139 ‘Financial Instruments: Recognition and Measurement’, fi nancial instruments will be required to be recognised in the statement of Financial Position. The fi nancial instruments must also be classifi ed into one of fi ve categories. The fi nancial instruments are to be carried at either fair value or amortised cost depending on their classifi cation. This will result in a change in the current accounting policy that does not classify fi nancial instruments. Current measurement is at amortised cost, with certain derivative fi nancial instruments not recognised on balance sheet. The future fi nancial effect of this change in accounting policy is not yet known as the classifi cation and measurement process has not yet been fully completed. Hedge Accounting Under AASB 139 ‘Financial Instruments: Recognition and Measurement’ in order to achieve a qualifying hedge, the entity is required to meet the following criteria: - - - - - - Identifi ed the type of hedge – fair value or cash fl ow; Identify the hedged item or transaction; Identify the nature of the risk being hedged; Identify the hedging instrument; Demonstrate that the hedge has and will continue to be highly effective; and Document the hedging relationship, including the risk management objectives and strategy for undertaking the hedge and how effectiveness will be tested. The entity’s foreign exchange contracts relating to the purchase of components and fi nished goods for resale are hedges and are expected to be qualifying hedges under these criteria. Business Combinations Under AASB 3 ‘Business Combinations’ goodwill will no longer be able to be amortised but instead will be subject to annual impairment testing. This will result in a change in the group’s current accounting policy, which amortises goodwill over its useful life of 10 years. However, the goodwill acquired on the acquisition of Gainsborough will be fully amortised in the 2004/05 year. Under the new policy, amortisation will no longer be charged on future goodwill, but goodwill will be written down to the extent it is impaired. Reliable estimation of the future fi nancial effects of this change in accounting policy is impracticable because the conditions under which impairment will be assessed are not yet known. Impairment of Assets Under AASB 136 ‘Impairment of Assets’ the recoverable amount of an asset is determined on a discounted basis with strict tests for determining whether goodwill and cash generating operations have been impaired. On adoption of IFRS, the current balance of goodwill will have been fully amortised in the consolidated accounts. As at 30 June 2004, the economic entity has $357 million of other intangibles held in the balance sheet at cost. Under AASB 136, these assets will be tested for impairment annually and any impairment loss will be recognised immediately in the statement of fi nancial performance. Reliable estimation of the future fi nancial effects of this change in accounting policy is impracticable because the conditions under which impairment will be assessed are not yet known. Income taxes Under AASB 112 ‘Income Taxes’, the company will be required to use a “balance sheet” approach, which focuses on the tax effects of transactions and other events that affect amounts recognised in either the Statement of Financial Position or the tax-based balance sheet. A material difference between the Statement of Financial Position and the tax balance sheet will be amortised goodwill, which will be treated as a temporary difference under the new standard. At this stage no other material impact of this standard has been identifi ed. 60 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 Directors’ Declaration In accordance with a resolution of the directors of GWA International Limited, we state that: 1. In the opinion of the directors: (a) the fi nancial statements and notes of the company and of the consolidated entity are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the company’s and consolidated entity’s fi nancial position as at 30 June 2004 and of their performance for the year ended on that date; and (ii) complying with Accounting Standards and Corporations Regulations 2001; and (b) there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. 2. In the opinion of the directors, as at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group identifi ed in Note 28 will be able to meet any obligations or liabilities to which they are or may become subject to, by virtue of the Deed of Cross Guarantee. On behalf of the Board B Thornton Director P C Crowley Director Brisbane 31 August 2004 D I R E C T O R S ’ D E C L A R A T I O N 61 Independent Audit Report To the members of GWA International Limited Scope The fi nancial report and directors’ responsibility The fi nancial report comprises the statements of fi nancial position, statements of fi nancial performance, statements of cash fl ows, accompanying notes to the fi nancial statements, and the directors’ declaration for GWA International Limited (the company) and the consolidated entity, for the year ended 30 June 2004. The consolidated entity comprises both the company and the entities it controlled during that year. The directors of the company are responsible for preparing a fi nancial report that gives a true and fair view of the fi nancial position and performance of the company and the consolidated entity, and that complies with Accounting Standards in Australia, in accordance with the Corporations Act 2001. This includes responsibility for the maintenance of adequate accounting records and internal controls that are designed to prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the fi nancial report. Audit approach We conducted an independent audit of the fi nancial report in order to express an opinion on it to the members of the company. Our audit was conducted in accordance with Australian Auditing Standards in order to provide reasonable assurance as to whether the fi nancial report is free of material misstatement. The nature of an audit is infl uenced by factors such as the use of professional judgment, selective testing, the inherent limitations of internal control, and the availability of persuasive rather than conclusive evidence. Therefore, an audit cannot guarantee that all material misstatements have been detected. We performed procedures to assess whether in all material respects the fi nancial report presents fairly, in accordance with the Corporations Act 2001, including compliance with Accounting Standards in Australia, and other mandatory fi nancial reporting requirements in Australia, a view which is consistent with our understanding of the company’s and the consolidated entity’s fi nancial position, and of its performance as represented by the results of its operations and cash fl ows. We formed our audit opinion on the basis of these procedures, which included: (cid:127) examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the fi nancial report, and (cid:127) assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of signifi cant accounting estimates made by the directors. While we considered the effectiveness of management’s internal controls over fi nancial reporting when determining the nature and extent of our procedures, our audit was not designed to provide assurance on internal controls. We performed procedures to assess whether the substance of business transactions was accurately refl ected in the fi nancial report. These and our other procedures did not include consideration or judgment of the appropriateness or reasonableness of the business plans or strategies adopted by the directors and management of the company. Independence We are independent of the company, and have met the independence requirements of Australian professional ethical pronouncements and the Corporations Act 2001. In addition to our audit of the fi nancial report, we were engaged to undertake the services disclosed in the notes to the fi nancial statements. The provision of these services has not impaired our independence. Audit opinion In our opinion, the fi nancial report of GWA International Limited is in accordance with: (a) the Corporations Act 2001, including: (i) giving a true and fair view of the fi nancial position of GWA International Limited and the consolidated entity at 30 June 2004 and of their performance for the year ended on that date; and (ii) complying with Accounting Standards in Australia and the Corporations Regulations 2001; and (b) other mandatory fi nancial reporting requirements in Australia. Ernst & Young Sydney Date: 31 August 2004 Graham Ezzy Partner 62 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4 Other Statutory Information As at 18 August 2004 Statement of shareholding In accordance with the Australian Stock Exchange Listing Rules, the directors state that, as at 18 August 2004, the share capital in the company was held as follows: Range 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total Ordinary Shareholders Ordinary Shares 1,702 7,387 3,511 1,999 123 1,166,052 22,665,112 26,381,643 41,389,066 186,701,122 % 0.4 8.1 9.5 14.9 67.1 14,722 278,302,995 100.0 The number of shareholders with less than a marketable parcel of shares is 165. Voting rights The voting rights attached to shares are as set out in clause 10.20 of the company’s Constitution. Subject to that clause, at General Meetings of the company: 1. 2. On a show of hands, every person present as a member, proxy, attorney or representative of a member has one vote; and On a poll, every person present as a member, proxy, attorney or representative of a member, has one vote for each fully paid share. Substantial shareholders The following information is extracted from the company’s register of substantial shareholders as at 18 August 2004: Shareholder Perpetual Trustees Australia Limited 20 largest shareholders as at 18 August 2004 Shareholder HGT Investments Pty Ltd National Nominees Limited Erand Pty Ltd RBC Global Services Australia Nominees Pty Limited (PIPOOLED A/C) KFA Investments Pty Ltd CJZ Investments Pty Ltd JP Morgan Nominees Australia Limited JMB Investments Pty Ltd Ashberg Pty Ltd Theme (No 3) Pty Ltd Australian Foundation Investment Company Limited RBC Global Services Australia Nominees Pty Limited (BKCUST A/C) ITA Investments Pty Ltd Stanley Gordon Sharp and Evelyn Vacy Sharp Citicorp Nominees Pty Limited (CFS WSLE Imputation Fund A/C) Westpac Custodian Nominees Limited RBC Global Services Australia Nominees Pty Limited (PIIC A/C) Dabary Investments Pty Ltd Michael John McFadyen (Michael McFadyen A/C) William Edward Duncan and Rodney John Turner Total Number % of Shares on Issue of Shares 20,079,607 7.22 Number of % Fully Paid Ordinary Shares on Issue Fully Paid Ordinary Shares 13,848,152 10,599,121 9,898,229 9,893,815 9,863,817 9,700,651 9,581,046 8,254,585 8,198,000 7,139,080 6,612,136 5,729,727 5,152,338 4,498,533 3,648,053 3,353,880 3,238,913 3,126,061 3,078,600 2,663,656 4.98 3.81 3.56 3.56 3.54 3.49 3.44 2.97 2.95 2.57 2.38 2.06 1.85 1.62 1.31 1.21 1.16 1.12 1.11 0.96 138,078,393 49.65 O T H E R S T A T U T O R Y I N F O R M A T I O N 63 Shareholder Information Annual General Meeting The Annual General Meeting of GWA International Limited will be held in The Grand Ballroom, Stamford Plaza Brisbane, cnr Edward and Margaret Streets Brisbane on Thursday 28 October 2004 commencing at 10:30 am. A Notice of Annual General Meeting and Proxy Form are enclosed with this report. Shareholder enquiries Shareholders with enquiries about their shareholding or dividend payments should contact the company’s share registry, Computershare Investor Services Pty Ltd, on 1300 552270 or write to GPO Box 523 Brisbane Queensland Australia 4001. Dividends Dividends are determined by the Board, having regard to the fi nancial circumstances of the company. The fi nal ordinary dividend of 8.0 cents per share, and the special dividend of 2.5 cents per share will be paid on 1 October 2004. The dividends will be 100% franked for Australian tax purposes at the corporate tax rate of 30%. Direct credit of dividends Dividends may be paid directly to a bank, building society or credit union account in Australia. Payments are electronically credited on the dividend payment date and confi rmed by mail payment advice. We encourage shareholders to avail themselves of this service. Direct credit application forms can be obtained from the company’s share registry. Tax fi le number information The company is obliged to record tax fi le number or exemption details provided by shareholders. Change of address Shareholders who have changed their address should immediately notify the company’s share registry in writing. Consolidation of shareholdings Shareholders who wish to consolidate their separate shareholdings into one holding should notify the company’s share registry in writing. Dividend Reinvestment Plan and Share Purchase Plan Both Plans were suspended on 8 February 2000. Past support from shareholders has provided suffi cient funds to meet the growth needs of the company. Directors keep this position under review. Stock Exchange listing The company’s shares are listed on the Australian Stock Exchange under the ASX code: GWT. Shareholder Timetable 2004 30 June 31 August 17 September 24 September 1 October 26 October 28 October Financial year end Year end result and fi nal dividend announcement Record date for determining fi nal dividend entitlement Notice of Annual General Meeting, Proxy Form and Annual Report mailed to shareholders Final ordinary dividend and special dividend paid Proxy returns close 10:30 am Brisbane Annual General Meeting 31 December Half year end Shareholder Timetable 2005 1 February 30 June 27 October Half year result and interim dividend announcement Financial year end Annual General Meeting 31 December Half year end 64 G W A I N T E R N A T I O N A L L I M I T E D A N N U A L R E P O R T 2 0 0 3 / 0 4