Hill International
Annual Report 2008

Plain-text annual report

Hills Industries Limited ABN 35 007 573 417 Annual Report 30 June 2008 Contents Directors’ report (including corporate governance statement and remuneration report) Income statements Balance sheets Statements of recognised income and expense Statements of cash flows Notes to the financial statements Directors’ declaration Independent auditor’s report Lead auditor’s independence declaration ASX additional information Page 3 24 25 26 27 28 96 97 99 100 2 Hills Industries Limited 30 June 2008 Annual Financial Report Directors’ report For the year ended 30 June 2008 The directors present their report together with the financial report of Hills Industries Limited (“the Company”) and of the Group, being the Company and its subsidiaries, and the Group’s interest in associates and jointly controlled entities for the financial year ended 30 June 2008 and the auditor’s report thereon. Contents of directors’ report Operating and financial review Directors Company secretary Officers who were previously partners of the audit firm Directors’ meetings Corporate governance statement Remuneration report - audited Principles of compensation Directors’ and executive officers’ remuneration Analysis of bonuses included in remuneration Equity instruments Options and rights over equity instruments granted as compensation Modification of terms of equity-settled share-based payment transactions Exercise of options granted as compensation Analysis of options and rights over equity instruments granted as compensation Analysis of movement in options Payments before taking office Principal activities Operating and financial review Dividends Events subsequent to reporting date Likely developments Directors’ interests Share options Indemnification and insurance of officers and auditors Non-audit services Lead auditor’s independence declaration Rounding off Page 4 6 8 8 8 9 11 11 13 14 16 16 16 16 17 18 18 19 19 19 20 20 20 21 22 22 23 23 3 Hills Industries Limited 30 June 2008 Annual Financial Report Directors’ report For the year ended 30 June 2008 1. Operating and financial review HILLS GROUP ACHIEVES 16TH CONSECUTIVE RECORD PROFIT The Hills Industries Group achieved a Group profit after tax from ordinary operations attributable to shareholders of $48.036 million. This was an increase of 1.8% over the previous year and represents the 16th consecutive year of record profits for the Group. In a year of difficult economic settings the Company was able to maintain its fully franked dividend at record levels. OVERVIEW 2008 The growth in sales and improvement in results for the Hills Group this year were achieved primarily through organic growth of existing businesses rather than acquisition of new businesses. Following a more difficult first half, the second half EBIT result was an improvement of 9% on the same period in the previous year and a 5.7% increase on the first half of this year. Notwithstanding this, profits were adversely affected in the year due to the higher costs of freight and distribution. The continued strong performance of Electronic Security and Entertainment more than offset the reduction in Building and Industrial Products, while the Home, Hardware and Eco Products result was flat. Our cash flows were below our targets as we funded the increased working capital requirements of the second half. Despite this our balance sheet gearing remains under our target levels, we have adequate banking facilities, which have long-term tenure, and we comfortably exceed all of our banking covenants. This year was one of great change at Hills. After 15 years as Managing Director, David Simmons announced his retirement in March. Under David’s leadership Hills achieved an unbroken record of growth in sales and profit. Over his time as our Managing Director the company transformed itself from a company with a high reliance on hardware products to a major diversified company. David will continue as a consultant to the company for a further 12 months. GROUP STRATEGY Our strategy is to develop competitive businesses in three main industry segments being Electronic Security and Entertainment; Building and Industrial Products and Home, Hardware and Eco Products. We are committed to diversification in order to minimise the impact of short-term changes to individual markets and economies. We aim to be product innovators and market leaders. Our objective overall is to grow revenue and earnings through a combination of organic growth and acquisitions. We aim to be good corporate citizens in all aspects of our business dealings. We look to provide a safe working environment for all of our employees in which they can develop to their potential. TRADING CONDITIONS Trading conditions in the year under review were mixed. As the year progressed there was more evidence of a slow down in the Australian economy and the New Zealand economy performed poorly. Strong economic activity in Western Australia, Queensland and South Australia was somewhat offset by subdued activity in New South Wales and Victoria. Steel prices began to rise late in the period under review and the Australian dollar strengthened over the course of the year. Further information on each division is contained later in this report. 4 Hills Industries Limited 30 June 2008 Annual Financial Report Directors’ report For the year ended 30 June 2008 1. Operating and financial review VISION AND VALUES Hills Industries Limited is a diversified company operating in three industry segments namely, Electronic Security and Entertainment; Home, Hardware and Eco and Building and Industrial Products. We aim to be market leaders in the industries in which we operate, supplying innovative quality products to our customers to achieve superior financial performance that provides strong shareholder value. To achieve this we value and promote: ! • • • • A leadership style that encourages autonomy and initiative; Commercial acumen with a focus on profitability and value; A never ending process of continuous improvement; Being open, ethical and earning the trust of those we deal with; and A culture of individual development, personal growth and safety SHAREHOLDERS We value the consistent support of our shareholders in a year that saw some significant fluctuations in our share price. The very good support for our Dividend Reinvestment Plans and Share Purchase Plans enabled us to continue our policy of paying 100% of our profits as dividends. We continue to offer our Dividend Reinvestment Plans to shareholders at discount levels that Directors feel are attractive for reinvestment. We also continue our practice of ensuring that employees who meet the relevant criteria participate in our Employee Share Scheme. We believe that widespread share ownership by our employees has many positive benefits to the employees, the Company and our shareholders. LIKELY DEVELOPMENTS There has been much publicity regarding the uncertain macro-economic settings, including higher interest rates, higher fuel and steel costs and the uncertainty surrounding capital markets. Many of our business units operate in markets that still exhibit growth despite these factors. We expect some improvements in businesses that have underperformed this year and the diversity of our businesses further mitigates the risks associated with these economic settings. Hills are not heavily exposed to the domestic housing cycle and as such we expect a satisfactory result in the year ahead. 5 Hills Industries Limited 30 June 2008 Annual Financial Report Directors’ report For the year ended 30 June 2008 2. Directors The directors of the Company at any time during or since the end of the financial year are: Name, qualifications and independence status Jennifer Helen Hill-Ling LLB(Adel) Chairman Non-Independent Non-Executive Director Graham Lloyd Twartz BA (Adel) DipAcc (Flinders) Group Managing Director David James Simmons BA (Accountancy) Former Group Managing Director Ian Elliot GAICD Independent Non-Executive Director Roger Baden Flynn BEng (Hons) MBA FIE(Aust) Independent Non-Executive Director 6 Experience, special responsibilities and other directorships Appointed Director in August 1985. Appointed Deputy Chairman in June 2004. Appointed Chairman 28 October 2005. Member of the Nomination Committee and Chairman of the Remuneration Committee. Former Director of Tower Trust Ltd. Jennifer Hill-Ling has extensive experience in corporate and commercial law. She specialises in corporate and business structuring, mergers and acquisitions, joint ventures and related commercial transactions. She has practiced law for 25 years. Joined the Company in 1993. Appointed Director in July 1993. Appointed as Group Managing Director 1 July 2008. Director of Korvest Ltd and Fielders Australia Pty Ltd. Graham Twartz is the Group Managing Director and is responsible for group operations, including business strategy and acquisitions. He was formerly the Finance Director and Company Secretary and has over 23 years experience in his field. Mr Twartz held senior management positions in diversified companies before joining Hills in 1993. Joined the Company in 1984. Appointed Finance Director in July 1987. Appointed Managing Director in December 1992. Resigned as Group Managing Director 30 June 2008. Chairman of Korvest Ltd. Resigned as Chairman of Fielders Australia Pty Ltd 27 July 2008. As Group Managing Director David Simmons was responsible for group operations, including business strategy and acquisitions. Mr Simmons has extensive financial and general management experience and was Chairman of the SA Government Economic Development Board until 30 June 2008. He also became a Director of Codan Limited in May 2008 and is a Board member of Thomson Playford lawyers. Appointed Director in August 2003. Member of the Remuneration Committee and Chairman of the Nomination Committee. Director of Salmat Limited. Former Chairman of Promentum Limited, Zenith Media Pty Ltd, Allied Brands Limited and Artist & Entertainment Group Limited. Ian Elliot has spent 35 years in marketing. His speciality is brand building, with extensive involvement in a number of icon brands. Mr Elliot is a fellow of the AICD and graduate of the Harvard Business School Advanced Management Program. Appointed Director in November 1999. Member of the Audit and Compliance Committee. Executive Chairman of Coventry Group Limited. Previously Managing Director of ION Limited, Non-Executive Director of Wattyl Limited and Director of Longreach Group Limited. Name, qualifications and independence status Geoffrey Guild Hill FCPA FAICD F.S.I BEc (Syd) MBA (NSW) Independent Non-Executive Director based in Hong Kong Peter William Stancliffe BE(Civil) FAICD Independent Non-Executive Director Experience, special responsibilities and other directorships Roger Flynn has 40 years experience working in a range of technical and commercial roles in manufacturing and distribution industries in Australia and the United States, including 38 years of Board experience in ASX listed companies. Appointed Director in February 1999. Appointed as a Director of Fielders Australia Pty Ltd 27 July 2008. Member of the Audit and Compliance, Remuneration and Nomination Committees. Chairman of International Pacific Securities (Group) Limited. Director Brickworks Investments Limited, Huntley Investments Limited, Metals Finance Limited, Asian Property Investments Limited and Heritage Gold (NZ) Limited Former Director of Biron Corporation Limited, Undercoverwear limited, Pitt Capital Partners and Pacific Strategic Investments Limited. Geoffrey Hill is a merchant banker, based in Hong Kong, with over 33 years experience in the securities industry. He has worked both in Europe and the United States and has managed merchant banks in Australia since 1989. Mr Hill specialises in mergers and acquisitions and corporate reconstructions and has been active in Merchant Banking field since 1979. Appointed Director in August 2003. Chairman of the Audit and Compliance Committee. Non-executive Director of Automotive Holdings Group Limited and Chairman of View Resources Limited. Former Chairman of Deck Guardrail Australia Pty Ltd, Victorian Regional Executives Group and Xtract Technologies Limited. Peter Stancliffe has over 38 years experience in the management of large industrial companies both in Australia and overseas and has held various senior management positions, including Chief Executive Officer. He has extensive experience in strategy development and a detailed knowledge of modern company management practices. Mr Stancliffe is a graduate of the MIT Senior Management Program and the AICD Company Directors’ Course. 7 Hills Industries Limited 30 June 2008 Annual Financial Report Directors’ report For the year ended 30 June 2008 3. Company secretary Mr Andrew Muir, B.Ec, MBA (Adelaide) was appointed to the position of Company Secretary in July 2008. Mr Muir is the Company's General Manager of Finance and was formerly the General Manager of Business Development for 5 years. Mr Paul Blewett, LLB, was appointed to the position of Company Secretary in April 2008 and held this position until July 2008. Mr Blewett previously held the role of General Counsel and Company Secretary with another listed public company for several years and prior to that worked as Legal Counsel for other large corporations, and as a lawyer for a major commercial legal practice. Mr Graham Twartz, B.A, Dip Acc was Company Secretary from 1July 2007 to 31 March 2008. Mr Twartz previously held the role of Finance Director and has over 23 years experience in his field. 4. Officers who were previously partners of the audit firm There were no persons who were officers of the Company during the financial year and were previously partners of the current audit firm, KPMG. 5. Directors’ meetings The number of directors’ meetings (including meetings of committees of directors) and number of meetings attended by each of the directors of the Company during the financial year are: Director J H Hill-Ling G L Twartz D J Simmons I Elliot R B Flynn G G Hill P W Stancilffe Board Meetings Audit Committee Meetings Remuneratio n Committee Meetings Non- executive directors Meetings Nomination Committee Meetings A 15 15 11 15 15 14 15 B 15 15 15 15 15 15 15 A - - - - 3 2 3 B - - - - 3 3 3 A 4 - - 4 - 3 - B 4 - - 4 - 4 - A 7 - - 7 7 6 7 B 7 - - 7 7 7 7 A 2 - - 2 - 2 - B 2 - - 2 - 2 - A – Number of meetings attended B – Number of meetings held during the time the director held office during the year 8 Hills Industries Limited 30 June 2008 Annual Financial Report Directors’ report For the year ended 30 June 2008 6. Corporate governance statement This statement outlines the main corporate governance practices in place throughout the financial year, which comply with the ASX Corporate Governance Council recommendations, unless otherwise stated. The ASX Principles are set out below, along with information provided in accordance with the Guide to Reporting for Annual Reports included in the ASX Recommendations. Further details of the corporate governance practices of the Company are available in the Corporate Governance section of the Company website at www.hills.com.au. Principle 1: Lay solid foundations for management and oversight The Company complies with the ASX recommendation of recognising and publishing the respective roles and responsibilities of Board and management. Principle 2: Structure the Board to add value ASX recommends the Company has a Board of an effective composition, size and commitment to adequately discharge its responsibilities and duties. The Company has substantially complied with this Principle during the reporting period. There has been a departure from the ASX Recommendation 2.2 in that the Chairman Ms Jennifer Hill-Ling is not considered an independent Chairman. The Company considers this departure is appropriate however given: ! The Hill-Ling family’s interest in the Hills Group; and ! Ms Hill-Ling’s considerable experience within the Hills Group. a) Composition of the Board The names, experience and term of the Directors of the Company in office at the date of this report are set out in section 2 of the Directors’ Report above. b) Independent professional advice and access to company information There is a procedure agreed by the Board whereby each Director is able to obtain independent professional advice at the expense of the Company should the Director require. c) Nomination Committee Membership of the Nomination Committee of the Company and details of meetings for the reporting period are set out in Section 5 of the Director’s Report above. Principle 3: Promote ethical and responsible decision-making The Company complies with the ASX recommendation that the Company actively promote ethical and responsible decision-making. Principle 4: Safeguard integrity in financial reporting The Company complies with the ASX recommendation that a structure be in place to independently verify and safeguard the integrity of the Company’s financial reporting. Details of the members and qualifications of the Audit and Compliance Committee of the Company, and of its meetings during the reporting period are set out in Section 2 and 5 of the Directors Report above. 9 Hills Industries Limited 30 June 2008 Annual Financial Report Directors’ report For the year ended 30 June 2008 Principle 5: Make timely and balanced disclosure The Company complies with the ASX recommendation that the Company should promote timely and balanced disclosure of all material matters concerning the Company. Principle 6: Respect the rights of shareholders The Company complies with the ASX recommendation that the Company should respect the rights of shareholders and facilitate the effective exercise of those rights. Principle 7: Recognise and manage risk The Company complies with the ASX recommendation that the Company should establish a sound system of risk oversight and management and internal control. The Audit and Compliance Committee oversees the operation of the risk management controls established by the Company. Principle 8: Encourage enhanced performance. The Company complies with the ASX recommendation that the Company should fairly review and actively encourage enhanced Board and management effectiveness. A performance evaluation for the Board and its members has taken place in the reporting period. Each Director meets individually with the Chairman annually to discuss their individual performance and the overall performance of the Board. Principle 9: Remunerate fairly and responsibly The ASX Recommendation is that the Company should ensure that the level and composition of remuneration is sufficient and reasonable and that its relationship to corporate and individual performance is defined. The Company has complied with this Principle during the reporting period. For further information, see the Remuneration Report at section 7 of this Directors’ Report Principle 10: Recognise the legitimate interests of stakeholders The Company complies with the ASX recommendation that the Company should recognise legal and other obligations to all legitimate stakeholders. 10 Hills Industries Limited 30 June 2008 Annual Financial Report Directors’ report For the year ended 30 June 2008 7 Remuneration report 7.1 Principles of compensation Remuneration is referred to as compensation throughout this report. Key management personnel have authority and responsibility for planning, directing and controlling the activities of the Company and the Group, including directors of the Company and other executives. Key management personnel comprise the directors of the Company and executives of the Company and the Group including the five most highly remunerated Company and Group executives. Compensation levels for key management personnel of the Company, and key management personnel of the Group are competitively set to attract and retain appropriately qualified and experienced directors and executives. The remuneration committee obtains independent advice on the appropriateness of compensation packages of both the Company and the Group given trends in comparative companies both locally and internationally, and the objectives of the Company’s compensation strategy. The compensation structures explained below are designed to attract suitably qualified candidates, reward the achievement of strategic objectives, and achieve the broader outcome of creation of value for shareholders. The compensation structures take into account: • • • the capability and experience of the key management personnel the key management personnel’s ability to control the relevant segment/s’ performance the Group’s performance including: - - the Group’s earnings the growth in share price and delivering constant returns on shareholder wealth Compensation packages include a mix of fixed and variable compensation, and short-term and long-term performance- based incentives. In addition to their salaries, the Group also provides non-cash benefits to its key management personnel, and contributes to a post-employment superannuation plan on their behalf. Directors receive their statutory superannuation entitlements. In addition, certain non-executive Directors are entitled to receive benefits on retirement under a scheme that has been discontinued. Under the scheme, Directors are entitled to a maximum retirement benefit of twice their annual Directors’ fees (calculated as an average of their fees over the last three years) accumulated over a period of eight years of service. Since the scheme was discontinued, no new Directors have become entitled to any benefit and the benefit multiple for existing Directors (up to a maximum of two times fees) remains fixed. These benefits have been fully provided for in the financial statements. Fixed compensation Fixed compensation consists of base compensation (which is calculated on a total cost basis and includes any FBT charges related to employee benefits including motor vehicles), as well as employer contributions to superannuation funds. The remuneration committee, through a process that considers individual, segment and overall performance of the Group, reviews compensation levels annually. In addition external consultants provide analysis and advice to ensure the directors’ and senior executives’ compensation is competitive in the market place. A senior executive’s compensation is also reviewed on promotion. Performance linked compensation Performance linked compensation includes both short-term and long-term incentives, and is designed to reward key management personnel for meeting or exceeding their financial and personal objectives. The short-term incentive (STI) is an ‘at risk’ bonus provided in the form of cash, while the long-term incentive (LTI) is provided as options over 11 ordinary shares of the Company under the rules of the Executive Share Option Plan (see note 26 to financial statements). Hills Industries Limited 30 June 2008 Annual Financial Report Directors’ report For the year ended 30 June 2008 7 Remuneration report 7.1 Principles of compensation (continued) Key management personnel may receive bonuses based on the achievement of agreed outcomes relating to the performance of the Group (including operational results). Bonuses earned are measured on a number of factors, the most common of which is based on the achievement of the Earnings before interest and tax (EBIT) result of the relevant business. EBIT is the chosen determinant upon which to measure bonus payments, as it is indicative of the businesses financial achievement, which has a direct correlation to shareholder value and successful operational business performance. Shares issued to key management personnel are a result of the Employee Share Bonus Plan under which shares are issued to all employees with more than a nominated period of service. Options issued to key management personnel are a result of the Executive Share Plan. Non-executive Directors do not receive any performance related remuneration. The remuneration structures take into account: - the overall level of remuneration for each key management personnel; - the executive’s ability to control performance; and The key management personnel receive performance-based remuneration primarily based on a percentage of divisional EBIT. The bonuses received by DJ Simmons and GL Twartz are discretionary, decided by the Remuneration Committee annually and based on a wide range of factors including the financial performance of the Group. The key management personnel are not currently entitled to contractual termination payments other than those generally applicable to all staff. Options are issued under the Executive Share Plan, to executive Directors, made in accordance with thresholds approved by shareholders at the AGM. The plan provides for 21 executives (22 executives in 2007) to receive options over ordinary shares for no consideration. The ability to exercise the options is conditional on the Company achieving certain performance outcomes. Non-executive Directors do not receive any options. Key management personnel who acquire shares through the exercise of options are provided with 20-year interest free loans by the Company in accordance with the rules of the Executive Share Plan approved by the Shareholders. These loans are of a non-recourse nature. For accounting purposes these 20-year, non-recourse loans are treated as part of options to purchase shares, until the loan is extinguished at which point the shares are recognised. A small number of shares are issued to executive Directors and specified executives as a result of the Employee Share Bonus Plan under which shares are issued to all employees with more than a nominated period of service. The Board considers that the above performance-linked remuneration structure is generating the desired outcome. 12 Hills Industries Limited 30 June 2008 Annual Financial Report Directors’ report (continued) For the year ended 30 June 2008 Remuneration report 7 7.2 Directors’ and executive officers’ remuneration (Company and Consolidated) Details of the nature and amount of each major element of remuneration of each director of the Company, each of the five named Company executives and relevant Group executives who receive the highest remuneration and other key management personnel are: in AUD Directors Non-executive directors J H Hill-Ling –Chairman ** I Elliot ** R B Flynn ** G G Hill ** P W Stancliffe ** Executive Directors D J Simmons - Group Managing Director** G L Twartz – Group Finance Director** Short-term Salary & fees $ STI cash bonus $(A) Non- monetary benefits $ Other short- term benefits $ Post- employment Super- annuation benefits $ Other long term Share-based payments $ Termination benefits $ Options $ (B) Shares $ Total $ Proportion of remunerati on performan ce related % Value of options as proportion of remuneration % 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 150,994 123,807 78,937 69,427 78,937 69,427 78,937 69,427 88,589 79,587 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 13,589 11,143 7,104 6,248 7,104 6,248 7,104 6,248 7,973 7,163 2008 579,526 160,000 11,952 42,813 2007 2008 2007 444,599 513,236 342,548 100,000 17,447 10,409 50,000 - 32,895 8,611 7,718 36,203 38,698 30,829 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 164,583 134,950 86,042 75,675 86,041 75,675 86,041 75,675 96,562 86,750 - - - - - - - - - - - - - - - - - - - - 38,491 1,000 833,782 19% 4.62% 37,911 1,000 647,569 25,728 1,000 637,272 25,639 1,000 440,629 15% 8% 0% 5.85% 4.04% 5.82% 13 Hills Industries Limited 30 June 2008 Annual Financial Report Directors’ report (continued) For the year ended 30 June 2008 Remuneration report 7 7.2 Directors’ and executive officers’ remuneration (Company and Consolidated) Post- employment Super-annuation benefits $ Salary & fees $ Short-term in AUD Non- monetary benefits $ Other short-term benefits $ STI cash bonus $(A) Other long term Share-based payments $ Terminatio n benefits $ Options $ (B) Shares $ Total $ Proportion of remuner- ation perfor- mance related % Value of options as proportion of remuner- ation % 320,000 320,000 211,837 197,324 239,966 215,023 259,145 263,669 - - 148,048 112,597 148,196 191,686 190,839 190,000 39,206 190,117 171,508 140,002 89,845 48,148 75,790 120,000 25,077 120,000 87,833 146,504 218,026 29,084 3,459,959 905,401 Executives L Andrewartha - Managing Director - Orrcon Group A Oliver - Group General Manager** - Antenna and TV Systems A Muir – General Manager – Finance** J Easling - Managing Director – Fielders R Meachem General Manager – Pacom** D Walker – Managing Director - Team Poly** S Cope – Group General Manager - Electronics, Security and Entertainment** R Gros – Group General Manager – Home, Hardware & Eco Products ** D Salvaterra – General Manager - EzyStrut Total compensation: key management personnel (consolidated) Total compensation: key management personnel (company**) 14 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 34,884 - 113,268 101,973 - - 21,500 - - 12,290 12,276 - - - - - - - - - - - - - - - 32,853 30,403 19,134 16,402 19,048 20,265 8,110 6,236 10,978 9,736 6,429 4,554 3,500 2,734 9,565 3,882 9,565 28,800 28,800 23,664 17,775 21,597 19,352 23,323 23,344 20,045 10,073 19,564 17,176 27,900 5,785 27,911 23,341 23,150 21,508 340,340 271,236 265,067 197,584 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,000 1,000 1,000 1,000 1,000 402,818 365,202 381,107 372,113 270,673 241,611 294,446 1,000 297,749 1,000 288,119 1,000 1,000 253,668 263,898 1,000 253,668 9% 0% 31% 27% 0% 0% 0% 0% 40% 35% 19% 26% 4.75% 4.49% 5.01% 5.45% 3.01% 2.58% 3.74% 3.27% 2.24% 1.80% 1.33% 1.00% 1,000 348,465 36% 2.75% 34% 36% 31% 90% 12% 5.25% 2.75% 1.35% 0.00% 0.00% 1,000 1,000 73,950 348,593 3,882 1,000 253,668 - - 1,000 310,656 1,000 269,618 150,549 10,000 4,899,098 131,241 10,000 3,918,170 120,437 105,103 9,000 8,000 3,891,179 2,985,601 2,962,613 509,602 71,842 2,740,811 724,013 - 32,853 2,160,918 480,518 71,842 30,403 Hills Industries Limited 30 June 2008 Annual Financial Report Directors’ report For the year ended 30 June 2008 7 Remuneration report 7.2 Directors’ and executive officers’ remuneration (Company and Consolidated) Notes in relation to the table of directors’ and executive officers remuneration A. The short-term incentive bonus is for performance during the respective financial year using the criteria set out in section 7.1 B. The options granted during the year expire on 31 January 2011 and each option entitles the holder to purchase one ordinary share in the Company. The ability to exercise the options is conditional on the Group achieving certain performance hurdles. For all options granted prior to 2008, once the option is exercised, the holder was restricted from selling the shares for a period of three years. The fair value of options granted to executive Directors and senior executives included above is calculated at the grant date using the valuation methodology set out in Division 13A of the Income Tax Assessment Act, 1936. This method has been adopted, as other methods do not reflect the number of conditions that must be met under the plan, including those applying after the shares have been allocated. Further details of options granted during the year are set out below. Details of performance related remuneration Details of the Group’s policy in relation to the proportion of remuneration that is performance related is discussed in section 7.1 7.3 Analysis of bonuses included in remuneration Short-term benefits are generally based on a percentage of the relevant business unit earnings before interest and tax. Short-term incentive cash bonuses awarded as remuneration to any Director of the Company and each of the five named Company executives and relevant group executives are detailed in the remuneration tables above. 15 Hills Industries Limited 30 June 2008 Annual Financial Report Directors’ report For the year ended 30 June 2008 7 Remuneration report 7.4 Equity instruments All options refer to options over ordinary shares of Hills Industries Limited, which are exercisable on a one-for- one basis under the Executive Share plan. 7.4.1 Options and rights over equity instruments granted as compensation Details on options over ordinary shares in the Company that were granted as compensation to each key management person during the reporting period and details on options that were vested during the reporting period are as follows: Number of options granted during 2008 Fair value per Exercise price Grant date option at grant per option date ($) ($) Expiry date Number of options vested during 2008 100,000 60,000 28/2/2008 28/2/2008 0.1867 0.1867 5.49 5.49 31 Jan 2031 31 Jan 2031 60,000 60,000 60,000 30,000 25,000 28/2/2008 28/2/2008 28/2/2008 28/2/2008 28/2/2008 0.1867 0.1867 0.1867 0.1867 0.1867 5.49 5.49 5.49 5.49 5.49 31 Jan 2031 31 Jan 2031 31 Jan 2031 31 Jan 2031 31 Jan 2031 - - - - - - - Directors DJ Simmons GL Twartz Executives L Andrewartha S Cope R Gros J Easling A Muir No options have been granted since the end of the financial year. The options were provided at no cost to the recipients. All options expire on the earlier of their expiry date or termination of the individual’s employment. The options are exercisable three years from grant date for the options issued in 2008, or two years from grant date for options issued prior to 2008. In addition to a continuing employment service condition, the ability to exercise options is conditional on the Group achieving certain performance hurdles. Details of the performance criteria are included in the long-term incentives discussion in section 6.1. For options granted in the current year, the earliest exercise date is 31 January 2011. 7.4.2 Modification of terms of equity-settled share-based payment transactions No terms of equity-settled share-based payment transactions (including options and rights granted as compensation to a key management person) have been altered or modified by the issuing entity during the reporting period or the prior period. 7.4.3 Exercise of options granted as compensation During the reporting period, no shares were issued on the exercise of options previously granted as compensation to key management personnel. 16 Hills Industries Limited 30 June 2008 Annual Financial Report Directors’ report For the year ended 30 June 2008 7 Remuneration report 7.4 Equity instruments 7.4.4 Analysis of options over equity instruments granted as compensation Details of vesting profile of the options granted as remuneration to each key management person of the Group and each of the five named Company executives and Group executives are detailed below. Options granted Financial years % vested % forfeited in in which option Directors D J Simmons G L Twartz Executives A R Oliver L Andrewartha J Easling A Muir D Walker R Meachem R Gros Number 80,000 100,000 100,000 60,000 60,000 60,000 45,000 45,000 25,000 60,000 60,000 60,000 30,000 30,000 30,000 25,000 25,000 25,000 10,000 10,000 20,000 10,000 25,000 25,000 60,000 60,000 Date Feb 06 Feb 07 Feb 08 Feb 06 Feb 07 Feb 08 Feb 06 Feb 07 Feb 08 Feb 06 Feb 07 Feb 08 Feb 06 Feb 07 Feb 08 Feb 06 Feb 07 Feb 08 Feb 06 Feb 07 Feb 08 Feb 06 Feb 07 Feb 08 Feb 07 Feb 08 in year - - - - - - year (A) 100% 100% 100% 100% - - vests 30 June 2008 30 June 2009 30 June 2011 30 June 2008 30 June 2009 30 June 2011 - - - - - - - - - - - - - - - - - - - - 100% - - 100% - - 100% - - 100% - - 100% - - 100% - - - - 30 June 2008 30 June 2009 30 June 2011 30 June 2008 30 June 2009 30 June 2011 30 June 2008 30 June 2009 30 June 2011 30 June 2008 30 June 2009 30 June 2011 30 June 2008 30 June 2009 30 June 2011 30 June 2008 30 June 2009 30 June 2011 30 June 2009 30 June 2011 (A) The % forfeited in the year represents the reduction from the maximum number of options available to vest due to the highest-level performance criteria as well as options that have lapsed due to termination of employment. 17 Hills Industries Limited 30 June 2008 Annual Financial Report Directors’ report For the year ended 30 June 2008 7 Remuneration report 7.4 Equity instruments 7.4.5 Analysis of movements in options The movement during the reporting period, by value, of options over ordinary shares in the Company held by each key management person, and each of the five named Company executives and Group executives is detailed below. D J Simmons G L Twartz A R Oliver L Andrewartha J Easling D Walker R Meachem R Gros A Muir Value of Options Lapsed/forfeited Granted in year Exercised in year $ (A) 18,670 11,202 11,202 11,202 5,601 3,734 4,668 11,202 4,668 82,149 $ (B) - - - - - - - - - - in year $ (C) 115,324 33,618 25,214 33,618 16,809 5,603 5,603 - 14,008 249,797 (A) (B) (C) The value of options granted in the year is the fair value of the options calculated at grant date using the method described above. The total value of the options granted is included in the table above. This amount is allocated to remuneration over the vesting period. The value of options exercised during the year is calculated as the market price of shares of the Company as at close of trading on the date the options were exercised after deducting the price paid to exercise the option. The value of the options that lapsed/forfeited during the year represents the benefit forgone and is calculated at the date the option lapsed using the method described above assuming the performance criteria had been achieved. The options issued in February 2006 lapsed during the year. 7.5 Payments to persons before taking office There were no payments to persons before taking office. 18 Hills Industries Limited 30 June 2008 Annual Financial Report Directors’ report For the year ended 30 June 2008 8. Principal activities The principal activities of the Group during the course of the year are outlined in section 1 of the Directors’ Report within the Overview of the Group. Objectives The Group’s objectives are to: increase net profit available to shareholders; increase earnings per share; • • • maintain the current dividend policy; and • improve the retention rate of our outstanding people resources. In order to meet theses objectives the following targets have been set for the 2009 financial year and beyond: • • • • • • increase revenue and operating activities; reduce operating costs; consider further strategic acquisitions; continue to improve our safety performance; continue to source cost effective supplies; and further develop our employees. 9 Dividends Dividends paid or declared by the Company to members since the end of the previous financial year were: Cents per share Total amount $’000 Franked/ unfranked Date of payment Declared and paid during the year 2008 Interim 2008 ordinary Interim dividend forgone for Share Investment Plan Final 2007 ordinary Final dividend forgone for Share Investment Plan Total amount 13.5 14.0 23,579 (3,390) 24,201 (3,779) 40,611 Franked 31 March 2008 Franked 24 September 2007 Franked dividends declared as paid during the year were franked at the rate of 30 per cent. Declared after end of year After the balance sheet date the directors proposed the following dividends. The dividends have not been provided and there are no income tax consequences. In thousands of AUD Final ordinary Total amount Cents per share Total amount 14.0 26,154 26,154 Franked/ un-franked Franked Date of payment 29 September 2008 The financial effect of these dividends has not been brought to account in the financial statements for the year ended 30 June 2008 and will be recognised in subsequent financial reports. For more information regarding dividends please refer to note 22. 19 Hills Industries Limited 30 June 2008 Annual Financial Report Directors’ report For the year ended 30 June 2008 11 Events subsequent to reporting date There has not arisen in the interval between the end of the financial year and the date of this report any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the Company, to affect significantly the operations of the Group, the results of those operations, or the state of affairs of the Group, in future financial years. 12. Likely developments For likely developments please refer to the review of operations in section 1 of the Directors’ report. Further information about likely developments in the operations of the Group and the expected results of those operations in future financial years has not been included in this report because disclosure of the information would be likely to result in unreasonable prejudice to the Group. 13. Directors’ interests The relevant interest of each director in the shares, debentures, interests in registered schemes and rights or options over such instruments issued by the companies within the Group and other related bodies corporate, as notified by the directors to the Australian Securities Exchange in accordance with S205G(1) of the Corporations Act 2001, at the date of this report is as follows: Hills Industries Limited J H Hill-Ling * DJ Simmons I Elliot RB Flynn GG Hill PW Stancliffe GL Twartz Ordinary shares 15,336,811 369,898 1,000 26,296 76,056 12,121 207,100 Options over ordinary shares - - - - - - 120,000 * Includes 1,057,001 shares owned by Hills Associates Ltd & Poplar Pty Ltd and 12,454,632 owned by Hills Associates Ltd of which J H Hill-Ling is a Director 20 Hills Industries Limited 30 June 2008 Annual Financial Report Directors’ report For the year ended 30 June 2008 14. Share options Options granted to directors and officers of the Company During the financial year, the Company granted options for no consideration over unissued ordinary shares in the Company to the following directors and to the following of the five most highly remunerated officers of the Company as part of their remuneration: Directors DJ Simmons GL Twartz Executives L Andrewatha J Easling A Muir S Cope R Gros Number of options granted Exercise price Expiry date 100,000 60,000 60,000 30,000 25,000 60,000 60,000 5.49 5.49 5.49 5.49 5.49 5.49 5.49 31 Jan 2031 31 Jan 2031 31 Jan 2031 31 Jan 2031 31 Jan 2031 31 Jan 2031 31 Jan 2031 All options were granted during the financial year. No options have been granted since the end of the financial year. Unissued shares under options At the date of this report unissued ordinary shares of the Company under option in accordance with the accounting standards are: Expiry date January 2023 January 2024 January 2025 January 2026 January 2027 January 2028 January 2029 January 2031 Exercise price $2.50 $2.90 $3.23 $3.66 $4.16 $4.83 $5.53 $5.49 Number of shares 120,000 133,000 210,000 260,000 340,000 - 465,000 515,000 2,043,000 All options expire on the earlier of their expiry date or termination of the employee’s employment. In addition, the ability to exercise the options is conditional on the Group achieving certain performance hurdles. The performance hurdles comprise two components, relative total shareholder return and growth in earnings per share. Further details are included in the Remuneration Report. These options do not entitle the holder to participate in any share issue of the Company or any other body corporate. Shares issued on exercise of options During or since the end of the financial year, the Company has not issued ordinary shares as a result of the exercise of options. 21 Hills Industries Limited 30 June 2008 Annual Financial Report Directors’ report For the year ended 30 June 2008 15. Indemnification and insurance of officers and auditors Indemnification The Company has agreed to indemnify the Directors and officers of the Company against all liabilities to another person (other than the Company or a related body corporate) that may arise from their position as Directors of the Company and its controlled entities, except where the liability arises out of conduct involving a lack of good faith. The agreement stipulates that the Company will meet the full amount of any such liabilities, including costs and expenses. The Company has also agreed to indemnify the current Directors of its controlled entities for all liabilities to another person (other than the Company or a related body corporate) that may arise from their position, except where the liability arises out of conduct involving a lack of good faith. The agreement stipulates that the Company will meet the full amount of any such liabilities, including costs and expenses. Insurance premiums Since the end of the previous financial year the Company has paid insurance premiums in respect of Directors’ and officers’ liability and legal expenses’ insurance contracts, for current and former Directors and officers, including senior executives of the Company and Directors, senior executives and secretaries of its controlled entities. The insurance premiums relate to: • • costs and expenses incurred by the relevant officers in defending proceedings, whether civil or criminal and whatever their outcome; and other liabilities that may arise from their position, with the exception of conduct involving a wilful breach of duty or improper use of information or position to gain a personal advantage. The Directors have not included details of the nature of the liabilities covered or the amount of the premiums paid in respect of the Directors’ and officers’ liability and legal expenses’ insurance contracts as such disclosure is prohibited under the terms of the contracts. 16. Non-audit services During the year KPMG, the Company’s auditor, has performed certain other services in addition to their statutory duties. The board has considered the non-audit services provided during the year by the auditor and in accordance with written advice provided by resolution of the audit and compliance committee, is satisfied that the provision of those non-audit services during the year by the auditor are compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: all non-audit services were subject to the corporate governance procedures adopted by the Company and have been reviewed by the audit committee to ensure they do not impact the integrity and objectivity of the auditor; and the non-audit services provided do not undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Company, acting as an advocate for the Company or jointly sharing risks and rewards. • • 22 Hills Industries Limited 30 June 2008 Annual Financial Report Directors’ report For the year ended 30 June 2008 16. Non-audit services (continued) Details of the amounts paid to the auditor of the Company, KPMG, and its related practices for audit and non-audit services provided during the year are set out below. In addition, amounts paid to other auditors for the statutory audit have been disclosed: Audit services: Auditors of the Company: Audit and review of financial reports (KPMG Australia) Audit and review of financial reports (Overseas KPMG firms) Other auditors: Audit and review of financial reports (non-KPMG firms) Services other than statutory audit: Other services Taxation compliance services (KPMG Australia) Taxation compliance services (Overseas KPMG firms) Consolidated 2008 $ 2007 $ 377,000 41,004 418,004 3,030 3,030 134,020 26,582 160,602 350,000 53,186 403,186 12,383 12,383 122,022 12,678 134,700 17. Lead auditor’s independence declaration The Lead auditor’s independence declaration is set out on page 99 and forms part of the directors’ report for financial year ended 30 June 2008. 18. Rounding off The Company is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 and in accordance with that Class Order, amounts in the financial report and directors’ report have been rounded off to the nearest thousand dollars, unless otherwise stated. This report is made with a resolution of the directors: ______________________________________________ J H Hill-Ling Director ______________________________________________ G L Twartz Director Dated at Adelaide this 12th day of September 2008. 23 Hills Industries Limited 30 June 2008 Annual Financial Report Income statements For the year ended 30 June 2008 In thousands of AUD Continuing operations Revenue Other income Expenses excluding net financing costs Results from operating activities Finance income Finance expenses Net finance expense Profit before income tax Income tax expense Profit for the period Attributable to: Equity holders of the Company Minority interest Profit for the period Earnings per share Basic earnings per share Diluted earnings per share Dividends per share Ordinary shares paid Final and interim dividend for the year ended 30 June Consolidated Company Note 2008 2007 2008 2007 8 9 10 6 12 12 13 22 23 23 22 22 1,184,737 10,384 1,195,121 1,013,999 2,372 1,016,371 342,182 13,503 355,685 295,930 9,034 304,964 (1,112,247) (934,098) (285,695) (271,741) 82,874 82,273 69,990 33,223 781 (15,155) (14,374) 716 (9,821) (9,105) 4,898 (15,733) (10,835) 3,923 (10,671) (6,748) 68,500 73,168 59,155 26,475 (16,140) (21,126) (5,397) (5,418) 52,360 52,042 53,758 21,057 46,807 5,553 52,360 47,173 4,869 52,042 53,758 - 53,758 21,057 - 21,057 26.6¢ 26.4¢ 27.6¢ 27.6¢ 27.5¢ 26.5¢ 27.5¢ 27.5¢ The notes on pages 28 to 95 are an integral part of these consolidated financial statements. 24 Hills Industries Limited 30 June 2008 Annual Financial Report Balance sheets As at 30 June 2008 In thousands of AUD Current Assets Cash and cash equivalents Trade and other receivables Inventories Non-current assets classified as held for sale Total Current Assets Non-Current Assets Receivables Investments Deferred tax assets Property, plant and equipment Intangible assets Total Non-Current Assets Total Assets Liabilities Bank overdraft Trade and other payables, including derivatives Loans and borrowings Employee benefits Current tax payable Provisions Total Current liabilities Non-Current Liabilities Loans and borrowings Employee benefits Provisions Total Non-Current Liabilities Total Liabilities Net Assets Equity Share capital Reserves Retained earnings Total Equity attributable to equity holders of the Company Minority interest Total Equity Consolidated Company Note 2008 2007 2008 2007 21 18 17 20 18 19 16 14 15 6 21 28 24 25 16 27 24 25 27 6 22 22 22 22 21,549 244,761 180,341 - 446,651 27,434 172,655 175,507 15,946 391,542 17,285 2 16,403 226,424 114,162 374,276 820,927 - 2 30,811 173,157 111,369 315,339 706,881 239 139,921 5,952 26,716 4,317 5,544 182,689 511 133,947 1,593 25,741 12,742 7,099 181,633 203,497 4,961 263 208,721 391,410 429,517 171,582 4,574 328 176,484 358,117 348,764 223,091 51,369 133,759 178,031 26,077 127,618 408,219 331,726 21,298 429,517 17,038 348,764 1,000 292,989 41,559 - 335,548 5,940 151,968 2,518 88,322 - 248,748 584,296 8,513 54,005 10,292 9,113 2,957 4,922 89,802 203,498 4,371 - 207,869 297,671 286,625 223,091 33,575 29,959 286,625 - 286,625 3,177 224,503 37,565 6,209 271,454 - 151,212 13,849 55,076 - 220,137 491,591 - 77,879 4,125 8,595 11,833 4,474 106,906 171,498 4,300 - 175,798 282,704 208,887 178,031 14,044 16,812 208,887 - 208,887 The notes on pages 28 to 95 are an integral part of these consolidated financial statements. 25 Hills Industries Limited 30 June 2008 Annual Financial Report Statements of recognised income and expense For the year ended 30 June 2008 In thousands of AUD Consolidated Company Note 2008 2007 2008 2007 Foreign currency translation differences for foreign operations Gain on revaluation of land and buildings Deferred income tax on revaluation Income and expense recognised directly in equity (2,340) 40,561 (11,966) 26,255 1,442 - - 1,442 - 28,877 (9,418) 19,459 - - - - Profit for the period 52,360 52,042 53,758 21,057 Total recognised income and expense for the period Attributable to: Equity holders of the Company Minority interest Total recognised income and expense for the period 22 22 22 78,615 53,484 73,217 21,057 71,968 6,647 48,615 73,217 21,057 4,869 - - 78,615 53,484 73,217 21,057 The notes on pages 28 to 95 are an integral part of these consolidated financial statements. 26 Hills Industries Limited 30 June 2008 Annual Financial Report Statements of cash flows For the year ended 30 June 2008 In thousands of AUD Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Cash generated from operations Interest received Interest paid Dividends received Income taxes paid Net cash from (used in) operating activities Cash flows from investing activities Proceeds from sale of property, plant and equipment Proceeds from disposal of asset held for sale Proceeds from sale of investments Disposal of subsidiaries Acquisition of subsidiaries (net of cash acquired) Acquisition of business operations (net of cash acquired) Acquisition of property, plant and equipment Acquisition of intangible assets Loans to other entities Loans to controlled entities Rent received Net cash from (used in) investing activities Cash flows from financing activities Proceeds from issue of share capital Proceeds from borrowings Repayment of borrowings Repayment of borrowings to controlled entities Dividends paid by the company Dividends paid to minority interest Net cash from (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at 1 July Effect of exchange rate fluctuations on cash held Consolidated Company Note 2008 2007 2008 2007 1,236,662 (1,205,856) 30,806 781 (15,143) 1 (22,459) (6,014) 1,132,806 (1,059,403) 73,403 716 (10,585) - (16,712) 46,822 306,008 (276,757) 29,251 4,898 (15,733) 1 (16,289) 2,128 328,473 (299,784) 28,689 3,923 (11,441) 6,400 (8,730) 18,841 840 3,500 - - (356) (7,097) (35,366) - (285) - 836 (37,928) 44,860 40,101 (3,827) - (40,611) (2,387) 38,136 (5,806) 26,923 193 4,502 - - 526 (86) (11,422) (38,459) (176) (297) - 787 (44,625) 10,206 44,901 (3,469) - (37,322) (2,343) 11,973 14,170 12,804 (51) 84 3,500 - - (356) - (10,018) - (285) (50,095) 3,103 (54,067) 44,860 37,000 - - (40,611) - 41,249 (10,690) 3,177 - 309 - (8,603) - (86) - - - (297) (11,613) 2,498 (17,792) 10,206 41,502 (560) (6,906) (37,322) - 6,920 7,969 (4,813) 21 21b 7 7 7 22 22 22 Cash and cash equivalents at 30 June 21(a) 21,310 26,923 (7,513) 3,177 The notes on pages 28 to 95 are an integral part of these consolidated financial statements. 27 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 1. Reporting entity Hills Industries Limited (the “Company”) is a company domiciled in Australia. The address of the Company’s registered office is 944-956 South Road Edwardstown SA 5039. The consolidated financial statements of the Company as at and for the year ended 30 June 2008 comprise the Company and its subsidiaries (together referred to as the “Group” and individually as “Group entities”). The Group primarily is involved in manufacturing and distribution businesses as detailed in note 6. 2. Basis of preparation (a) Statement of compliance The financial report is a general purpose financial report that has been prepared in accordance with Australian Accounting Standards (AASBs) (including Australian Interpretations) adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The consolidated financial report of the Group and the financial report of the Company comply with International Financial Reporting Standards (IFRSs) and interpretations adopted by the International Accounting Standards Board (IASB). The Board of Directors approved the financial statements on 12 September 2008. (b) Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except for the following: • • The methods used to measure fair values are discussed further in note 4. financial instruments at fair value through profit or loss are measured at fair value land and buildings are measured at fair value. (c) Functional and presentation currency These consolidated financial statements are presented in Australian dollars, which is the Company’s functional currency and the functional currency of the majority of the Group. The Company is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 and in accordance with that Class Order, all financial information presented in Australian dollars has been rounded to the nearest thousand unless otherwise stated. (d) Use of estimates and judgements The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described in the following notes: • • • • note 7 – business combinations note 15 – measurement of the recoverable amounts of cash-generating units containing goodwill note 26 – measurement of share-based payments note 27 and 32 – provisions and contingencies 28 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 3. Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Group entities. The Company and Group have not elected to early adopt any accounting standards or amendments: (a) Basis of consolidation (i) Subsidiaries Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that currently are exercisable are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. In the Company’s financial statements, investments in subsidiaries are carried at cost, less any impairment charges. (ii) Transactions eliminated on consolidation Intra-group balances, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. (b) Foreign currency (i) Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the foreign exchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary assets and liabilities that are measured in terms of historical cost are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on retranslation are recognised in profit or loss. (ii) Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to Australian dollars at exchange rates at the reporting date. The income and expenses of foreign operations are translated to Australian dollars at exchange rates at the dates of the transactions. Foreign currency differences are recognised directly in equity. Since 1 July 2004, the Group’s date of transition to AASBs, such differences have been recognised in the foreign currency translation reserve (FCTR). When a foreign operation is disposed of, in part or in full, the relevant amount in the FCTR is transferred to profit or loss. 29 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 3. Significant accounting policies (continued) (c) Financial instruments (i) Non-derivative financial instruments Non-derivative financial instruments comprise investments in equity securities, trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables. Non-derivative financial instruments are recognised initially at fair value plus, for instruments not at fair value through profit or loss, any directly attributable transaction costs. Subsequent to initial recognition non-derivative financial instruments are measured as described below. A financial instrument is recognised if the Group becomes a party to the contractual provisions of the instrument. Financial assets are derecognised if the Group’s contractual rights to the cash flows from the financial assets expire or if the Group transfers the financial asset to another party without retaining control or substantially all risks and rewards of the asset. Regular way purchases and sales of financial assets are accounted for at trade date, i.e., the date that the Group commits itself to purchase or sell the asset. Financial liabilities are derecognised if the Group’s obligations specified in the contract expire or are discharged or cancelled. Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Accounting for finance income and expense is discussed in note 3(n). Financial assets at fair value through profit or loss An instrument is classified as at fair value through profit or loss if it is held for trading or is designated as such upon initial recognition. Financial instruments are designated at fair value through profit or loss if the Group manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Group’s documented risk management or investment strategy. Upon initial recognition, attributable transaction costs are recognised in profit or loss when incurred. Financial instruments at fair value through profit or loss are measured at fair value, and changes therein are recognised in profit or loss. Other Other non-derivative financial instruments are measured at amortised cost using the effective interest method, less any impairment losses. (ii) Share capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects. Dividends Dividends are recognised as a liability in the period in which they are declared. 30  Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 3. Significant accounting policies (continued) (d) Property, plant and equipment (i) Land and Buildings Land and buildings are stated at fair value. Land and buildings are independently valued at least every four years on basis of open market values, and in the intervening years are valued by the Directors based on the most recent independent valuation. Building improvements are carried at cost and depreciated over the life of the building. Increases in the carrying amounts arising on revaluation of land and buildings are credited to the asset revaluation reserve. To the extent that the increase reverses a decrease previously recognised in profit or loss, for an asset the increase is recognised in profit or loss. Decreases that reverse previous increases for the same asset are first charged against the asset revaluation reserve to the extent of the remaining reserve attributable to the asset; all other decreases are charged directly to the income statement. (ii) Plant and Equipment Items of property, plant and equipment are measured at cost less accumulated depreciation and impairment losses Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. Borrowing costs related to the acquisition or construction of qualifying assets are recognised in profit or loss as incurred. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognised net within “other income” in profit or loss. When revalued assets are sold, the amounts included in the revaluation reserve are transferred to retained earnings. 31 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 3. Significant accounting policies (continued) (d) Property, plant and equipment (continued) (iii) Subsequent costs The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred. (iv) Depreciation Depreciation is recognised in profit or loss over the estimated useful lives of each part of an item of property, plant and equipment, excluding land, taking into account estimated residual values. The diminishing value, straight line or units of production method is used as considered appropriate The estimated rates of depreciation for the current and comparative periods are as follows: • • • buildings plant and equipment leasehold improvements 0.75% 5.00% to 33.33% 20.00% to 33.33% Depreciation methods, useful lives and residual values are reviewed at each reporting date. When changes are made, adjustments are reflected prospectively in current and future reporting periods only. (e) Intangible assets (i) Goodwill Goodwill arises on the acquisition of subsidiaries and business operations. Acquisitions prior to 1 July 2004 As part of its transition to AASBs, the Group elected to restate only those business combinations that occurred on or after 1 July 2004. In respect of acquisitions prior to 1 July 2004, goodwill represents the amount recognised under the Group’s previous accounting framework, Australian GAAP. 32 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 3. Significant accounting policies (continued) (e) Intangible assets (continued) (i) Goodwill (continued) Acquisitions on or after 1 July 2004 For acquisitions on or after 1 July 2004, goodwill represents the excess of the cost of the acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess is negative (negative goodwill), it is recognised immediately in profit or loss. Acquisitions of minority interests Goodwill arising on the acquisition of a minority interest in a subsidiary represents the excess of the cost of the additional investment over the carrying amount of the net assets acquired at the date of exchange. Subsequent measurement Goodwill is measured at cost less any accumulated impairment losses. (ii) Research and development Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised in profit or loss when incurred. Development activities involve a plan or design for the production of new or substantially improved products and processes. Development expenditure is capitalised only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Group intends to and has sufficient resources to complete development and to use or sell the asset. The expenditure capitalised includes the cost of materials, direct labour and overhead costs that are directly attributable to preparing the asset for its intended use. Borrowing costs related to the development of qualifying assets are recognised in profit or loss as incurred. Other development expenditure is recognised in profit or loss as incurred. Capitalised development expenditure is measured at cost less accumulated amortisation and accumulated impairment losses. (iii) Other intangible assets Other intangible assets that are acquired by the Group, which have finite useful lives, are measured at cost less accumulated amortisation and accumulated impairment losses. (iv) Subsequent expenditure Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognised in profit or loss as incurred. (v) Amortisation Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill, from the date that they are available for use. The estimated useful lives for the current and comparative periods are as follows: • • patents and trademarks capitalised development costs 10 to 20 years 20 years 33 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 3. Significant accounting policies (continued) (f) Leased assets Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases are operating leases and the leased assets are not recognised on the Group’s balance sheet. (g) Inventories Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the first-in first-out principle, and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based on normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. (h) Impairment (i) Financial assets A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. All impairment losses are recognised in profit or loss. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost the reversal is recognised in profit or loss. 34 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 3. Significant accounting policies (continued) (h) Impairment (continued) (ii) Non-financial assets The carrying amounts of the Group’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, recoverable amount is estimated at each reporting date. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”). The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash-generating units that are expected to benefit from the synergies of the combination. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. 35 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 3. Significant accounting policies (continued) (i) Non-current assets held for sale Non-current assets (or disposal groups comprising assets and liabilities) that are expected to be recovered primarily through sale rather than through continuing use are classified as held for sale. Immediately before classification as held for sale, the assets (or components of a disposal group) are remeasured in accordance with the Group’s accounting policies. Thereafter generally the assets (or disposal group) are measured at the lower of their carrying amount and fair value less cost to sell. Any impairment loss on a disposal group first is allocated to goodwill, and then to remaining assets and liabilities on pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, employee benefit assets, investment property and biological assets, which continue to be measured in accordance with the Group’s accounting policies. Impairment losses on initial classification as held for sale and subsequent gains or losses on remeasurement are recognised in profit or loss. Gains are not recognised in excess of any cumulative impairment loss. (j) Employee benefits (i) Defined contribution plans A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution plans are recognised as a personnel expense in profit or loss when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. (ii) Long-term employee benefits The Group’s net obligation in respect of long-term service benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods. The obligation is calculated using expected future increases in wage and salary rates, including related on-costs and expected settlement dates, and is discounted using the rates attached to the Commonwealth Government bonds at the balance sheet date which have maturity dates approximating to the terms of the Group’s obligations. 36 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 3. Significant accounting policies (continued) (j) Employee benefits (continued) (v) Short-term benefits Liabilities for employee benefits for wages, salaries, annual leave and sick leave represent present obligations resulting from employees’ services provided to reporting date and are calculated at undiscounted amounts based on remuneration wage and salary rates that the Group expects to pay as at reporting date including related on-costs, such as workers compensation insurance and payroll tax. Non-accumulating non-monetary benefits, such as medical care, housing, cars and free or subsidised goods and services, are expensed based on the net marginal cost to the Group as the benefits are taken by the employees. A liability is recognised for the amount expected to be paid under short-term cash bonus or profit- sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. (vi) Share-based payment transactions The grant date fair value of options granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the options. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest, except for those that fail to vest due to market conditions not being met. Employee Share Bonus Plan The Employee Share Bonus Plan allows Group employees to acquire shares of the Company. Shares are allotted to employees who have served a qualifying period. Up to $1,000 per year in shares is allotted to each qualifying employee. The fair value of shares issued is recognised as an employee expense with a corresponding increase in equity. The fair value of the shares granted is measured using a present value method. Executive Share Plan The Executive Share Plan allows Group employees to acquire shares of the Company. The fair value of options granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options. The valuation method takes into account the exercise price of the option, the life of the option, the current price of the underlying shares, the expected volatility of the share price, the dividends expected of the shares and the risk-free interest rate for the life of the option. (k) Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. (i) Claims A provision for claims is the estimated future liability of the Group’s self-insurance arrangements. The value of the provision is determined in consultation with the company’s actuaries or legal advisers as appropriate. Claims estimate is based on historical claims data and a weighting of the possible outcomes against their associated probabilities. Outstanding claims are recognised for incidences that have occurred that may give rise to a claim and are measured at the cost that the entity expects to incur in settling the claims, discounted using a Commonwealth government bond rate with a maturity date approximating the terms of the Group’s obligations. 37 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 3. Significant accounting policies (continued) (k) Provisions (continued) (ii) Provision for contingent consideration Provision is made for contingent consideration payable on the acquisition of businesses and controlled entities where the consideration is payable in the future subject to certain performance measures and those measures are considered likely to be met. The estimated consideration payable is discounted and the expiration of the discount is recognised as interest expense. Subsequent changes to estimates of contingent consideration are adjusted against the purchase price and goodwill in the period identified. (l) Revenue (i) Goods sold Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates. Revenue is recognised when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods and the amount of revenue can be measured reliably. (ii) Services Revenue from services rendered is recognised in profit or loss in proportion to the stage of completion of the transaction at the reporting date. The stage of completion is assessed by reference to surveys of work performed. (v) Rental income Rental income from investment property is recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income, over the term of the lease. (m) Lease payments Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. 38  Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 3. Significant accounting policies (continued) (n) Finance income and expense Finance income comprises interest income on funds invested and dividend income. Interest income is recognised as it accrues in profit or loss and dividend income is recognised in profit or loss on the date that the Group’s right to receive payment is established Finance expenses comprise interest expense on borrowings, unwinding of the discount on provisions and foreign currency losses. All borrowing costs are recognised in profit or loss using the effective interest method. Foreign currency gains and losses are reported on a net basis. (o) Income tax Income tax expense comprises current and deferred tax. Income tax expense is recognised in profit or loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognised using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not recognised for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend is recognised. 39 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 3. Significant accounting policies (continued) (o) Income tax (continued) (i) Tax consolidation The Company and its wholly-owned Australian resident entities formed a tax-consolidated group with effect from 1 July 2003. As a consequence, all members of the tax-consolidated group are taxed as a single entity from that date. The head entity within the tax-consolidated group is Hills Industries Limited. Current tax expense/income, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax-consolidated group are recognised in the separate financial statements of the members of the tax-consolidated group using the “separate taxpayer within group” approach by reference to the carrying amounts of assets and liabilities in the separate financial statements of each entity and the tax values applying under tax consolidation. Any current tax liabilities (or assets) and deferred tax assets arising from unused tax losses of the subsidiaries is assumed by the head entity in the tax-consolidated group and are recognised by the Company as amounts payable/(receivable) to/(from) other entities in the tax-consolidated group in conjunction with any tax funding arrangement amounts (refer below). Any difference between these amounts is recognised by the Company as an equity contribution or distribution. The Company recognises deferred tax assets arising from unused tax losses of the tax- consolidated group to the extent that it is probable that future taxable profits of the tax- consolidated group will be available against which the asset can be utilised. Any subsequent period adjustments to deferred tax assets arising from unused tax losses as a result of revised assessments of the probability of recoverability is recognised by the head entity only. (ii) Nature of tax funding arrangements and tax sharing arrangements The head entity, in conjunction with other members of the tax-consolidated group, has entered into a tax funding arrangement that sets out the funding obligations of members of the tax- consolidated group in respect of tax amounts. The tax funding arrangements require payments to/from the head entity equal to the current tax liability/(asset) assumed by the head entity and any tax-loss deferred tax asset assumed by the head entity, resulting in the head entity recognising an inter-entity receivable/(payable) equal in amount to the tax liability/(asset) assumed. The inter-entity receivable/(payable) is at call. Contributions to fund the current tax liabilities are payable as per the tax funding arrangement and reflect the timing of the head entity’s obligation to make payments for tax liabilities to the relevant tax authorities. The head entity in conjunction with other members of the tax-consolidated group, has also entered into a tax sharing agreement. The tax sharing agreement provides for the determination of the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. No amounts have been recognised in the financial statements in respect of this agreement as payment of any amounts under the tax sharing agreement is considered remote. (p) Goods and services tax Revenue, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the balance sheet. 40 Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities that are recoverable from, or payable to, the ATO are classified as operating cash flows. 41 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 3. Significant accounting policies (continued) (q) Earnings per share The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise share options granted to employees. (r) Segment reporting A segment is a distinguishable component of the Group that is engaged either in providing related products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. Segment information is presented in respect of the Group’s business and geographical segments. The Group’s primary format for segment reporting is based on business segments. The business segments are determined based on the Group’s management and internal reporting structure. Inter-segment pricing is determined on an arm’s length basis. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly investments (other than investment property) and related revenue, loans and borrowings and related expenses, corporate assets (primarily the Company’s headquarters) and head office expenses, and income tax assets and liabilities. Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment, and intangible assets other than goodwill. (s) New standards and interpretations not yet adopted The following standards, amendments to standards and interpretations have been identified as those which may impact the entity in the period of initial application. They are available for early adoption at 30 June 2008, but have not been applied in preparing this financial report: • Revised AASB 3 Business Combinations changes the application of acquisition accounting for business combinations and the accounting for non-controlling (minority) interests. Key changes include: the immediate expensing of all transaction costs; measurement of contingent consideration at acquisition date with subsequent changes through the income statement; measurement of non- controlling (minority) interests at full fair value or the proportionate share of the fair value of the underlying net assets; guidance on issues such as reacquired rights and vendor indemnities; and the inclusion of combinations by contract alone and those involving mutuals. The revised standard becomes mandatory for the Group’s 30 June 2010 financial statements. The Group has not yet determined the potential effect of the revised standard on the Group’s financial report. 42 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 3. Significant accounting policies (continued) (s) New standards and interpretations not yet adopted (continued) • • • • • • AASB 8 Operating Segments introduces the “management approach” to segment reporting. AASB 8, which becomes mandatory for the Group’s 30 June 2010 financial statements, will require the disclosure of segment information based on the internal reports regularly reviewed by the Group’s Chief Operating Decision Maker in order to assess each segment’s performance and to allocate resources to them. Currently the Group presents segment information in respect of its business and geographical segments (see note 6). Under the management approach, the Group will present segment information in respect of Home, Hardware and Eco, Building and Industrial and Electronic, Security and Entertainment. Revised AASB 101 Presentation of Financial Statements introduces as a financial statement (formerly “primary” statement) the “statement of comprehensive income”. The revised standard does not change the recognition, measurement or disclosure of transactions and events that are required by other AASBs. The revised AASB 101 will become mandatory for the Group’s 30 June 2010 financial statements. The Group has not yet determined the potential effect of the revised standard on the Group’s disclosures. Revised AASB 123 Borrowing Costs removes the option to expense borrowing costs and requires that an entity capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. The revised AASB 123 will become mandatory for the Group’s 30 June 2010 financial statements and will constitute a change in accounting policy for the Group. In accordance with the transitional provisions the Group will apply the revised AASB 123 to qualifying assets for which capitalisation of borrowing costs commences on or after the effective date. The Group has not yet determined the potential effect of the revised standard on future earnings. Revised AASB 127 Consolidated and Separate Financial Statements changes the accounting for investments in subsidiaries. Key changes include: the remeasurement to fair value of any previous/retained investment when control is obtained/lost, with any resulting gain or loss being recognised in profit or loss; and the treatment of increases in ownership interest after control is obtained as transactions with equity holders in their capacity as equity holders. The revised standard will become mandatory for the Group’s 30 June 2010 financial statements. The Group has not yet determined the potential effect of the revised standard on the Group’s financial report. AASB 2008-1 Amendments to Australian Accounting Standard - Share-based Payment: Vesting Conditions and Cancellations changes the measurement of share-based payments that contain non- vesting conditions. AASB 2008-1 becomes mandatory for the Group’s 30 June 2010 financial statements. The Group has not yet determined the potential effect of the amending standard on the Group’s financial report. AI 13 Customer Loyalty Programmes addresses the accounting by entities that operate, or otherwise participate in, customer loyalty programmes for their customers. It relates to customer loyalty programmes under which the customer can redeem credits for awards such as free or discounted goods or services. AI 13, which becomes mandatory for the Group’s 30 June 2009 financial statements, is not expected to have any impact on the financial report. 43 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 4. Determination of fair values A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and / or disclosure purposes based on the following methods. Where applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. (a) Land and Buildings Fair value of land and buildings at 30 June 2008 is a based on an independent valuation of all freehold land and buildings carried out during March 2008. The valuation process was managed by AON Risk Services Australia Limited with the individual valuations being performed by various certified valuers. The market value of property is the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The valuations were determined having regard to the highest and best use of the assets for which market participants would be prepared to pay. Fair value at 30 June 2007 is a Directors’ valuation as at that date based on an independent valuation of all freehold land and buildings dated 15 September 2003. The costs of additions since the valuations are deemed to be the fair value of those assets. The Directors are of the opinion that these bases provide a reasonable estimate of fair value. The fair value of property, plant and equipment recognised as a result of a business combination is based on market values. (b) Intangible assets The fair value of patents and trademarks acquired in a business combination is based on the discounted estimated royalty payments that have been avoided as a result of the patent or trademark being owned. The fair value of other intangible assets is based on the discounted cash flows expected to be derived from the use and eventual sale of the assets. (e) Inventories The fair value of inventories acquired in a business combination is determined based on its estimated selling price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable profit margin based on the effort required to complete and sell the inventories. (g) Trade and other receivables The fair value of trade and other receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. (i) Non-derivative financial liabilities Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. (j) Share-based payment transactions For information regarding the fair-value of share-based payments please refer to note 26. 44 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 5. Financial risk management Overview The Company and Group have exposure to the following risks from their use of financial instruments: • credit risk • liquidity risk • market risk The Group's overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses derivative financial instruments such as foreign exchange contracts and interest rate swaps to hedge certain risk exposures. Derivatives are exclusively used for hedging purposes, ie not as trading or other speculative instruments. The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate, foreign exchange and other price risks, aging analysis for credit risk. Risk management is carried out by a central treasury department (Group Treasury) under policies approved by the Board of Directors. Group Treasury identifies, evaluates and hedges financial risks in close co-operation with the Group’s operating units. The Board provides written principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and investment of excess liquidity. Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers and investment securities. For the Company it also arises from receivables due from subsidiaries. Trade and other receivables Credit risk is managed on a group basis. Credit risk arises from cash and cash equivalents and deposits with banks and financial institutions, as well as credit exposures to wholesale and retail customers, including outstanding receivables and committed transactions. Management has established a credit policy under which each new customer is analysed individually for creditworthiness before the Group’s standard payment and delivery terms and conditions are offered. The Group’s review includes external ratings and trade references. Purchase limits are established for each customer, which represent the maximum open amount without requiring further approval. These limits are reviewed monthly. Customers that fail to meet the Group’s benchmark creditworthiness may transact with the Group only on a prepayment basis. The maximum exposure to credit risk at the reporting date is the carrying amount of the financial assets as summarised in note 29. In monitoring customer credit risk, customers are grouped according to their credit characteristics, including whether they are an individual or incorporated legal entity, whether they are a wholesale, retail or end-user customer, geographic location, industry, aging profile, maturity and existence of previous financial difficulties. 45 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 5. Financial risk management (continued) Trade and other receivables (continued) In most cases goods are sold subject to retention of title clauses, so that in the event of non-payment the Group may have a priority claim. The Group does not require collateral in respect of trade and other receivables. The Company and Group have established an allowance for impairment that represents their estimate of incurred losses in respect of trade and other receivables and investments. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets. Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The Group manages liquidity risk by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Due to the dynamic and diversified nature of the underlying businesses, Group Treasury aims at maintaining flexibility in funding by keeping committed credit lines available with a variety of counterparties. Surplus funds are generally only invested in instruments that are tradeable in highly liquid markets. The Group has a financing facility of $264,388,000 that has been approved until November 2010. For more information please refer to Note 24. Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. 46 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 5. Financial risk management (continued) Currency risk The Group and the parent entity operate internationally and are exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar. Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities denominated in a currency that is not the entity’s functional currency and net investments in foreign operations. The risk is measured using cash flow forecasting. Management and group treasury manage the group companies’ foreign exchange risk against their functional currency. The group companies are required to hedge their foreign exchange risk exposure arising from future commercial transactions and recognised assets and liabilities using forward contracts transacted with Group Treasury. The Group Treasury's risk management policy is to hedge between 3 months of anticipated cash flows (mainly purchases of inventory) in US dollars. External foreign exchange contracts are designated at Group level as hedges of foreign exchange risk on specific assets, liabilities or future transactions on a gross basis. Interest rate risk The Group's main interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Group policy is to maintain approximately 50 to 75% of its borrowings at fixed rate using interest rate swaps to achieve this when necessary. During 2008 and 2007, the Group’s borrowings at variable rate were denominated in Australian Dollars and NZ Dollars. The Group manages its cash flow interest rate risk by using floating-to-fixed interest rate swaps. Such interest rate swaps have the economic effect of converting borrowings from floating rates to fixed rates. Generally, the Group raises long-term borrowings at floating rates and swaps them into fixed rates that are lower than those available if the Group borrowed at fixed rates directly. Under the interest rate swaps, the Group agrees with other parties to exchange, at specified intervals (mainly quarterly), the difference between fixed contract rates and floating-rate interest amounts calculated by reference to the agreed notional principal amounts. Other market price risk The Group has no material financial exposure to other market price risk as it is not exposed to either commodity price risk or equity securities price risk. 47 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 5. Financial risk management (continued) Capital management The Group and the company's objectives when managing capital are to safeguard their ability to continue as a going concern, so that they can continue to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. The Group and the Company monitor capital on the basis of the gearing ratio in conjunction with its review of the Group and Company’s banking covenants. This ratio is calculated as net debt divided by total equity. Net debt is calculated as total borrowings in the balance sheet less cash and cash equivalents. Total equity is ‘equity’ as shown in the balance sheet (including minority interest). During 2008, the Group's strategy, which was unchanged from 2007, was to maintain a target gearing ratio less than 45%. The gearing ratios at 30 June 2008 and 30 June 2007 were as follows: In thousands of AUD 2008 2007 2008 2007 Note Consolidated Company Total borrowings Less: cash and cash equivalents Net debt Total equity Gearing ratio 24 21 22 209,449 (21,310) 188,139 429,517 173,175 (26,923) 146,252 348,764 213,790 175,623 7,513 (3,177) 221,303 172,446 286,625 208,887 43.8% 41.9% 77.2% 82.6% Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements. 48 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 6. Segment reporting Business segments The Group comprises the following main business segments: • Electronic Security and Entertainment: Communications related products and services, domestic and commercial antennas, master antenna television systems, communications antennas, amplifiers, electronic security systems, closed circuit television systems, home and commercial automation and control systems, professional audio products, fibre optic transmission solutions and subscription TV installation services. • • Home, Hardware and Eco: Outdoor clothes driers, ladders, ironing boards, laundry trolleys, security doors, playtime equipment, garden sprayers, wheelbarrows, scaffold systems, rehabilitation and mobility products, water tanks and other rotationally moulded products, solar hot water products, stainless steel products and plumbing products. Building and Industrial: Structural, precision and large steel tubing, galvanising, cable tray and pipe systems, steel doorframes, roll-formed metal building products, carports and shed systems. During the current year Woodroffe Industries Pty Ltd has been reclassified for business segment reporting purposes from Building and Industrial to Home, Hardware and Eco. The comparative numbers have also been adjusted to reflect this change. Geographical segments In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers. Segment assets are based on the geographical location of the assets. The Group’s business segments operate geographically as follows: • Australia: Manufacturing facilities and sales offices and customers in all states and territories. • Overseas: Manufacturing facilities and sales offices in New Zealand. 49 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 6. Segment reporting (continued) Business Segments Electronic, Security and Entertainment 2007 2008 Home, Hardware Building and and Eco Industrial Eliminations Consolidated 2008 2007 2008 2007 2008 2007 2008 2007 312,322 277,174 227,558 201,914 643,060 534,124 - - 1,182,940 1,013,212 - - - - 5,353 7,457 (5,353) (7,457) - - 312,322 277,174 227,558 201,914 648,413 541,581 (5,353) (7,457) 1,182,940 1,013,212 38,098 31,726 13,806 13,783 23,891 36,059 - - 1,797 787 1,184,737 1,013,999 75,795 7,079 82,874 (14,374) 68,500 (16,140) 52,360 81,568 705 82,273 (9,105) 73,168 (21,126) 52,042 In thousands of AUD External revenues Inter-segment revenue Segment revenue Rentals Total Revenue Segment result Unallocated/corporate result Results from operating activities Net finance costs Profit before income tax Income tax expense Profit for the period 50 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 6. Segment reporting (continued) Business segments (continued) In thousands of AUD 2008 2007 2008 2007 2008 2007 2008 2007 Electronic, Security and Entertainment Home, Hardware and Eco Building and Industrial Consolidated Segment assets Unallocated/corporate assets Total assets Segment liabilities Unallocated/corporate liabilities Total liabilities 127,940 117,506 157,189 130,374 401,814 337,095 32,239 32,312 24,235 29,344 96,287 90,113 Capital expenditure 3,908 4,597 7,965 10,004 19,148 22,125 Unallocated/corporate assets Depreciation 2,897 3,098 6,574 5,738 10,952 9,020 Unallocated/corporate assets 686,943 133,984 820,927 152,761 238,649 391,410 31,021 4,170 35,191 20,423 1,361 21,784 584,975 121,906 706,881 151,769 206,348 358,117 36,726 1,909 38,635 17,856 1,132 18,988 Geographical segments In thousands of AUD 2008 2007 2008 2007 2008 2007 2008 2007 Australia Overseas Unallocated/corporat e Consolidated Revenue from external customers 1,127,552 954,953 Segment assets Capital expenditure 665,359 566,134 30,828 36,490 55,388 21,584 193 58,259 18,841 236 1,797 787 1,184,737 1,013,999 133,984 121,906 820,927 706,881 4,170 1,909 35,191 38,635 51 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 7. Acquisitions of subsidiaries and business operations Acquisition of subsidiaries On 5 October 2007 the Company acquired 50% of the shares in Opticomm Co Pty Ltd (Opticomm), for consideration of $756,000. The Company controls Opticomm by virtue of conditions contained in the shareholders agreement. Aside from this acquisition, the Group did not acquire any other subsidiaries during the current reporting period. In the prior reporting period the Group paid $86,000 deferred payment in respect of the Alquip Group acquired in January 2006. No other acquisitions of subsidiaries or payments in respect of subsidiaries were made in the prior reporting period. Company Name In thousands of AUD 2008 • Opticomm Date of Control Consideration Net of Cash Nature of Business % Acquired 05/10/2007 356* Provision of fibre networks and infrastructure 50 Total 356 2007 • Alquip Group – deferred payment Total 01/01/2006 86 86 * Excludes contingent consideration payable of $400,000 that is payable subject to certain performance criteria being met. Opticomm operates in the provision of fibre infrastructure to deliver high-speed voice, data and video to homes and multi-residential developments. The acquired business contributed revenues of $1,851,000 and net loss of $80,000 for the period from 5 October 2007 to 30 June 2008. As Opticomm was not actively trading prior to acquisition, had the acquisition occurred on 1 July 2007, the profit for the year ended 30 June 2008 would have been the same. The acquisition had the following effect on the Group’s assets and liabilities on acquisition date: In thousands of AUD Net identifiable assets and liabilities* Goodwill on acquisition Consideration paid, satisfied in cash** Cash acquired Net cash outflow Note 15 Pre - acquisition carrying amounts Fair value adjustments Recognised values on acquisition - - - 756 356 - 356 * Opticomm was not trading and as such there were no assets acquired as part of the acquisition. ** Includes legal fees of $6,000 In the prior reporting period the difference between the actual and estimated contingent consideration for the Alquip Group resulted in a decrease of $914,000 in goodwill on consolidation. 52 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 7. Acquisitions of subsidiaries and business operations (continued) Acquisition of business operations Year ended 30 June 2008 On 1 March 2008 the Group acquired the business operations of L. W. Gemmell & Associates (Aust) Pty Ltd (Gemmell) for $5,938,000 in cash. Gemmell manufactures and distributes a range of specialised plumbing products including pressure reducing valves and backflow prevention devices. It is not practicable to estimate the effect on the income statement had the business been acquired at 1 July 2007 nor is it practicable to individually estimate the profit or loss since acquisition. A deferred payment of $1,159,000 was made in respect of the Air Comfort Systems business acquired in the previous reporting period. The details of the acquisitions are noted in the table below. Name of business In thousands of AUD 2008 Air Comfort Seating Systems LW Gemmell & Associates Date of Control Consideration Net of Cash Nature of Business 01/05/2007 01/03/2008 1,159 5,938 7,097 Manufacturer of pressure care seating for the aged care sector. Distributor of specialised plumbing products. The acquisition of Gemmell had the following effect on the Group’s assets and liabilities on acquisition date: In thousands of AUD Property, plant and equipment Inventories Trade and other payables Net identifiable assets and liabilities Goodwill on acquisition Consideration paid, satisfied in cash Cash acquired Net cash outflow Pre - acquisition carrying amounts 212 2,520 (118) 2,614 Note 14 15 Fair value adjustments Recognised values on acquisition - - - - 212 2,520 (118) 2,614 3,324 5,938 - 5,938 Pre-acquisition carrying amounts were determined based on applicable AASBs immediately before the acquisition. The values of assets and liabilities recognised on acquisition are their estimated fair values (see note 4 for methods used in determining fair values). The goodwill recognised on the acquisition is attributable mainly to the skills and technical talent of the acquired business’s work force and the synergies expected to be achieved from integrating the company into the Group’s existing Home, Hardware and Eco business (see note 15). 53 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 7. Acquisitions of subsidiaries and business operations (continued) Year ended 30 June 2007 During the prior reporting period the Group acquired two business operations. A contingent payment of $261,000 was also made in respect of the Australian Audio Supplies business acquired in the previous reporting period. Provision for future contingent payments for the Australian Audio Supplies business was increased by $839,000. This resulted in an increase in goodwill of $1,100,000. Results for the businesses since the date of their respective acquisitions have been included in the consolidated results. The details of the acquisitions are noted in the table below. Name of business In thousands of AUD 2007 Date of Control Consideration Net of Cash Nature of Business Manufacturer of pressure care seating for the aged care sector. Steel distribution business based in Bunbury in Western Australia. • Air Comfort 01/05/2007 *6,536 Seating Systems Impressive Steel • 01/05/2007 • Australian Audio Supplies – contingent consideration Total 4,625 **261 11,422 * Excludes deferred payment payable of $859,000 ** Excludes deferred payment payable of $839,000 Details of the individual businesses acquired in the prior period are detailed below. In thousands of AUD Fair value of assets acquired Inventories Trade and other receivables Property, plant and equipment Patents Goodwill purchased Employee benefits Trade and other payables Fair value of assets and liabilities acquired Less contingent consideration Cash flow on acquisition net of cash acquired Air Comfort Seating Systems Impressive Steel Total 568 981 65 87 5,772 (48) (30) 7,395 (859) 6,536 2,214 - 1,168 - 1,300 (57) - 4,625 - 4,625 2,782 981 1,233 87 7,072 (105) (30) 12,020 (859) 11,161 At acquisition, due diligence procedures, applying applicable AASBs, identified no difference between fair values and the acquiree’s book values. The goodwill recognised on the acquisition is attributable mainly to management expertise, work force, distribution channels and geographic presence. The consideration for Air Comfort Seating Systems includes a contingent consideration of $859,000. The amount is payable provided certain performance criteria are met. The contingent consideration of $839,000 in respect of Australian Audio Supplies is payable provided certain performance criteria are met. 54 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 8. Revenue In thousands of AUD Sales Revenue Sales Services Other Revenue Property rentals Dividends received Revenue 9. Other income In thousands of AUD Net gain on sale of property, plant and equipment Net gain on disposal of asset held for sale Net gain on disposal of a controlled entity Other income 10. Expenses In thousands of AUD Cost of goods sold Cost of services provided Sales and marketing expenses Distribution expenses Administration expenses Occupancy expenses Net loss on disposal of property, plant and equipment Other expenses 11. Personnel expenses In thousands of AUD Wages and salaries Other associated personnel expenses Increase in liability for annual leave Increase in liability for long-service leave Equity-settled share-based payment transactions Consolidated Company 2008 2007 2008 2007 1,130,531 967,435 309,078 287,032 53,369 45,777 - - 1,183,900 1,013,212 309,078 287,032 836 1 787 3,103 - 30,001 2,498 6,400 1,184,737 1,013,999 342,182 295,930 Consolidated Company 2008 2007 2008 2007 113 6,751 - 3,520 10,384 - - 526 1,846 2,372 - 2,416 - 11,087 13,503 108 - - 8,926 9,034 Consolidated Company 2008 2007 2008 2007 782,404 44,259 133,324 82,338 49,063 20,727 64 68 646,161 37,503 117,450 69,490 44,760 17,561 347 826 185,097 - 56,333 21,989 17,578 4,567 1 130 1,112,247 934,098 285,695 180,106 - 53,207 19,712 15,145 3,499 - 72 271,741 Consolidated 2008 2007 Company 2008 2007 160,328 35,252 9,524 3,206 369 152,780 32,064 8,687 3,530 471 48,110 9,167 3,730 1,450 353 46,502 9,191 2,357 1,356 419 208,679 197,352 62,810 59,825 55 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 12. Profit from Ordinary Activities Profit from ordinary activities is arrived after charging the following items In thousands of AUD Depreciation of buildings Depreciation of plant and equipment Total depreciation Amortisation of patents and trademarks Total depreciation, impairment and amortisation Interest paid or payable Interest received or receivable Net financing costs Impairment of trade receivables Impairment of loans receivable Impairment of intangible assets Impairment (reversal of impairment) of inventory Increase in provisions Decreases in provisions Consolidated Company 2008 2007 2008 2007 1,034 20,176 21,210 574 21,784 15,155 (781) 14,374 2,103 - 176 2,174 253 - 19,080 731 17,650 18,381 607 18,988 9,821 (716) 9,105 291 705 - 3,544 60 (1,007) 12,698 411 5,155 5,566 - - 15,733 (4,898) 10,835 850 - - (2,893) 63 - 8,855 368 5,364 5,732 - 5,732 10,671 (3,923) 6,748 300 - - 643 - - 7,691 The above finance income and expense include the following in respect of assets (liabilities) (not at fair value through profit or loss): Total interest income on financial assets Total interest expense on financial liabilities 15,155 (781) 9,821 (716) 15,733 (4,898) 10,671 (3,923) 56 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 12. Profit from Ordinary Activities (continued) Profit for the year includes the following items that are unusual because of their nature size or incidence: In thousands of AUD Gains Gain on sale of asset held for sale Less: Applicable income tax expense/benefit Expenses Impairment of Inventory – Orrcon Less: Applicable income tax benefit (a) Gain on sale of Asset held for sale Consolidated Note 2008 2007 (a) (b) 6,750 174 6,924 11,649 (3,495) 8,154 - - - - - - During the period a contract was entered into for the sale of the land and building at the Hills manufacturing site in Edwardstown South Australia. The impact of the sale of this property was a decrease in assets held for sale of $15,946,000 and an increase in profit after tax of $6,924,000. Tax payable on this gain was calculated after absorbing certain capital tax losses. (b) Impairment of Inventory - Orrcon As part of a review of the large pipe and tube business of Orrcon it was determined that certain inventory on hand was impaired. A contract to supply water pipe to a major customer in Queensland was cancelled due to the quality of the pipe received from our overseas supplier. Directors consider it prudent to write down the value of the pipe to expected recoverable value. In addition, all other costs that are related to this contract have been expensed. All of these costs are included in the impairment charge. Since 1 July 2007, a quantity of the pipe has been sold and the remaining pipe on hand as at 30 June 2008 has been revalued to realisable value. 57 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 13. Income tax expense In thousands of AUD Current tax expense Current period Adjustment for prior periods Deferred tax expense Origination and reversal of temporary differences Change in tax rate Expense of derecognised tax loss Prior year adjustments Income tax expense from continuing operations Numerical reconciliation between tax expense and pre-tax accounting profit In thousands of AUD Profit for the period Total income tax expense Profit excluding income tax Income tax using the Company’s domestic tax rate of 30% (2007: 30%) Non-deductible expenses Tax exempt income Recognition of previously unrecognised tax losses Under (over) provided in prior periods Income tax recognised directly in equity In thousands of AUD Revaluation of land and buildings 58 Consolidated Company 2008 2007 2008 2007 15,111 (1,413) 13,698 2,109 42 - 291 16,140 23,215 650 23,865 (2,277) (57) 240 (645) 21,126 3,484 - 3,484 1,913 - - - 5,397 4,827 - 4,827 591 - - - 5,418 Consolidated 2008 2007 52,360 16,140 68,500 20,550 787 (1,288) (2,787) (1,122) 16,140 52,042 21,126 73,168 21,950 1,013 (1,829) (13) 5 21,126 Company 2008 53,758 5,397 59,155 17,747 176 (9,879) (2,647) - 5,397 2007 21,057 5,418 26,475 7,943 156 (2,681) - - 5,418 Consolidated Company 2008 11,966 2007 2008 2007 - 9,418 - Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 14. Property, plant and equipment In thousands of AUD Balance at 1 July 2006 Acquisitions through business combinations Additions Disposals Transfer to assets held for sale Effect of movements in exchange rates Balance at 30 June 2007 Balance at 1 July 2007 Acquisitions through business combinations Additions Revaluation to fair value Disposals Effect of movements in exchange rates Balance at 30 June 2008 Consolidated Plant and Company Plant and Land Buildings – equipment - Land Buildings – equipment - - Fair Value Fair Value cost Total - Fair Value Fair Value cost Total 27,213 - 1 (1,710) (9,585) 121 16,040 16,040 - 8 720 31,160 - (419) 51,889 - 1,929 (3,134) (6,532) 381 44,533 44,533 - 2,695 8,047 (24) (527) 185,505 1,232 264,607 1,232 36,529 (7,644) - 337 215,959 38,459 (12,488) (16,117) 839 276,532 215,959 212 276,532 212 31,954 - (2,860) (433) 35,369 39,207 (2,884) (1,379) 47,501 54,724 244,832 347,057 15,156 - 1 - (4,305) - 10,852 10,852 - 720 21,420 - - 32,992 32,131 - 504 - (1,945) - 30,690 30,690 - 1,276 6,574 - - 38,540 61,414 - 108,701 - 8,098 (5,848) - - 63,664 63,664 - 8,021 - (938) - 70,747 8,603 (5,848) (6,250) - 105,206 105,206 10,017 27,994 (938) - 142,279 59 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 14. Property, plant and equipment (continued) Consolidated Company Land Buildings - Plant and Land Buildings - Plant and - Fair Value Fair Value equipment Total - Fair Value Fair Value equipment Total - - - - - - - - - - - - (2,396) (731) 256 171 (11) (90,164) (17,650) 7,384 - (234) (92,560) (18,381) 7,640 171 (245) (2,711) (100,664) (103,375) (2,711) (1,034) 1,354 16 9 (2,366) (100,664) (20,176) - 2,252 321 (118,267) (103,375) (21,210) 1,354 2,268 330 (120,633) - - - - - - - - - - - (1,146) (368) - 40 - (1,474) (1,474) (411) 883 - - (1,002) (48,939) (5,364) 5,647 - - (48,656) (48,656) (5,155) - 856 - (52,955) (50,085) (5,732) 5,647 40 - (50,130) (50,130) (5,566) 883 856 - (53,957) Consolidated Plant and Company Plant and Land Buildings – equipment - Land Buildings – equipment - - Fair Value Fair Value cost Total - Fair Value Fair Value cost Total 27,213 16,040 16,040 47,501 49,493 41,822 95,341 115,295 41,822 52,357 115,295 126,565 172,047 173,157 173,157 226,424 15,156 10,852 10,852 32,992 30,985 29,216 29,216 37,538 12,475 15,008 15,008 17,792 58,616 55,076 55,076 88,322 In thousands of AUD Depreciation and impairment losses Balance at 1 July 2006 Depreciation for the year Disposals Transfer to assets held for sale Effect of movements in exchange rates Balance at 30 June 2007 Balance at 1 July 2007 Depreciation for the year Adjustment on revaluation to fair value Disposals Effect of movements in exchange rates Balance at 30 June 2008 In thousands of AUD Carrying amounts At 1 July 2006 At 30 June 2007 At 1 July 2007 At 30 June 2008 60 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 15. Intangible assets In thousands of AUD Costs Balance at 1 July 2006 Acquisitions – internally developed Reduction arising from recognition of assets not previously recognised Increase in provision for contingent consideration Fully amortised eliminated against amortisation Acquisition through business combination Additions Balance at 30 June 2007 Balance at 1 July 2007 Acquisitions through business combinations Derecognised – contingent consideration not paid Additions Balance at 30 June 2008 Consolidated Goodwill on consolidation Purchased Goodwill Patents and trademarks Development costs Total Goodwill Company Patents and trademarks 96,570 - (355) 186 (85) - - 96,316 96,316 754 - - 97,070 11,412 - - - (1,791) 7,072 - 16,693 16,693 3,623 (839) - 19,477 8,051 87 1 8,139 8,139 - - 5 8,144 - 176 - - - - - 116,033 176 (355) 186 (1,876) 7,159 1 176 121,324 176 - - - 176 121,324 4,377 (839) 5 124,867 3,149 - - - (1,791) - - 1,358 1,358 - - - 1,358 50 - - - - - - 50 50 - - - 50 Total 3,199 - - - (1,791) - - 1,408 1,408 - - - 1,408 61 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 15. Intangible assets (continued) In thousands of AUD Amortisation and impairment losses Balance at 1 July 2006 Amortisation for the year Fully amortised against eliminated against cost Balance at 30 June 2007 Balance at 1 July 2007 Amortisation for the year Impairment loss Balance at 30 June 2008 Carrying amounts At 1 July 2006 At 30 June 2007 At 1 July 2007 At 30 June 2008 Consolidated Goodwill on Consolidation Purchased Goodwill Patents and trademarks Development costs Total Goodwill Company Patents and trademarks Total (4,314) - 85 (4,229) (4,229) - - (4,229) 92,256 92,087 92,087 92,841 (3,223) - 1,791 (1,432) (1,432) - - (1,432) 8,189 15,261 15,261 18,045 (3,687) (607) - (4,294) (4,294) (574) - (4,868) 4,364 3,845 3,845 3,277 - - - - - - (176) (176) - 176 176 - (11,224) (607) 1,876 (9,955) (9,955) (574) (176) (10,705) 104,809 111,369 111,369 114,162 (3,419) - 1,791 (1,358) (1,358) - - (1,358) - - - - (50) - - (50) (50) - - (50) 17 - - - (3,199) - 1,791 (1,408) (1,408) - - (1,408) 17 - - - Amortisation and impairment charge The amortisation and impairment charge is recognised in operating expenses in the income statement. 62 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 15. Intangible assets (continued) Impairment testing for cash-generating units containing goodwill During the year ended 30 June 2008 the Group determined that there is no impairment of any of its cash generating units containing goodwill or intangible assets with indefinite useful lives. For the purpose of impairment testing, goodwill is allocated to the Group’s operating units that represent the lowest level within the Group at which the goodwill is monitored for internal management purposes. The aggregate carrying amounts of goodwill allocated to each unit are as follows: In thousands of AUD Building and Industrial Electronic Security and Entertainment Home, Hardware and Eco Consolidated 2008 60,383 16,991 33,512 110,886 2007 56,760 17,076 33,512 107,348 Company 2008 2007 - - - - - - - - The cash generating unit impairment tests are based on value in use calculations. Value in use was determined by discounting the future cash flows generated from the continuing use of the unit and was based on the following key assumptions: • Cash flows have been extrapolated over periods consistent with useful lives of intangibles with finite useful lives in each cash generating unit, using a growth rate of 3% (2007: 3%) for periods past the three year strategic plan which is no greater than the long term average growth rate for the market to which the asset is dedicated. A post-tax discount rate of 11% (2007 11%), determined by reference to the Group’s weighted average cost of capital was applied in determining the recoverable amount of the units. • A reasonably possible change in the key assumptions above would not have resulted in the carrying amount exceeding the recoverable amount for any of the Group’s cash generating units. 63 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 16. Tax assets and liabilities Current tax assets and liabilities The current tax liability for the Group of $4,317,000 (2007: $12,742,000) and for the Company of $2,957,000 (2007: $11,833,000) represent the amount of income taxes payable in respect of current and prior financial periods. In accordance with the tax consolidation legislation, the Company as the head entity of the Australian tax-consolidated group has assumed the current tax liability (asset) initially recognised by the members in the tax-consolidated group. Unrecognised deferred tax assets Deferred tax assets have not been recognised in respect of the following items: In thousands of AUD Capital tax losses Consolidated Company 2008 8,628 8,628 2007 11,166 11,166 2008 8,477 8,477 2007 10,814 10,814 The tax losses do not expire under current tax legislation. Deferred tax assets have not been recognised in respect of these items because it is not probable that future capital gains will be available against which the Group can utilise the benefits from. Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Consolidated In thousands of AUD Property, plant and equipment Inventories Employee benefit plans Receivables Loans and borrowings Provisions Self insurance provisions Other accruals Software and prepayments Other items Tax assets/(liabilities) Company In thousands of AUD Property, plant and equipment Inventories Employee benefit plans Receivables Loans and borrowings Provisions Other accruals Software and prepayments Other items Tax (assets)/liabilities Assets Liabilities Net 2008 2007 2008 10,677 3,414 9,908 1,752 1,218 2,100 897 897 320 606 31,789 11,489 5,386 9,320 1,956 1,218 1,627 848 953 407 699 (15,007) (179) 86 - - (5) - (281) - - 33,903 (15,386) 2007 (2,828) (339) 100 - - - - (25) - - (3,092) 2008 (4,330) 3,235 9,994 1,752 1,218 2,095 897 616 320 606 2007 8,661 5,047 9,420 1,956 1,218 1,627 848 928 407 699 16,403 30,811 Assets Liabilities Net 2008 2007 2008 3,157 1,239 4,937 645 1,218 973 438 132 746 3,265 2,812 4,606 750 1,218 938 634 205 773 (10,967) - - - - - - - - 13,485 15,201 (10,967) 2007 (1,352) - - - - - - - - (1,352) 2008 (7,810) 1,239 4,937 645 1,218 973 438 132 746 2007 1,913 2,812 4,606 750 1,218 938 634 205 773 2,518 13,849 64 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 16. Tax assets and liabilities (continued) Movement in temporary differences during the year Consolidated In thousands of AUD Property, plant and equipment Inventories Employee benefit plans Receivables Loans and borrowings Provisions Self insurance provisions Other accruals Software and prepayments Other items Tax loss carry-forwards recognised Company In thousands of AUD Property, plant and equipment Inventories Employee benefit plans Receivavles Loans and borrowings Provisions Other accruals Software and prepayments Other items Tax (assets)/liabilities Balance 1 July 2006 Recognised in profit or loss Balance 30 June 2007 Recognised in profit or loss Recognised in equity Balance 30 June 2008 8,220 441 8,661 (1,025) (11,966) (4,330) 2,748 9,094 1,784 1,218 1,654 1,118 521 815 660 240 2,299 326 172 - (27) (270) 407 (408) 39 (240) 5,047 9,420 1,956 1,218 1,627 848 928 407 699 - (1,812) 574 (204) - 468 49 (312) (87) (93) - - - - - - - - - - - 3,235 9,994 1,752 1,218 2,095 897 616 320 606 - 28,072 2,739 30,811 (2,442) (11,966) 16,403 2,201 2,068 5,201 750 1,218 1,376 528 554 544 14,140 (288) 1,913 (305) (9,418) (7,810) 744 (595) - - (438) 106 (349) 229 (291) 2,812 4,606 750 1,218 938 634 205 773 13,849 (1,573) 331 (105) - 35 (196) (73) (27) (1,913) - - - - - - - - (9,418) 1,239 4,937 645 1,218 973 438 132 746 2,518 65 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 17. Inventories In thousands of AUD Raw materials and consumables Work in progress Finished goods Impairment losses included in inventory: Impairment losses related to raw materials Impairment losses related to finished goods Consolidated Company 2008 2007 2008 2007 68,923 58,101 5,810 4,421 5,214 5,017 106,204 112,389 180,341 175,507 10 10,796 10,806 331 10,495 10,826 - 35,749 41,559 - 1,350 1,350 16 33,128 37,565 - 4,243 4,243 18. Trade and other receivables In thousands of AUD Trade receivables Less impairment losses Consolidated 2008 2007 227,964 (5,528) 171,590 (5,179) Company 2008 61,767 (2,150) Other receivables and prepayments Loans – other entities Loans – controlled entities Less impairment losses Current Non-Current 222,436 166,411 59,617 38,921 689 - - 262,046 244,761 17,285 262,046 5,811 433 - - 6,517 528 236,327 (4,060) 172,655 298,929 172,655 - 292,989 5,940 172,655 298,929 2007 46,607 (1,300) 45,307 802 433 182,021 (4,060) 224,503 224,503 - 224,503 The Company and Group’s exposure to credit and currency risks and impairment losses related to trade and other receivables are disclosed in note 29. 19. Investments In thousands of AUD Non-current investments Listed equity securities Investments in controlled entities - at cost Total non-current investments Consolidated Company 2008 2007 2008 2007 2 - 2 2 - 2 2 151,966 151,968 2 151,210 151,212 20. Non-current assets classified as held for sale During the period a contract was entered into for the sale of the land and building at the Hills manufacturing site in Edwardstown South Australia. In the prior year, the Land and buildings at the manufacturing site were reclassified from Property, Plant and Equipment to non-current assets classified as held for sale. On 4 July 2007 a sale agreement of $24.3 million, excluding selling costs, was reached. In compliance with AASB 5 Non-current Assets Held for Sale and Discontinued Operations the assets were measured at the lower of their carrying value and their fair value less costs to sell. These assets have been included in the unallocated/corporate segment. The impact of the sale of this property was a decrease in assets held for sale of $15,946,000 and an increase in profit after tax of $6,924,000. 66 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 21a. Cash and cash equivalents In thousands of AUD Bank balances Call deposits Cash and cash equivalents Bank overdrafts used for cash management purposes Cash and cash equivalents in the statement of cash flows Consolidated Company 2008 19,397 2,152 21,549 (239) 21,310 2007 20,349 7,085 27,434 (511) 26,923 2008 2007 - 1,000 1,000 (8,513) (7,513) - 3,177 3,177 - 3,177 The Company and Group’s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities are disclosed in note 29. 21b. Reconciliation of cash flows from operating activities In thousands of AUD Cash flows from operating activities Profit for the period Adjustments for: Depreciation Amortisation of intangible assets Impairment of trade receivables Impairment (reversal of impairment) of inventory Impairment of loans Tax payable transferred to head entity of tax consolidated group Foreign exchange (gains)/losses Dilution of interest in controlled entity (Gain)/loss on sale of asset held for sale (Gain)/loss on sale of property, plant and equipment (Gain)/loss on sale of entities Rent received Non-cash inter-company dividend Equity-settled share-based payment transactions Add/(less) amounts set aside to provisions: - Employee benefits - Outstanding claims - Other Operating profit before changes in working capital and provisions Change in trade and other receivables Change in inventories Change in deferred tax assets Change in trade and other payables Change in income taxes payable Change in provisions and employee benefits Net cash from operating activities Consolidated Company Note 2008 2007 2008 2007 52,360 52,042 53,758 21,057 14 15 26 21,210 574 2,103 2,174 - - 5 - (6,751) (21) - (836) - 369 14,412 103 235 85,937 18,381 607 291 3,544 705 - 5,566 - 850 (2,893) - (3,931) 5,732 - 300 643 - (12,193) (38) 24 - 347 (526) 787 - 471 - - (1,641) - - (3,103) (30,000) 353 (23) - - (108) - (2,498) - 419 12,217 (1,007) 60 86,331 5,180 63 271 3,713 - - 24,473 17,042 (71,398) (3,755) 1,205 5,128 (8,816) (14,315) (6,209) (41,210) (2,739) 16,402 7,085 (12,838) (14,867) (1,102) 2,146 6,061 (9,108) (5,475) 561 (4,483) 591 2,619 8,391 (5,880) (6,014) 46,822 2,128 18,841 25, 27 67 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 22. Capital and reserves Reconciliation of movement in capital and reserves attributable to equity holders Consolidated In thousands of AUD Balance at 1 July 2006 Total recognised income and expense Shares issued under the executive Share Plan Shares issued under the Employee Share Bonus Plan Shares issued under the Dividend investment plan Dividends to Shareholders Minority interest in dividends paid or payable by controlled entities Minority interest increase in controlled entities Transfers from/to reserves Share Capital 167,525 Equity compensati on reserve 313 - 80 300 10,126 - - - - - 124 - - - - - - Translation reserve (1,183) 1,442 - - - - - - - Asset Revaluation reserve 22,956 Asset realisation reserve 2,825 - - - - - - - (400) - - - - - - - Retained earnings Total Minority Interest Total equity 117,516 47,173 - - - 309,952 48,615 204 300 10,126 (37,322) (37,322) - - - - 251 (149) 14,459 4,869 324,411 53,484 - - - - (2,343) 53 - 204 300 10,126 (37,322) (2,343) 53 (149) Balance at 30 June 2007 178,031 437 259 22,556 2,825 127,618 331,726 17,038 348,764 68 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 22. Capital and reserves Reconciliation of movement in capital and reserves attributable to equity holders Consolidated In thousands of AUD Balance at 1 July 2007 Total recognised income and expense Shares issued under the Executive Share Plan Shares issued under the Employee Share Bonus Plan Shares issued under the Dividend Investment plan Shares issued under the Share Purchase plan Dividends to Shareholders Minority interest in dividends paid or payable by controlled entities Share Issue costs Transfers from/to reserves Share Capital 178,031 Equity Compensat ion reserve 437 - 74 200 11,336 33,515 - - (65) - - 76 - - - - - Translation reserve 259 (2,340) Asset Revaluation reserve 22,556 27,501 - - - - - - - - - - - - - - - 55 Asset realisation reserve Retained earnings Total Minority Interest Total equity 2,825 127,618 17,038 6,647 348,764 78,615 46,807 - - - - 331,726 71,968 150 200 11,336 33,515 (40,611) (40,611) - - (55) - (2,387) (65) - - - - - - - - 150 200 11,336 33,515 (40,611) (2,387) (65) - - - - - - - - - - Balance at 30 June 2008 223,091 513 (2,081) 50,112 2,825 133,759 408,219 21,298 429,517 69 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 22. Capital and reserves (continued) Reconciliation of movement in capital and reserves Company In thousands of AUD Balance at 1 July 2006 Total recognised income and expense Shares issued under the Executive Share Plan Shares issued under the Employee Share Bonus Plan Shares issued under the Dividend investment plan Dividends to equity holders Balance at 30 June 2007 Balance at 1 July 2007 Total recognised income and expense Shares issued under the Executive Share Plan Shares issued under the Employee Share Bonus Plan Shares issued under the Dividend investment plan Shares issued under the Share purchase plan Dividends to equity holders Share issue costs Transfers to/from reserves Balance at 30 June 2008 70 Share Capital 167,525 - 80 300 10,126 178,031 178,031 - 74 200 11,336 33,515 - (65) - Equity Compensation reserve Asset Revaluation reserve Asset realisation reserve 308 - 119 - - - 427 427 - 72 - - - - - - 11,763 1,854 - - - - - - - - - - Retained earnings 33,077 21,057 - - - Total equity 214,527 21,057 199 300 10,126 (37,322) (37,322) 11,763 1,854 16,812 208,887 11,763 19,459 - - - - - - - 1,854 - - - - - - - - 16,812 53,758 - - - - (40,611) - - 208,887 73,217 146 200 11,336 33,515 (40,611) (65) - 286,625 223,091 499 31,222 1,854 29,959 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 22. Capital and reserves (continued) Share capital In thousands of AUD On issue at 1 July Issued under the Dividend Investment Plan Issued under the Share Investment Plan Issued under the Employee Share Bonus Plan Issued under the Executive Share Plan Issued under the Share Placement Plan On issue at 30 June – fully paid Company Ordinary Shares 2008 2007 172,827 2,447 168,692 2,128 1,548 1,618 192 67 292 97 8,708 185,789 - 172,827 The Company made two issues of ordinary shares under the Employee Share Bonus Plan during the year. All employees meeting the service criteria were eligible to participate in the issue. The shares are issued at market value. The Company issued ordinary shares under a Dividend Investment Plan and a Share Investment Plan during the year. Under the Dividend Investment Plan, participating shareholders elected to apply dividends in whole or in part to the purchase of ordinary shares at an issue price. Under the Share Investment Plan, participating shareholders elected to forgo dividends in whole or in part and to substitute shares issued out of the capital account. The issue price was at a 10% discount on the market price. During the year the Company invited shareholders to participate in a Share Purchase Plan. Each shareholder was entitled to purchase up to $5,000 worth of shares. The price of the shares was at a 10% discount to the volume weighted average price of the Company’s ordinary shares for the 10 days up to and including the closing date of 2 May 2008. The share issue price was $3.85 per share. Shares under the Dividend Investment Plan are recognised in equity at the value of the dividends applied to purchase those shares. The value of shares issued slightly exceeds the value of the dividends applied due to the rounding up of shares issued to the nearest whole share. Shares issued under the Share Investment Plan are recognised in equity at nil value as the dividends are forgone and substituted for shares issued for no consideration. The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. All shares rank equally with regard to the Company’s residual assets. Translation reserve The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations where their functional currency is different to the presentation currency of the reporting entity. Revaluation reserve The revaluation reserve relates to the revaluation of land and buildings measured at fair value in accordance with applicable Australian Accounting Standards Asset realisation reserve Where a revalued asset is sold, that portion of the asset revaluation reserve that relates to that asset is transferred to the asset realisation reserve upon settlement. Equity compensation reserve The equity compensation reserve represents the value of shares held by an equity compensation plan that the Group is required to include in the consolidated financial statements. This reserve will be reversed against share capital when the underlying shares vest in the employee. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Group’s own equity instruments. 71 72 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 22. Capital and reserves (continued) Dividends Dividends recognised in the current year by the Group are: In thousands of AUD 2008 Interim 2008 ordinary Interim dividend forgone for Share Investment Plan Final 2007 ordinary Final dividend forgone for Share Investment Plan Total amount 2007 Interim 2007 ordinary Interim dividend forgone for Share Investment Plan Final 2006 ordinary Final dividend forgone for Share Investment Plan Total amount Cents per share Total amount Franked / unfranked Date of payment 13.5 23,579 Franked 31 March 2008 14.0 13.5 13.0 (3,390) 24,201 (3,779) 40,611 23,059 (3,864) 21,930 (3,803) 37,322 Franked 24 September 2007 Franked 26 March 2007 Franked 25 September 2006 Franked dividends declared or paid during the year were franked at the tax rate of 30%. Subsequent to 30 June 2008 the directors proposed the following dividends for 2008. The dividends have not been provided. The declaration and subsequent payment of dividends has no income tax consequences. In thousands of AUD Final ordinary Total amount Cents per share 14.0 Total amount 26,154 26,154 Franked / unfranked Franked Date of payment 29 September 2008 The financial effect of these dividends have not been brought to account in the financial statements for the financial year ended 30 June 2008 and will be recognised in subsequent financial reports. Dividend and share reinvestment plans The Dividend Investment Plan and Share Investment Plan will operate in respect of the proposed final dividend. Under the Dividend Investment Plan, participating shareholders elect to apply dividends in whole or in part to the purchase of ordinary shares at an issue price. Under the Share Investment Plan, participating shareholders elect to forgo dividends in whole or in part and to substitute shares issued out of the capital account. A discount of 10.0% will apply under the rules of the plans. Last date for receipt of election notice for the dividend plans: 15 September 2008 73 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 22. Capital and reserves (continued) Dividend franking account In thousands of AUD Dividend franking account 30 percent franking credits available to shareholders of Hills Industries Limited for subsequent financial years Company 2008 2007 29,091 41,103 67,880 95,907 The above available amounts are based on the balance of the dividend franking account at year-end adjusted for: (a) (b) (c) franking credits that will arise from the payment of the current tax liabilities; franking debits that will arise from the payment of dividends recognised as a liability at the year end; franking credits that will arise from the receipt of dividends recognised as receivables by the tax consolidated group at the year end; and (d) franking credits that the entity may be prevented from distributing in subsequent years. The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends. The impact on the dividend franking account of dividends proposed after the balance sheet date but not recognised as a liability is to reduce it by $26,154 thousand (2007: 24,080 thousand) franking credits. 23. Earnings per share Basic earnings per share The calculation of basic earnings per share at 30 June 2008 was based on the profit attributable to ordinary shareholders of $46.807 million (2007: $47.173 million) and a weighted average number of ordinary shares outstanding of 175,927 thousand (2007: 170,823 thousand), calculated as follows: Profit attributable to ordinary shareholders In thousands of AUD Profit for the period Weighted average number of ordinary shares In thousands of shares Issued ordinary shares at 1 July Effect of Dividend Investment Plan Effect of Share Investment Plan Effect of Employee share scheme Effect of Executive Share Plan Effect of Share Purchase Plan Weighted average number of ordinary shares at 30 June Consolidated 2008 2007 46,807 47,173 Consolidated 2008 172,827 1,145 722 83 33 1,166 175,976 2007 168,692 1,068 851 174 38 - 170,823 22 22 22 22 22 74 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 23. Earnings per share (continued) Diluted earnings per share The calculation of diluted earnings per share at 30 June 2008 was based on profit attributable to ordinary shareholders of $46.807 million (2007: $47.173 million) and a weighted average number of ordinary shares outstanding after adjustment for the effects of all dilutive potential ordinary shares of 177,066 thousand (2007: 171,729 thousand), calculated as follows: Profit attributable to ordinary shareholders (diluted) In thousands of AUD Profit for the period Consolidated 2008 46,807 2007 47,173 Weighted average number of ordinary shares (diluted) In thousands of shares Weighted average number of ordinary shares (basic) Effect of share options on issue Weighted average number of ordinary shares (diluted) at 30 June Consolidated Note 2008 2007 175,976 170,823 26 1,090 906 177,066 171,729 75 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 24. Loans and borrowings This note provides information about the contractual terms of the Company’s and Group’s interest-bearing loans and borrowings. For more information about the Company’s and Group’s exposure to interest rate, foreign currency liquidity and risk, see note 29. In thousands of AUD Current liabilities Current portion of unsecured bank loans Loans – controlled entities Non-current liabilities Unsecured bank loans Other loans - secured Loans – controlled entities Financing facilities In thousands of AUD Bank overdraft Unsecured bank loans Standby letters of credit Short term money market Facilities utilised at reporting date Bank overdraft Unsecured bank loans Facilities not utilised at reporting date Bank overdraft Unsecured bank loans Standby letters of credit Short term money market Consolidated Company 2008 2007 2008 2007 5,952 1,593 - - 5,000 5,292 5,952 1,593 10,292 - 4,125 4,125 202,999 498 - 203,497 171,044 538 - 171,582 177,000 498 26,000 203,498 145,000 498 26,000 171,498 Consolidated Company 2008 2007 2008 2007 1,897 264,388 300 21,000 287,585 2,945 199,903 300 21,000 224,148 1,000 225,000 - 21,000 247,000 1,000 160,000 - 21,000 182,000 239 208,952 209,191 511 172,637 173,148 8,513 182,000 190,513 - 145,000 145,000 1,658 55,436 300 21,000 78,394 2,434 27,266 300 21,000 51,000 (7,513) 43,000 - 21,000 56,487 1,000 15,000 - 21,000 37,000 76 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 24. Loans and borrowings (continued) Bank overdrafts Bank overdrafts are denominated in $A and $NZ. The bank overdraft of a controlled entity is secured by a guarantee from the Company. Interest on bank overdrafts is charged at prevailing market rates. The bank overdrafts are payable on demand and are subject to annual review. The Company and a number of its subsidiaries have a net bank overdraft facility of $1,897,000 (disclosed above). While at 30 June 2008 the Company overdraft was not within its limits, the overdrafts are provided as part of a financing arrangement that assesses the Group’s overall cash position. Unsecured bank loans Bank loans are denominated $A and $NZ. The bank loans are Commercial Bills with interest charged at prevailing market rates. The Company and its wholly owned subsidiaries have provided an interlocking guarantee and indemnity to its financiers for these facilities. An assessment of the contractual maturities of financial liabilities is provided in Note 29. Standby letter of credit The standby letter of credit facility is a committed facility reviewed annually. No drawdowns against this facility had been made as at 30 June 2008. Short term money market Borrowings on the short-term money market are denominated in $A. Interest on the borrowings is charged at the prevailing market rates 77 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 25. Employee benefits Current In thousands of AUD Employee benefits Non-Current Employee Benefits 26. Share-based payments Consolidated Company 2008 26,716 2007 25,741 2008 2007 9,113 8,595 4,961 4,574 4,371 4,300 31,677 30,315 13,484 12,895 In October 1997, the Group established a share option plan that entitles selected senior managers to acquire shares in the entity subject to the successful achievement of performance targets related to improvements in total shareholder returns. Previously the options were exercisable if the total shareholder return (measured as share price growth plus dividends paid) over a two-year period from the grant date exceeds ten percent plus CPI per annum. Once exercised the shares were forfeited if the holder ceased to be an employee of the Group within a further three- year period. The shareholders approved an amendment to this plan as part of the 2007 Annual General Meeting such that the option period over which the shareholder return must be achieved was extended to three years. The three-year period during which the shares were restricted has now been removed. This amendment is applicable for all share options granted after the resolution was passed. No changes were made to the rules governing options already granted. The shares issued pursuant to these options are financed by an interest free loan from the holding company repayable within twenty years from the proceeds of dividends declared by the holding company. These loans are of a non-recourse nature. For accounting purposes these 20-year loans are treated as part of the options to purchase shares, until the loan is extinguished at which point the shares are recognised. The options are offered only to selected senior managers. Details of the options are as follows: Grant date February 2001 February 2002 February 2003 February 2004 February 2005 February 2006 February 2007 February 2008 Number of options Number outstandin g at balance date AIFRS Number outstanding at balance date ASX 195,000 245,000 280,000 370,000 460,000 510,000 595,000 625,000 120,000 133,000 210,000 260,000 340,000 - 465,000 515,000 - - - - - - 465,000 515,000 980,000 Total share options 3,280,000 2,043,000 Options subject to a non-recourse loan for the purchase of shares are not recognised as shares exercised by International Financial Reporting Standards, until the loan is extinguished at which point the shares are then recognised. 78 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 26. Share-based payments (continued) The number and weighted average exercise prices of share options is as follows: Grant date Exercise date Expiry date Exercise price Consolidated and Company 2008 Number of Options at Beginning of Year Options granted Options lapsed Options exercised Number of options at end of year on issue Jan 2023 Feb 01 Jan 2024 Feb 02 Jan 2025 Feb 03 Jan 2026 Feb 04 Jan 2027 Feb 05 Jan 2028 Feb 06 Feb 07 Jan 2029 Feb 08 Jan 2031 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 11 Weighted average exercise price $2.50 $2.90 $3.23 $3.66 $4.16 $4.83 $5.53 $5.49 120,000 133,000 210,000 270,000 360,000 420,000 595,000 - 2,108,000 $4.35 - - - - - - - 625,000 625,000 $5.49 - - - - - (420,000) (130,000) (110,000) (660,000) - - - (10,000) (20,000) - - - 120,000 133,000 210,000 260,000 340,000 - 465,000 515,000 (30,000) 2,043,000 $5.08 $3.99 $4.47 Grant date Exercise date Expiry date Exercise price Consolidated and Company 2007 Feb 01 Feb 02 Feb 03 Feb 04 Feb 05 Feb 06 Feb 07 Jan 2023 Jan 2024 Jan 2025 Jan 2026 Jan 2027 Jan 2028 Jan 2029 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Weighted average exercise price $2.50 $2.90 $3.23 $3.66 $4.16 $4.83 $5.53 Number of Options at Beginning of Year 155,000 195,000 270,000 360,000 450,000 510,000 - 1,940,000 $3.83 Options granted Options lapsed Options exercised Number of options at end of year on issue - - - - - - 595,000 595,000 $5.53 - - (60,000) (90,000) (90,000) (90,000) - (330,000) (35,000) (62,000) - - - - - 120,000 133,000 210,000 270,000 360,000 420,000 595,000 (97,000) 2,108,000 $4.04 $2.76 $4.35 79 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 26. Share-based payments (continued) The fair value of services received in return for share options granted during the year was $117,000 (2007: $382,000), This amount is amortised over the life of the option (and the three year holding period for those options issued prior to 2008). The estimate of the fair value of the services received is based on a model that includes the length of the option period and the relationship between the market price at the date of the grant of the option and the strike price of the option. This method has been applied consistently. Employee expenses In thousands of AUD Share options granted in 2002 – equity settled Share options granted in 2003 – equity settled Share options granted in 2004 – equity settled Share options granted in 2005 – equity settled Share options granted in 2006 – equity settled Share options granted in 2007 – equity settled Share options granted in 2008 – equity settled Expense arising from employee share scheme Total expense recognised as employee costs Consolidated Company 2008 - 10 12 26 41 49 15 216 369 2007 8 3 4 23 42 50 - 341 471 2008 - 10 12 26 41 49 15 200 353 2007 8 3 4 23 42 39 - 300 419 80 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 27. Provisions In thousands of AUD Outstanding claims Contingent consideratio n Site restoration Total Consolidated Balance at 1 July 2007 Acquired in a business combination Provisions made during the period Provisions used during the period Provisions reversed during the period Balance at 30 June 2008 Non-current Current Company Balance at 1 July 2007 Acquired in a business combination Provisions made during the period Provisions used during the period Provisions reversed during the period Balance at 30 June 2008 Non-current Current Outstanding claims 5,112 - 103 (244) - 4,971 - 4,971 4,971 4,474 - 64 - - 4,538 - 4,538 4,538 1,698 617 7,427 384 150 637 (859) (839) (315) - (1,418) (839) 384 - 384 384 - - 384 - - 384 - 384 384 452 263 189 452 - - - - - - - - - 5,807 263 5,544 5,807 4,474 - 448 - - 4,922 - 4,922 4,922 The provision for claims is the estimated future liability of the Group’s self-insurance arrangements. The value of the provision is determined in consultation with the company’s actuaries or legal advisers as appropriate. Contingent consideration The contingent consideration provision represents present value of the component, on acquisition of subsidiaries or business operations, of consideration payable only if the acquiree meets certain performance criteria over a specified period of time. Other Other provisions comprise mainly a provision for site restoration. 81 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 28. Trade and other payables Consolidated Company In thousands of AUD Trade payables Other trade payables and accrued expenses Loans from controlled entities Other loans – secured Note 2008 98,765 40,991 - 165 2007 101,289 2008 2007 20,374 21,451 32,493 - 165 14,429 19,202 - 54,005 12,795 43,633 - 77,879 139,921 133,947 The Company and Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 29. The Company has entered into a Deed of Cross Guarantee with certain subsidiaries as described in note 37. Details of the consolidated financial position of the Company and subsidiaries party to the Deed are set out in note 37. 29. Financial instruments Credit risk Exposure to credit risk The carrying amount of the Group and Company’s financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date is summarised below: In thousands of AUD Cash and cash equivalents Trade and other receivables Investments at fair value Investments in controlled entities - at cost Note 21 18 19 19 Consolidated Company 2008 21,310 262,046 2 - 2007 26,923 172,655 2 - 2008 (7,513) 298,929 2 151,966 2007 3,177 224,503 2 151,210 82 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 29. Financial instruments (continued) Impairment losses The aging of the Group and Company’s trade receivables at the reporting date was: Group In thousands of AUD Not past due Past due 0-30 days Past due 31-90 days More than 91 days Company In thousands of AUD Not past due Past due 0-30 days Past due 31-90 days More than 91 days Gross 2008 126,529 73,290 20,795 7,350 227,964 Gross 2008 32,787 17,657 7,473 3,810 61,727 Impairment 2008 - - - (5,528) (5,528) Impairment 2008 - - - (2,150) (2,150) Gross 2007 96,824 56,490 13,089 5,187 171,590 Gross 2007 25,615 16,005 3,687 1,300 46,607 Impairment 2007 - - - (5,179) (5,179) Impairment 2007 - - - (1,300) (1,300) The movement in the allowance for impairment in respect of trade receivables during the year was as follows: Group In thousands of AUD Balance at 1 July Impairment loss recognised Balance at 30 June Company In thousands of AUD Balance at 1 July Impairment loss recognised Balance at 30 June 2008 (5,179) (349) (5,528) 2008 (1,300) (850) (2,150) 2007 (4,888) (291) (5,179) 2007 (1,000) (300) (1,300) Based on historic default rates, the Group believes that no impairment allowance is necessary in respect of trade receivables not yet past due, or loans to/ investments in Group companies. 83 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 29. Financial instruments (continued) Liquidity risk The following are the contractual maturities of financial assets and liabilities, including estimated interest payments. The amounts disclosed are the contractual undiscounted cash flows (inflows shown as positive, outflows as negative). Consolidated 30 June 2008 In thousands of AUD Financial assets Non-interest bearing Fixed rate Variable rate Financial liabilities Non-interest bearing Variable rate* Carrying amount Contractual cash flows 6 months or less 6-12 months 1-2 years 2-5 years More than 5 years 262,046 2,152 19,397 262,046 2,280 20,095 244,761 2,280 20,095 283,595 284,421 267,136 - - - - 17,285 - - 17,285 - - - - (140,418) (209,191) (140,418) (263,167) (139,920) (15,632) - (16,311) - (16,393) - (214,830) (349,609) (403,585) (155,552) (16,311) (16,393) (214,830) - - - - (498) - (498) * Variable rate financing consists of commercial bills that are drawn under a facility agreement entitling the Group and Company to financing until November 2010. Consolidated 30 June 2007 In thousands of AUD Financial assets Non-interest bearing Fixed Rate Variable rate Financial liabilities Non-interest bearing Variable rate Carrying amount Contractual cash flows 6 months or less 6-12 months 1-2 years 2-5 years More than 5 years 172,655 7,085 20,349 172,655 7,292 20,942 172,655 7,292 20,942 200,089 200,889 200,889 - - - - - - (134,485) (173,148) (134,485) (184,429) (133,947) (6,167) - (5,626) - (172,637) (307,633) (318,914) (140,114) (5,626) (172,637) - - - - - - - - - (538) - (538) 84 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 29. Financial instruments (continued) Company 30 June 2008 In thousands of AUD Financial assets Non-interest bearing Non-interest bearing - Loans to controlled entities Fixed rate Financial liabilities Non-interest bearing Variable rate – intercompany Variable rate – external 30 June 2007 In thousands of AUD Financial assets Non-interest bearing Loans to controlled entities Fixed rate Financial liabilities Non-interest bearing Variable rate – intercompany Variable rate – external Carrying amount Contractual cash flows 6 months or less 6-12 months 1-2 years 2-5 years More than 5 years 66,662 232,267 66,662 232,267 60,722 232,267 1,000 1,072 1,072 299,929 300,001 294,061 - - - - 5,940 - - 5,940 - - - - - - - - (54,503) (31,292) (54,503) (46,543) (54,005) (1,592) - (1,592) - (3,183) - (40,177) (498) - (190,513) (239,363) (22,811) (14,298) (14,298) (187,957) - (276,308) (340,409) (78,408) (15,890) (17,481) (228,134) (498) Carrying amount Contractual cash flows 6 months or less 6-12 months 1-2 years 2-5 years More than 5 years 46,542 177,961 46,542 177,961 46,542 177,961 3,177 3,245 3,245 227,680 227,748 227,748 - - - - - - - - - - - - - - - - (78,377) (30,125) (78,377) (43,798) (77,879) (1,341) - (5,466) - (2,314) - (6,942) (498) (27,736) (145,000) (154,367) (4,684) (4,684) (145,000) - - (253,502) (276,542) (83,903) (10,149) (147,314) (6,942) (28,234) 85 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 29. Financial instruments (continued) Currency risk Exposure to currency risk The Group’s exposure to foreign currency risk at balance date was as follows: In thousands USD NZD euro JPY USD NZD euro JPY Trade receivables Secured bank loans Trade payables Gross balance sheet exposure 30 June 2008 30 June 2007 483 - (2,078) 6,813 (1,200) (2,894) - - (67) - - (14,809) (1,595) 2,719 (67) (14,809) - - - - 11,594 (2,520) (5,541) 3,533 - - - - - - - - The Company’s exposure to foreign currency risk was as follows: In thousands USD NZD euro JPY USD NZD euro JPY 30 June 2008 30 June 2007 435 (920) (485) - - - - (21) - (14,807) (21) (14,807) - - - - - - - - - - - - Trade receivables Trade payables Gross balance sheet exposure Sensitivity analysis A 5 percent strengthening/weakening of the Australian dollar against the above currencies at 30 June would not have materially increased/(decreased) equity and profit or loss in the current or prior year. This analysis assumes that all other variables, in particular interest rates remain constant. Interest rate risk Profile At the reporting date the interest rate profile of the Company’s and the Group’s interest-bearing financial instruments was: In thousands of AUD Fixed rate instruments Financial assets Variable rate instruments Financial assets Financial liabilities Consolidated Carrying amount Company Carrying amount 2008 2007 2008 2007 2,152 7,085 1,000 3,177 19,397 (209,191) (187,642) 20,349 (173,148) (145,714) - (221,805) (220,805) - (175,125) (171,948) Fair value sensitivity analysis for fixed rate instruments The Group does not account for any fixed rate financial assets and liabilities at fair value through profit or loss, and the Group does not designate derivatives (interest rate swaps) as hedging. Therefore a change in interest rates at the reporting date would not materially affect profit or loss. 86 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 29. Financial instruments (continued) Cash flow sensitivity analysis for variable rate instruments A change of 50 basis points in interest rates at the reporting date would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis for 2007. Group Effect in thousands of AUD 30 June 2008 30 June 2007 Company Effect in thousands of AUD 30 June 2008 30 June 2007 Fair values Profit or loss Equity 50bp increase 50bp decrease 50bp increase 50bp decrease (929) 929 (929) 929 (725) 725 (725) 725 Profit or loss Equity 50bp increase 50bp decrease 50bp increase 50bp decrease (790) 790 (790) 790 (709) 709 (709) 709 Fair values versus carrying amounts The carrying values of financial assets and liabilities as shown in the balance sheet are a reasonable approximation of fair value. The basis for determining fair values is disclosed in note 4. 30. Operating leases Leases as lessee Non-cancellable operating lease rentals are payable as follows: In thousands of AUD Less than one year Between one and five years More than five years Consolidated Company 2008 2007 2008 2007 14,010 31,737 3,156 48,903 13,785 33,828 5,814 53,427 1,208 1,448 - 2,656 1,904 2,562 - 4,466 The Group leases a number of warehouse and factory facilities under operating leases. The leases run for a period ranging from 1 to 15 years with the majority running for a period of 5 years, with an option to renew the lease after that date. Lease payments are increased each renewal period to reflect market rentals. Some leases provide for additional rent payments that are based on changes in a local price index. 87 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 31. Capital and other commitments In thousands of AUD Capital expenditure commitments Plant and equipment Contracted but not yet provided for and payable: Within one year Consolidated 2007 2008 Company 2008 2007 11,864 11,827 1,636 1,272 32. Contingencies The directors are of the opinion that provisions are not required in respect of these matters, as it is not probable that a future sacrifice of economic benefits will be required or the amount is not capable of reliable measurement. In thousands of AUD Contingent liabilities not considered remote Consolidated Company 2008 2007 2008 2007 Guarantees (i) Under the terms of a Deed of Cross Guarantee the Company and its wholly owned subsidiaries, have guaranteed the bank facilities in each other’s companies. The amounts shown are the bank guarantees. No material deficiency in net assets exists in these companies at reporting date. - - 276,420 193,168 (ii) Letters of credit established in favour of suppliers/creditors. 38 27,701 - (iii) Bank guarantees in favour of customers and suppliers 18,493 18,170 9,892 8,514 There are no contingent assets where the probability of future receipts is not considered remote. 88 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 33. Related parties Key management personnel The following were key management personnel of the Group at any time during the reporting period and unless otherwise indicated were key management personnel for the entire period: Non-executive Directors Jennifer Helen Hill-Ling (Chairman) Ian Elliot Roger Baden Flynn Geoffrey Guild Hill Peter William Stancliffe Executive Directors David James Simmons (Group Managing Director, resigned 30 June 2008) Graham Lloyd Twartz (Group Finance Director, appointed Group Managing Director 1 July 2008) Executives L Andrewatha (Managing Director - Orrcon Group) A Muir (General Manger - Business Development, appointed Group Finance Manager 28 March 2008) J Easling (Managing Director - Fielders) S Cope (Group General Manager – Electronics, Security and Entertainment) R Gros (Group General Manger – Home, Hardware & Eco Products) A Oliver - Group General Manager - Antenna and TV Systems R Meachem General Manager – Pacom D Salvaterra – General Manager - EzyStrut Key management personnel compensation The key management personnel (KMP) compensation included in ‘personnel expenses’ (see note 11) is as follows In AUD Short-term employee benefits Post-employment benefits Termination benefits Share-based payments Consolidated Company 2008 4,398,212 340,340 - 150,549 4,889,101 2007 2,930,011 224,779 291,068 258,993 3,704,851 2008 3,497,677 265,067 - 120,437 3,883,181 2007 2,087,001 149,294 291,068 161,768 2,689,131 Individual directors and executives compensation disclosures Information regarding individual directors and executives compensation and some equity instruments disclosures as permitted by Corporations Regulations 2M.3.03 are provided in the Remuneration Report section 7 of the Directors’ Report. Apart from the details disclosed in this note, no director has entered into a material contract with the Company or the Group since the end of the previous financial year and there were no material contracts involving directors’ interests existing at year-end. 89 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 33. Related parties (continued) Loans to key management personnel and their related parties There were no loans outstanding at the reporting date to key management personnel and their related parties. Option loans detailed in prior year reports are no longer recognised as loans as they are included in the fair value of the options as required by AIFRS. Other key management personnel transactions A number of key management persons, or their related parties, hold positions in other entities that result in them having control or significant influence over the financial or operating policies of those entities. A number of these entities transacted with the Company or its subsidiaries in the reporting period. The terms and conditions of the transactions with management persons and their related parties were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to non- director related entities on an arm’s length basis. The aggregate amounts recognised during the year relating to key management personnel and their related parties were as follows: In AUD Key management person J Easling Transactions value year ended 30 June Note 2008 2007 (i) 1,135,180 899,047 Transactio n Property Rental (i) The Group rents certain property from a company in which J Easling is a shareholder. Amounts were billed based on normal market rentals and were due and payable under normal payment terms. There were no amounts receivable from and payable to key management personnel at reporting date arising from this transaction. (2007: $nil) From time to time, key management personnel of the Company or its controlled entities, or their related entities, may purchase goods from the Group. These purchases are on the same terms and conditions as those entered into by other Group employees or customers and are trivial or domestic in nature. 90 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 33. Related parties (continued) Options and rights over equity instruments The movement during the reporting period in the number of options over ordinary shares in the Company held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows: Held at 1 July 2007 Granted as compen- sation Exercised Other changes* Held at 30 June 2008** Vested during the year Vested and exercisable at 30 June 2008 540,000 323,000 100,000 60,000 280,000 180,000 110,000 70,000 30,000 55,000 60,000 60,000 25,000 60,000 30,000 25,000 20,000 25,000 60,000 60,000 - - - - - - - - - - (280,000) (60,000) 360,000 323,000 240,000 40,000 360,000 83,000 (45,000) (60,000) (30,000) (25,000) (10,000) (10,000) - - 260,000 180,000 110,000 70,000 40,000 70,000 120,000 120,000 40,000 - 10,000 - - - - - 100,000 - 10,000 - - - - - Held at Granted as 1 July 2006 compen- sation Exercised Other changes* Vested and Held at 30 June 2007** Vested exercise-able during the at 30 June year 2007 440,000 280,000 100,000 60,000 - (17,000) - - 540,000 323,000 280,000 235,000 100,000 120,000 80,000 - - 45,000 - 45,000 - 60,000 30,000 60,000 60,000 25,000 (60,000) - (20,000) - - - (220,000) - (80,000) - - - - - - - - 280,000 - 180,000 110,000 60,000 60,000 70,000 80,000 60,000 60,000 45,000 20,000 60,000 25,000 - - 10,000 120,000 43,000 60,000 60,000 20,000 - - - - - Directors D J Simmons G L Twartz Executives A Oliver L Andrewatha J Easling A Muir D Walker R Meachem S Cope R Gros Directors D J Simmons G L Twartz Executives M Canny A Oliver P Mellino L Andrewatha J Easling S Cope R Gros A Muir * Other changes represent options that lapsed or were forfeited during the year. **Options are subject to a non-recourse loan for the purchase of shares. The shares are not recognised as exercised by International Financial Reporting Standards, until the loan is extinguished. No options were held by key management person related parties. 91 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 33. Related parties (continued) Movement in shares The movement during the reporting period in the number of ordinary shares in the Company held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows Received on exercise of options Employee Share Bonus Plan Sales Purchases Held at 1 July 2007 14,782,908 9,706 1,000 70,482 24,407 10,202 2,609 553,903 - - 5,574 1,889 1,919 1,299 40,264 - 5,383 1,911 1,416 6,315 - - 2,445 - 330 1,299 4,421 387 - 1,299 Received on exercise of options Purchases 541,494 - - 3,778 1,309 548 - - 2,150 - - 281 - - - - - - - 17,000 60,000 - 20,000 - - - Held at 1 July 2006 14,289,414 9,500 1,000 66,704 23,098 9,654 12,403 28,976 37,908 5,306 - 4,896 1,705 Held at 30 June 2008 15,336,811 9,898 1,000 76,056 26,296 12,121 4,100 42,901 - 5,905 3,402 6,029 6,894 - 1,391 - - - - - - - - - - - - - - - Held at 30 June 2007 14,782,908 9,706 1,000 70,482 24,407 10,202 2,609 39,504 40,264 25,437 - 5,383 1,911 Sales (48,000) - - - - - (27,000) (49,678) - - - - - - - - - - - - - - - - - - - - 192 - - - - 192 192 - 192 192 192 192 - 92 Employee Share Bonus Plan - 206 - - - - 206 206 206 131 - 206 206 Directors J H Hill-Ling* D J Simmons I Elliot GG Hill R B Flynn P W Stancliffe G L Twartz Executives A Oliver L Andrewatha J Easling A Muir D Walker R Meachem S Cope R Gros Directors J H Hill-Ling* D J Simmons I Elliot G G Hill R B Flynn P W Stancliffe G L Twartz Executives M Canny** A Oliver P Mellino** L Andrewartha J Easling A Muir * Includes 1,057,001 (2007: 996,714) shares owned by Hills Associates & Poplar Pty Ltd and 12,454,632 (2007: 11,970,195) owned by Hills Associates Ltd in which J H Hill-Ling is a Director 92 **Held at the date of cessation of classification of KMP. 93 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 33. Related parties (continued) Movements in shares (continued) The above analysis does not include options exercised as options subject to a non-recourse loan for the purchase of shares are not recognised as exercised by International Financial Reporting Standards, until the loan is extinguished at which point the shares are recognised. No shares were granted to key management personnel during the reporting period as compensation in 2007 or 2008 aside from those issued to the executives as part of the employee share scheme. Changes in key management personnel in the period after the reporting date and prior to the date when the financial report is authorised for issue On the 30th of June 2008 David Simmons retired as Managing Director and as a Director of the Company. Graham Twartz was appointed Managing Director on 1 July 2008. David will continue as a consultant to the company for a further 12 months. Subsidiaries All transactions with partly owned controlled entities are on normal terms and conditions. Transactions with controlled entities are determined on a cost basis. Sales of goods and services that eliminated with cost of goods sold and services provided amounted to $14,117,000 (2007: $32,756,000). Loans and borrowings with Australian wholly owned controlled entities are interest free and payable on demand while loans to or from non- wholly owned subsidiaries are charged interest at rates no more favourable than current market rates. Inter entity interest paid and received during the year was $9,189,000 (2007: $7,978,000). Entities within the group rent properties to or from other entities within the group at rentals that are market related. Property rentals during the year were $2,299,000 (2007: $1,711,000). Group entities charge an administration fee for services rendered which during the year was $10,566,000 (2007: $8,296,000). Inter entity dividends paid and received during the year amounted to $35,713,000 (2007: $11,434,000). Group entity trading transactions and borrowings result in balances arising in respect of current and non-current assets and liabilities. At 30 June 2008 the current assets and liabilities were $128,285,000 (2007: $150,592,000) and the non-current assets and liabilities were $184,914,000 (2007: $137,158,000). Other related parties Key management persons related parties For details of these transactions refer to key management personnel related disclosures. Other related parties Contributions to superannuation funds on behalf of employees are disclosed in note 11. 94 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 34. Group entities Parent and ultimate controlling party The consolidated financial statement’s incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 3(a). Country of Incorporation Note Ownership interest 2008 2007 Parent entity Hills Industries Limited Subsidiaries Hills Finance Pty Ltd Hills Industries Limited Spraygen Sprayers Limited (deregistered) Korvest Ltd Korvest NZ Limited Hills Hoists Pty Ltd Bailey Aluminium Products Pty Ltd ACN 000195 951 Pty Ltd (Formerly Triton Manufacturing & Design Co Pty Ltd) ACN 089 622 622 Pty Ltd (Formerly Triton Workshop Systems (UK) Pty Ltd) Woodroffe Industries Pty Ltd Fielders Australia Pty Ltd Fielders Mobile Mill Pty Ltd (Formerly Aveso Pty Ltd) Zen 99 Pty Ltd Orrcon Holdings Pty Ltd Orrcon Operations Pty Ltd Orrcon Tubing Pty Ltd Precision Tube Company Ltd (deregistered) Tube Specialist Pty Ltd (deregistered) Access Television Services Pty Ltd (Formerly ATS 2005 Pty Ltd) ATS 2004 Pty Ltd (deregistered) Universal Communications Corp Pty Ltd (deregistered) ACN 089 140 134 Pty Ltd (deregistered) Techlife Solutions Pty Ltd (Formerly Access Television Services Pty Ltd (Shelved)) Audio Telex Communications Pty Ltd Crestron Control Solutions Pty Ltd Team Poly Pty Ltd KDB Engineering Pty Ltd Kerry Equipment (Aust) Pty Ltd Step Electronics 2005 Pty Ltd Greenwattle Investments Pty Ltd Access Scaffolding (Aust) Pty Ltd Greenwattle Equipment Pty Ltd Alquip Holdings Pty Ltd Alquip Pty Ltd Pathfinder (Edwardstown) Pty Ltd Hills Nominees Pty Ltd DAS Security Wholesalers Pty Ltd Pacific Communications Pty Ltd Pacom Security Pty Ltd Australia Australia New Zealand United kingdom Australia New Zealand Australia Australia (a) (b) (a) Australia Registered branch in United Kingdom Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Singapore Australia Australia Australia Australia (a) 100 100 - 46.4 46.4 100 100 100 100 100 46.4 46.4 100 100 100 100 100 100 60 100 100 100 100 100 - - 100 - - - 100 100 100 100 100 100 50 100 100 100 100 100 100 100 100 100 100 100 100 60 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 50 100 100 100 100 100 100 100 100 100 100 95 96 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 34. Group entities (continued) Country of Incorporation CBS Hardware Pty Ltd Step Electronics Pty Ltd Opticomm Co Pty Ltd Australia Australia Australia (a) Ownership interest 2008 100 100 50 2007 100 100 - All shares are ordinary shares. Names inset indicate shares held by the company immediately above the inset. The percentage shown is the interest of Hills Industries Limited. (a) These companies are controlled by virtue of the parent entity’s control of the company’s Board through the chairman’s casting vote, effective management of the company and exposure to the risks and benefits of ownership, or control of voting rights through the dilution of the minority shareholders. (b) During the year Korvest Ltd issued 15,604 (2007: 19,553) ordinary shares pursuant to its Employee Share Bonus Plan for no consideration. Hills Industries Limited does not participate in this plan. As a result of this transaction Hills Industries Limited decreased its interest in Korvest Ltd. 35. Subsequent event There have been no events subsequent to balance date that would have a material effect on the Group’s financial statements at 30 June 2008. 36. Auditors’ remuneration In AUD Audit services Auditors of the Company KPMG Australia: Consolidated Company 2008 2007 2008 2007 Audit and review of financial reports 377,000 350,000 261,000 291,500 Overseas KPMG Firms: Audit and review of financial reports Other auditors Audit and review of financial reports Other services Auditors of the Company KPMG Australia 41,004 418,004 53,186 403,186 - 261,000 - 291,500 3,030 421,034 12,383 415,569 - 261,000 - Taxation and other services 134,020 122,022 128,770 117,522 Overseas KPMG Firms: Taxation services 26,582 160,602 12,678 134,700 - 128,770 - 117,522 97 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 37. Deed of cross guarantee Pursuant to ASIC Class Order 98/1418 (as amended) dated 13 August 1998, the wholly-owned subsidiaries listed below are relieved from the Corporations Act 2001 requirements for preparation, audit and lodgement of financial reports, and directors’ report. It is a condition of the Class Order that the Company and each of the subsidiaries enter into a Deed of Cross Guarantee. The effect of the Deed is that the Company guarantees to each creditor payment in full of any debt in the event of winding up of any of the subsidiaries under certain provisions of the Corporations Act 2001. If a winding up occurs under other provisions of the Act, the Company will only be liable in the event that after six months any creditor has not been paid in full. The subsidiaries have also given similar guarantees in the event that the Company is wound up. The subsidiaries subject to the Deed are: KDB Engineering Pty Ltd Kerry Equipment (Aust) Pty Ltd • Hills Finance Pty Ltd • Hills Hoists Pty Ltd • Bailey Aluminium Products Pty Ltd • • • Woodroffe Industries Pty Ltd • ACN 000 195 951 Pty Ltd (Formerly Triton Manufacturing & Design Co Pty Ltd) • Orrcon Operations Pty Ltd • Orrcon Holdings Pty Ltd • Greenwattle Investments Pty Ltd (Alquip) • Audio Telex Communications Pty Ltd • Team Poly Pty Ltd All of the subsidiaries except KDB Engineering Pty Ltd, Orrcon Operations Pty Ltd and Orrcon Holdings Pty Ltd became a party to the deed on 15 April 2004 by virtue of a Deed of Assumption. Orrcon Holdings Limited and Orrcon Operations Pty Ltd became parties to the deed on 23 June 2006, by virtue of a Deed of Assumption. Greenwattle Investments Pty Ltd (Alquip) and Audio Telex Communications Pty Ltd became parties to the deed on 25 June 2007. Team Poly Pty Ltd became a party to the deed on 14 May 2008. Hills Industries Limited is the Holding Company and Pacom Security Pty Ltd is the Trustee under the Deed. A consolidated income statement and consolidated balance sheet, comprising the Company and controlled entities that are a party to the Deed, after eliminating all transactions between parties to the Deed of Cross Guarantee, at 30 June 2008 is set out as follows: Summarised income statement and retained profits In thousands of AUD Profit before tax Income tax expense Profit after tax Retained profits at beginning of year Transfers to and from reserves Adjustment to retained profits at the beginning of the year on inclusion of addition company in the Class Order Dividends recognised during the year Retained profits at end of year Attributable to: Equity holders of the Company Minority interest Profit for the period 98 Consolidated 2008 2007 49,929 9,656 40,273 96,488 135 3,115 54,564 11,590 42,974 86,127 251 4,458 (40,611) 99,400 (37,322) 96,488 99,400 - 99,400 96,488 - 96,488 Hills Industries Limited 30 June 2008 Annual Financial Report Notes to the financial statements 37. Deed of cross guarantee (continued) Balance sheet In thousands of AUD Assets Cash and cash equivalents Trade and other receivables Inventories Assets classified as held for sale Total Current Assets Investments Deferred tax assets Property, plant and equipment Intangible assets Total Non-Current Assets Total Assets Liabilities Bank overdraft Trade and other payables Loans and borrowings Employee benefits Current tax payable Provisions Total Current Liabilities Loans and borrowings Employee benefits Total Non-Current Liabilities Total Liabilities Net Assets Equity Share capital Reserves Retained earnings Total equity Consolidated 2008 2007 19,929 260,152 141,774 - 421,855 9,514 11,440 181,154 95,888 297,946 719,851 10,271 94,404 10,842 17,292 2,957 5,176 140,942 203,498 4,677 208,175 349,117 12,593 179,774 127,490 15,946 335,803 21,046 24,103 130,664 86,986 262,799 598,602 - 84,766 4,125 15,977 11,833 6,209 122,910 171,498 4,319 175,817 298,727 370,504 299,875 223,091 48,013 99,400 370,504 178,031 25,356 96,488 299,875 99 Directors’ declaration 1 In the opinion of the directors of Hills Industries Limited (‘the Company’): (a) the financial statements and notes set out on pages 24 to 95, and the Remuneration report in the Directors' report, set out on pages 11 to 18, are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Company’s and the Group’s financial position as at 30 June 2008 and of their performance, for the financial year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; (b) the financial report also complies with International Financial Reporting Standards as disclosed in note 2(a); (c) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. There are reasonable grounds to believe that the Company and the group entities identified in note 37 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 between the Company and those group entities pursuant to ASIC Class Order 98/1418. The directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the chief executive officer and chief financial officer for the financial year ended 30 June 2008. 2 3 Signed in accordance with a resolution of the directors: Dated at Adelaide on this 12th day of September 2008. G L Twartz Director 100 Independent audit report to the members of Hills Industries Limited 30 June 2008 Annual Financial Report Report on the financial report We have audited the accompanying financial report of Hills Industries Limited (the Company), which comprises the balance sheets as at 30 June 2008, and the income statements, statements of recognised income and expense and cash flow statements for the year ended on that date, a description of significant accounting policies and other explanatory notes [x to y] and the directors’ declaration of the Group comprising the company and the entities it controlled at the year’s end or from time to time during the financial year. Directors’ responsibility for the financial report The directors of the company are responsible for the preparation and fair presentation of the financial report in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal control relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. In note 2(a), the directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements, that the financial report, comprising the financial statements and notes, complies with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We performed the procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001 and Australian Accounting Standards (including the Australian Accounting Interpretations), a view which is consistent with our understanding of the Company’s and the Group’s financial position and of their performance We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 101 Independent audit report to the members of Hills Industries Limited 30 June 2008 Annual Financial Report Auditor’s opinion In our opinion: (a) the financial report of Hills Industries Limited is in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of the Company’s and the Group’s financial position as at 30 June 2008 and of their performance for the year ended on that date; and complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001. (b) the financial report also complies with International Financial Reporting Standards as disclosed in note 2(a). Report on the remuneration report We have audited the Remuneration Report included in paragraphs 11 to 18 of the directors’ report for the year ended 30 June 2008. The directors of the company are responsible for the preparation and presentation of the remuneration report in accordance with Section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with auditing standards. Auditor’s opinion In our opinion, the remuneration report of Hills Industries Limited for the year ended 30 June 2008, complies with Section 300A of the Corporations Act 2001. KPMG G Savage Partner Adelaide Dated this the 12th day of September 2008 102 Lead auditor’s independence declaration under Section 307C of the Corporations Act 2001 To: the directors of Hills Industries Limited I declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 30 June 2008 there have been: (i) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and (ii) no contraventions of any applicable code of professional conduct in relation to the audit. KPMG G Savage Partner Adelaide Dated this the 12th day of September 2008 103 ASX additional information Additional information required by the ASX Limited Listing Rules and not disclosed elsewhere in this report is set out below. Shareholdings (as at 22 August 2008) Substantial shareholders The number of shares held by substantial shareholders and their associates are set out below: Shareholder Poplar Pty Limited Hills Associates Limited Voting rights Ordinary shares Number 17,955,072 12,454,632 On a show of hands, every person present in one or more of the following capacities, namely, that of a member or the proxy attorney or representative of a member, shall have one vote. On a poll, every member present in person or by proxy attorney or representative shall have one vote for every ordinary share held. Direct payment to shareholders’ accounts Dividends may be paid directly to bank, building society or credit union accounts in Australia. Payments are electronically credited on the dividend date and confirmed by mailed payment advice. Shareholders who want their dividends paid this way should advise the Company’s share register in writing. Distribution of equity security holders As at 13 August 2008 Category 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,000 - 100,000 100,000 and over Number of equity security holders Ordinary shares Options 4,730 11,516 4,712 2,816 64 23,838 - - - 15 7 22 The number of shareholders holding less than a marketable parcel of ordinary shares is 768. Securities Exchange The Company is listed on the Australian Securities Exchange. The Home exchange is Adelaide. Other information Hills Industries Limited, incorporated and domiciled in Australia, is a publicly listed company limited by shares. 104 ASX additional information (continued) On-market buy-back There is no current on-market buy-back. Twenty largest shareholders Name Number of ordinary shares held Percentage of capital held Poplar Pty Limited Hills Associates Limited Jacaranda Pastoral Pty Ltd Australian Foundation Investment Company Limited Argo Investments Ltd Donald Cant Pty Ltd National Nominees Limited Colleen Sims Nominees Pty Ltd Milton Corporation Limited J P Morgan Nominees Australia Limited Hills Associates Limited & Poplar Pty Ltd Choiseul Investments Limited ANZ Nominees Limited Citicorp Nominees Pty Limited HSBC Custody Nominees (Australia) Limited Tamarisk Pty Limited Queensland Investment Corporation Mr David James Simmons RBC Dexia Investor Services Australia Nominees Pty Limited S Kidman & Co Ltd Offices and officers Company Secretary Mr Andrew Muir, B.Ec, MBA Principal Registered Office 944-956 South Road Edwardstown SA 5039 Telephone: (08) 8301 3200 Facsimile: (08) 8297 4468 Web: www.hills.com.au Locations of Share Registries Computershare Investor Services Pty Limited Level 5, 115 Grenfell Street Adelaide, SA 5000 Telephone (within Australia): 1300 556 161 Telephone (outside Australia): +61 3 9415 4000 Facsimile: (08) 8236 2305 Email: web.queries@computershare.com.au Internet address: www.computershare.com 17,955,072 12,454,632 5,665,250 4,262,130 4,088,006 1,832,426 1,733,223 1,693,012 1,615,648 1,528,457 1,057,001 801,039 705,425 703,424 653,172 571,062 477,978 360,000 307,858 298,000 58,762,815 9.61 6.67 3.03 2.28 2.19 0.98 0.93 0.91 0.86 0.82 0.57 0.43 0.38 0.38 0.35 0.31 0.26 0.19 0.16 0.16 31.47 105 

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