Invacare Annual Report 2004

Plain-text annual report

I n v o C a r e L m i i t e d A n n u a l R e p o r t 2 0 0 4 ANNUAL REPORT 2004 InvoCare Locations InvoCare Funeral Homes Twin Towns Funerals Tweed Heads William Riley Funerals Lismore Sydney Allan Drew Funerals Castle Hill Economy Funerals All areas Guardian Funeral providers A F Anderson Funerals Granville Allen Matthews Funerals Cremorne North Ryde Bruce Maurer Funerals Crows Nest Butler Funerals Camden Campbelltown Dignified Funerals Burwood Five Dock Guardian Funerals Blacktown J & C Hardy Funerals Hurstville Rockdale J.W. Chandler Funerals Richmond Windsor Labor Funerals Bankstown Macarthur District Funerals Leppington Metcalfe & Morris Funerals Parramatta Metropolitan Funeral Homes Bankstown Rockdale Parkway Funerals Dee Why Sydney Funeral Services Minchinbury ACT Guardian Funeral providers Tobin Brothers Funerals (ACT) Belconnen Kingston Queanbeyan White Lady Funerals Belconnen Kingston NSW Central Coast Simplicity Funerals Bateau Bay Erina Toukley East Woy Woy White Lady Funerals Wyoming Illawarra Economy Funerals All areas Guardian Funeral providers Hansen & Cole Funerals Bulli Kembla Grange Wollongong Newcastle & Hunter David Lloyd Funerals – incorporating Beresfield and Parsons Funerals Adamstown Belmont Beresfield Economy Funerals All areas White Lady Funerals Charlestown Mayfield North Coast Casino Funerals Casino Kevin Geaghan Funerals Ballina Simplicity Funerals Tweed Heads InvoCare Cemeteries and Crematoria NSW Castlebrook Memorial Park Rouse Hill Forest Lawn Memorial Park Leppington Lake Macquarie Memorial Park Ryhope Lakeside Memorial Park Dapto Lung Po Shan Information Centre Haymarket Newcastle Memorial Park Beresfield Northern Suburbs Memorial Gardens and Crematorium North Ryde Simplicity Funerals Balgowlah Chatswood Liverpool Mascot Miranda Newtown Paddington Randwick Smithfield Warrawee Universal Chung Wah Funerals Fairfield White Lady Funerals Bankstown Bondi Junction Eastwood Manly Mosman Narrabeen Pennant Hills Penrith Roseville Sutherland QLD George Hartnett Funerals Cleveland Holland Park Redcliffe Sandgate Wynnum Cannon & Cripps Funerals – A George Hartnett Funeral Home Kelvin Grove J & H Reed | O. Bottcher & Son Funerals Ipswich Simplicity Funerals Buranda Kedron Miami Parkwood Somerville Funerals Nerang Southport White Lady Funerals Chelmer Gold Coast Kelvin Grove Tanah Merah Value Funerals All areas Pinegrove Memorial Park Eastern Creek Po Fook Shan Information Centre Cabramatta Rookwood Memorial Gardens and Crematorium Rookwood Provinciale Servizio Funebre Coburg Simplicity Funerals Carnegie Frankston Reservoir Sunshine Value Funerals All areas White Lady Funerals Caulfield South Heidelberg South Melbourne WA Mareena Purslowe & Associates Funerals Subiaco Willetton Oakwood Funeral Home Booragoon Rockingham Purslowe Funerals Midland North Perth Northam South Fremantle Victoria Park Wangara Simplicity Funerals Kelmscott Osborne Park Value Funerals All areas SA Blackwell Funerals Morphett Vale Payneham Prospect Torrensville Pengelley & Knabe Funerals – Member of the Blackwell Funerals Group Glenside Simplicity Funerals Black Forest Enfield Victor Harbor Value Funerals All areas White Lady Funerals Hillcrest Plympton VIC Le Pine Funerals Box Hill Camberwell Dandenong Eltham Glen Waverley Greensborough Ivanhoe Kew East Mordialloc Oakleigh St Kilda Thornbury Le Pine Heritage Funerals Croydon Ferntree Gully Healesville Lilydale Le Pine Asian Funerals Glen Waverley Mulqueen Funerals Coburg Epping Greensborough QLD Albany Creek Memorial Park Bridgeman Downs Allambe Memorial Park Nerang Mt Thompson Memorial Gardens Holland Park Tweed Heads Memorial Gardens Tweed Heads South 69 For more details visit www.invocare.com.au . i g n h c a e b l r o f e n i r o h c l l a t n e m e e l D E T M L I I Contents Financial Highlights 2 Chairman’s Message 3 Simplicity Funerals 4 White Lady Funerals 6 Traditional Funeral Brands 8 Cemeteries and Crematoria 10 CEO Review 12 Directors’ and Financial Reports 17 Shareholder Information 66 Corporate Information 68 InvoCare Locations 69 I Y T P S E T A C O S S A & R R A B S S O R Y B D E C U D O R P D N A D E N G S E D I o n s e s u d n a l a i r e t a m d e c y c e r l % 0 5 m o r f e d a m r e p a p n o d e t n i r p s i t r o p e r i s h T InvoCare Annual Report 2004 commemorating life The most important component of everything we do is meeting the personal needs of the family. We advise the families who we assist of the options available to them to make the funeral and memorial everything they would like it to be. That means showing our willingness to cater for traditional through to contemporary ceremonies, being mindful of cultural requirements, religious beliefs and special requests. InvoCare’s focus is on excellence in service delivery to allow families the opportunity to commemorate a life in the manner they choose. 1 InvoCare Annual Report 2004 Financial Highlights Year ended 31 December 2004 • Net Proﬁt after tax up 47% to $17.1 million • Sales Revenue (Operating) up 6% to $148.3 million • Operating EBITDA up 10% to $44.8 million • EBITDA Margin up 5% to 30.2% • Earnings Per Share up 51% to 18.1 cents RESULTS AT A GLANCE $ million unless stated Sales Revenue (Operating) EBITDA (Operating) Proﬁt from sales of ﬁxed assets Proﬁt after tax before Goodwill Amortisation Net Proﬁt after Tax Gross Assets Net Assets 2004 148.3 44.8 1.7 19.6 17.1 279.0 75.7 2003 140.3 40.5 2.7 14.1 11.6 291.1 64.1 Earnings per Share (Basic) 18.1 cents 12.0 cents Prepaid Funerals Funds (in trust) 198.6 169.5 Funerals Homes (number) Cemeteries & Crematoria (number) Employees (Full Time Equivalent numbers) 123 12 809 124 12 806 % Change + 6 + 10 - 37 + 39 + 47 - 4 + 18 + 51 + 17 2 • Sales Revenue (Operating) up 6% to $148.3 million InvoCare Annual Report 2004 Chairman’s Message One of the most pleasing aspects of InvoCare’s We were pleased to report that during the year our performance for the year ended 31 December debt has been reduced by $23.5 million or 15%, which 2004 was exceeding the 2004 Prospectus forecast is $9.0 million ahead of our Prospectus forecast. performance in terms of revenues and proﬁt after tax even though the number of deaths was in line with that forecast. The proﬁt after tax for the year exceeded the Prospectus forecast by 37%, or 26% if you exclude the asset sale gains, based on a revenue increase of 3%. EPS growth was 36% above the Prospectus forecast while there were also improvements in free In January we welcomed Roger Penman to the Board as a replacement for John Murphy who resigned from the Board on 28 February 2005. Mr Penman is a Principal in the national accounting ﬁrm WHK Greenwoods and a specialist in taxation, advisory and business services. I convey to Mr Murphy the appreciation of the Board for his invaluable contribution over the past four years. cash ﬂow and debt repayments. We are strongly committed to appropriate corporate These results have enabled the Board to maintain its policy of a payout ratio of 75% of after tax proﬁts adjusted for amortisation and declare a fully franked ﬁnal dividend of 9.0 cents per share following the interim dividend of 6.4 cents per share. The total dividend for the year of 15.4 cents per share represents an increase of 20% over the Prospectus forecast. As you will read in Richard Davis’ CEO Review, InvoCare has made solid progress during 2004 and remains well positioned for continuing growth with the number of deaths expected to increase over time. Growth is also likely to come from increased market share as the Company continues to develop and promote its major brands, pursue acquisition opportunities as well as its strategies to increase cemeteries and crematoria memorialisation. The potential to increase operating margins due to the relatively ﬁxed nature of many costs, along with the Company’s ability to generate cash, should lead to an enhancement of shareholder value. governance controls and continue to embrace the ASX Corporate Governance Guidelines and CLERP 9 reforms. Our Audit Committee, Risk Committee and Remuneration Committee have functioned effectively during the year. Preparations for adoption of the new AASB standards which are the Australian equivalent to the International Financial Reporting Standards and will apply in the 2005 year, are well in hand. On behalf of the Board and all the Shareholders, I congratulate and thank all the Company’s management and employees for their effort and contribution in achieving the excellent 2004 result. Ian Ferrier Chairman 3 Simplicity Funerals provide a simple, respectful, digniﬁed and affordable service that is both practical and ﬂexible. 4 “ When people come to a funeral director, they are often distressed and feel overwhelmed by the prospect of having to arrange a funeral. The satisfaction I get is from making that process as easy as possible.” Simon Davidson, Simplicity Manager, VIC. www.simplicityfunerals.com.au l d e ﬁ n E r o b r a H t r o c V i C V I i e g e n r a C n o t s k n a r F r i o v r e s e R i e n h s n u S A W t t o c s m e K l k r a P e n r o b s O y a B u a e t a B d o o w s t a h C a n i r E l o o p r e v L i t o c s a M a d n a r i M t n w o w e N t n o g n d d a P i i k c w d n a R l d e ﬁ h t i m S t s a E y e k u o T l s d a e H d e e w T e e w a r r a W y o W y o W D L Q i m a M i n o r d e K a d n a r u B d o o w k r a P A S t s e r o F k c a B l 5 l h a w o g a B l W S N I S N O T A C O L Our aim is provide excellent funeral service to families of every race and religion. We are a dedicated team of women who offer the assurance of absolute support and professional attention with genuine care. We are committed to the training of staff in all areas of funeral service with the vision of providing the best service available in this honourable profession. Because our families are our highest priority, our mission is to provide this service with honesty, care and respect. 6 “ I have worked for White Lady for many years and everyone who sees you in the uniform recognises who you are and appreciates the approach we take and the work we do. I’m proud of the way we lead the industry by always adding those extra touches to make a difference to families.” Sharyn Schubert, Regional Manager, SA, www.whiteladyfunerals.com.au I S N O T A C O L n w o t s k n a B n e n n o c e B l T C A & W S N n w o t s e l r a h C n o i t c n u J i d n o B n o t s g n K i d o o w t s a E l y n a M l d e ﬁ y a M n a m s o M n e e b a r r a N s l l i H t n a n n e P h t i r n e P e l l i v e s o R i g n m o y W d n a l r e h u S t D L Q l r e m e h C t s a o C d o G l e v o r G n v e K l i l g r e b e d e H i l e n r u o b e M h u o S t s e t a r e p o e r a C o v n I A W n I a n e e r a M e m a n e h t r e d n u t h u o S d e ﬁ u a C l l C V I t n o p m y P l A S t s e r c l l i H h a r e M h a n a T 7 i s e t a c o s s A & e w o s r u P l t a s n o i t a c o l s a h i h c h w . n o t t e l l i W d n a i o c a b u S traditional funeral brands We have generations of local experience offering the highest standard of professional and personal service. We will gently guide you through the funeral arrangement process. We strive to make each funeral reﬂect the life of the individual. 8 “ I am in the unique position where both my son and I are Regional Managers and have been a part of the industry for many years. Every day we have the opportunity not just to guide families, but to assist our local communities and work closely with them.” Warwick Hansen, Regional Manager, NSW, t c e p s o r P m a h e n y a P e l l i v s n e r r o T l e a V t t e h p r o M C V I l l i H x o B l l e w r e b m a C g r u b o C n o d y o r C g n o n e d n a D m a h t l E i g n p p E y l l u G e e r t n r e F y e l r e v a W n e G l h g u o r o b s n e e r G e l l i l v s e a e H e o h n a v I t s a E w e K l e a d y l i L c o l l i a d r o M i h g e k a O l A W a d l i K t S y r u b n r o h T n o o g a r o o B d n a d M i l m a h t r o N h t r e P h t r o N m a h g n k c o R i e l t n a m e r F t h u o S a r a g n a W k r a P a i r o c V t i l d n a e v e C l i h c w s p I k r a P d n a l l o H e v o r G n v e K l i A S g n a r e N e f f i l c d e R e t a g d n a S t r o p h u o S t m u n n y W i e d s n e G l T C A & W S N n w o t s m a d A a n i l l a B n w o t s k n a B n e n n o c e B l t n o m e B l l d e ﬁ s e r e B n w o t k c a B l i l l u B d o o w r u B n e d m a C n w o t l l e b p m a C i o n s a C l l i H e l t s a C e n r o m e r C t s e N s w o r C l d e ﬁ r i a F y h W e e D k c o D e v F i e l l i v n a r G e l l i v t s r u H n o t s g n K i e g n a r G a b m e K l e r o m s L i t n o g n p p e L i 9 i y r u b n h c n M i e d y R h t r o N a t t a m a r r a P n a y e b n a e u Q d n o m h c R i l e a d k c o R r o s d n W i g n o g n o l l o W s d a e H d e e w T D L Q I S N O T A C O L cemeteries and crematoria Our Parks and Gardens provide a sanctuary where reﬂections and thoughts can ﬂourish and resonate in a tranquil, inviting environment. They are places of natural landscaped beauty that provide family and friends with a place to go to commemorate and celebrate the lives of those who have passed away. They offer a wide choice of memorial options designed to reﬂect personal aesthetics, meet cultural and religious requirements – all within a wide range of budgets. They are restful places, where one can just reﬂect. 10 “ We are constantly developing our grounds to enhance them and demonstrate we care. Memorials play such an important role for families in providing a focus to reﬂect on a loved one’s life. That’s why I view our Parks and Gardens as so much more than a traditional cemetery or crematorium” Kathyn Taylor, Regional Manager, Family Service, NSW t o p a D e p o h y R l d e ﬁ s e r e B e d y R h t r o N d o o w k o o R k e e r C n r e t s a E g n a r e N k r a P d n a l l o H D L Q s n w o D n a m e g d i r B t h u o S s d a e H d e e w T 11 t n o g n p p e L i W S N l l i H e s u o R I S N O T A C O L InvoCare Annual Report 2004 CEO Review I am pleased to report that InvoCare has completed a During the year the Company reduced its debt by successful year with respect to both ﬁnancial results 15% or $23.5 million to $131.5 million, exceeding its and strategic initiatives. The Financial Highlights Prospectus debt reduction forecast by 62%. on page 2 illustrate the performance across key parameters showing the solid growth in revenues and the excellent growth in proﬁtability. The results reﬂect the Company’s and staff’s commitment to service as much as its overall market share position. The strong ﬁnancial result enabled the Board to declare a ﬁnal fully franked dividend of 9 cents per share. The total dividend paid or payable for the year amounted to 15.4 cents per share fully franked, a 20% increase on that forecast in the Prospectus. Strategically, we continued our focus on service This dividend together with the growth in the share levels, major brand awareness improvement, price during the year has delivered superior returns asset management enhancement, including the to shareholders. performance of the prepaid funds under management, and acquisitions. FUNERAL HOMES Sales revenues from our 123 funeral homes was FINANCIAL OVERVIEW $97.1 million – 3% above our forecasts and up from For the year ended 31 December 2004, sales $91.9 million in 2003. We also achieved the forecast revenues exceeded our forecasts by 3%. For the full 1% growth in funeral services performed. Thus the year the number of funerals performed was in line with revenue gain was a composite of price increases, our forecast, although there were fewer deaths in the volume growth and the mix of funerals in relation to second six months of the year than expected. Overall location and brand. Also contributing was the focus the number of deaths for 2004 is expected to be in line on product offerings and a better than expected with forecasts, but the Australian Bureau of Statistics contribution from prepaid funerals performed due information is not yet available. to improved investment returns. We estimate there has been a small overall increase in market share in the markets in which InvoCare operates. White Lady Funerals and Simplicity Funerals in particular experienced growth in their market share. We will continue to build on this in 2005. InvoCare generated $17.1 million in proﬁt after tax in 2004, which was 37% above the Prospectus forecast and up from $11.6 million for the previous year. This was due to the increase in sales revenues of 6% on the prior year, an improvement in operating margins largely attributable to the ﬁxed nature of the Company’s cost base and a proﬁt generated from asset sales. The earnings per share amounted to 18.1 cents up 36% on the Prospectus forecast and up 51% from 2003. 12 “ InvoCare generated $17.1 million in proﬁt after tax in 2004, which was 37% above the Prospectus forecast and up from $11.6 million for the previous year.” Richard Davis, CEO The brand awareness of our major brands remained The efforts of our professional and committed staff strong, both nationally with Simplicity Funerals and cannot be forgotten in this list of achievements. They White Lady Funerals and with the major ‘traditional are the front line for InvoCare, delivering professional style’ brands operating in each state. The new services, care and support to families. Their Guardian umbrella brand introduced in the past compassion and personal approach to each family year in NSW, is slowly growing its brand awareness. make a difference not just to the Company’s overall The introduction of new signage and a continued performance, but most importantly to the individual advertising campaign will further assist this growth. families who appreciate their guidance at what for We have opened three new funeral homes in the past year, 2 in Melbourne at Frankston and Reservoir with another in Sydney’s north west at Richmond. In 2005 we expect to open three more new funeral homes, with one scheduled to open shortly at Manly in Sydney and at least 2 other new funeral homes planned for key markets around the country. most is an emotional and stressful time. CEMETERIES & CREMATORIA Sales revenues from our 12 cemeteries and crematoria (Memorial Parks and Gardens) was $51.2 million, 3% above our forecasts and up 6 % from $48.4 million in 2003. This 6% growth compared to 2003 can be attributed to an increase in cremation and burial services The client satisfaction index generated from our including prepaid services and adjustments in pricing. surveys, shows a 6% increase in 2004. The survey is sent to all our client families after the funeral service and around 40% respond. One of the key indicators from this survey is that 97% of families say they would deﬁnitely or probably recommend the services of an InvoCare funeral home. It also shows 88% believe InvoCare’s prices were in line with or below consumer expectations. Despite strong competition, InvoCare’s market share showed a small increase. To date there has not been any material ﬁnancial impact from the October 2004 opening of Macquarie Park crematorium, at North Ryde in Sydney. Further cremation competition is likely as the Catholic Cemeteries Board pursues the establishment of a crematorium within the Catholic section of Rookwood Cemetery. If established, the Company’s leased crematorium within the grounds of Rookwood Cemetery will be affected. 13 InvoCare Annual Report 2004 CEO Review continued Crypt construction delays and lower than expected PREPAID FUNERAL FUNDS deaths adversely affected revenue performance in the 13% of the funerals the Company conducted in 2004 second half of the year. were prepaid. This ﬁgure is consistent with previous Strategically the Company continues to focus on increasing the number of memorials from cremations within the cemeteries and crematoria locations where currently some 30% of cremations result in a memorial being placed at the location. Whilst there has been no material change in this rate in recent times, we are continuing to develop strategies and educate the years. As at 31 December 2004 $198.6 million was independently managed in trust funds, up 17% on the previous year. Gross returns for funds under management for the past year of 17.2% is an increase over the prior year of 229%. This gross return excludes investment management fees and administration fees which are currently at 1.9%. public on the beneﬁts of having a memorial. During the year the investment bias has moved A new survey is being introduced to send to client families who choose to have a memorial in one of our to where equities comprise 52% of the portfolio compared to 50% in the prior year. Memorial Parks or Gardens. From this survey we will This improved investment return has also contributed be able to generate information similar to our client to an increase in funeral revenues as prepaid funerals funeral surveys. are performed. Our operations and family service staff play a key role in ensuring the Memorial Parks and Gardens continue to present themselves as beautiful and peaceful places for people to reﬂect. They all provide an invaluable function in ensuring a life, which is important to family and friends, is not forgotten. Our cemeteries and crematoria staff continues to set high levels of excellence and as such lead the industry. CASH FLOWS & ACQUISITIONS There were no acquisitions in 2004. Unrealistic pricing expectations have inhibited any opportunities to date and we do not believe it likely that a signiﬁcant acquisition will be completed in 2005. However we are still actively seeking opportunities for acquisitions. 14 Net cash ﬂows were strong in the year assisted by In order to enhance our key funeral home brands in proceeds from the sale of assets and lower than particular, we are developing brand blue prints. This expected capital expenditure due to delays in will also assist us with a direction for future growth of gaining development approvals from Councils for the brands. The Company has identiﬁed key segments major refurbishment works. This contributed to the of the market and continues to position its brands to improved debt reduction mentioned earlier. cater for each segment. During the year, 20% of our vehicle ﬂeet was replaced Whilst the industry remains fragmented, the Company in keeping with our vehicle management policy of an continues to face active competition in the markets in average vehicle life of 5 years. which it operates. As a consequence of the strong cash ﬂow and lack of InvoCare continues working with the industry acquisition activity, the Company is currently reviewing and other stakeholder groups as various state its capital management program. Governments review their legislation in respect of the OVERVIEW OF OPERATIONS Four non-strategic or non-performing funeral homes were sold in the past year at Ipswich (QLD), Burwood & Healesville (VIC) and Victor Harbor (SA) generating $1.3 million in proﬁt. Whilst the revenue and proﬁt contribution from these locations was not material, a proportion of both should be retained as the Company retains a presence in the markets utilising other Company facilities in the areas. Further non-strategic property has been identiﬁed for divestment in 2005. The Company continues to focus on the strategic importance and effective returns of its locations and in doing so has embarked on a long-term property plan for the Company, commencing with Sydney. Key sites have also been identiﬁed for an upgrade in facilities. For example, our main operational centre in Western Australia at North Perth is being upgraded. In Queensland, work is nearing completion on a new condolence lounge and the upgrading of the Chapels at Albany Creek Memorial Park in Brisbane. Other upgrade works have been identiﬁed and are being scheduled for completion over for the next two years. industry. The majority of the focus in 2004 was on consumer protection, including minimum standards of service. Importantly all of InvoCare’s locations continue to foster relationships within the local communities in which they serve. These efforts are not just based on sponsorship, but often extend to volunteering time, facilities and assisting in raising funds. We value these local activities, because we view them as essential to participate at this level. Working with the local community aside from relationship building also helps to demystify the industry and reach many people at a time far less emotional than after the death of a loved one. InvoCare continues to be committed to training and developing its employees with extensive ‘learning and development’ programs catering to key areas of the business. We now have a network of accredited trainers within the organisation who focus on delivering programs, which ensure the Company sets the highest 15 InvoCare Annual Report 2004 CEO Review continued standards for the way its staff conduct themselves Finally I would like to take this opportunity to thank and service our client families. We are constantly my management team and all the dedicated developing these programs and will shortly also employees of InvoCare who have worked so hard to launch some computer based learning programs. generate this performance. Richard Davis Chief Executive Ofﬁcer InvoCare’s new ﬁnancial system and funeral operating system have been successfully implemented on time and within budget. The resource utilisation system for our funeral operations is scheduled to be rolled out in the ﬁrst half of this year. This will be followed by a new operating system for cemeteries and crematoria. The Company has appointed two full time Occupational Health and Safety (OHS) personnel who have undertaken audits across Australia. They are working with internal and external resources to develop ways to eliminate or minimise risks within the workplace in a structured manner. Currently we are reviewing our manual handling procedures, an area identiﬁed as a major area of potential injury and lost working days. LOOKING AHEAD Since InvoCare listed in December 2003, we have successfully exceeded our forecasts. We have shown the capacity to grow organically leveraging from our strong brands, professional service and wide network of locations and thus provide sustainable growth. Whilst InvoCare’s results will always be affected by the number of deaths, our positioning in the market and the strategies we are putting in place position the Company well for the future. 16 Directors’ and Financial Reports Directors’ Report 18 Corporate Governance Statement 24 Financial Report Statements of Financial Performance 31 Statements of Financial Position 32 Statements of Cash Flows 33 Notes to the Financial Statements 34 Directors’ Declaration 63 Independent Audit Report 64 17 InvoCare Annual Report 2004 Directors’ Report The Directors submit their report on the consolidated REVIEW OF OPERATIONS entity consisting of InvoCare Limited (the Company) The key highlights for the year include: and the entities it controlled for the year ended 31 December 2004. InvoCare Limited and its controlled entities together are referred to as InvoCare or the consolidated entity in this Financial Report. DIRECTORS Unless indicated otherwise, the following persons were Directors of InvoCare Limited during the whole of the ﬁnancial year and until the date of this report: Ian Ferrier Richard Davis Michael Grehan John Murphy (resigned 28 February 2005) Christine Clifton Richard Fisher Roger Penman (appointed 1 January 2005) PRINCIPAL ACTIVITIES – The consolidated net proﬁt for the year after tax attributable to members of InvoCare Limited was $17.1 million compared to the Prospectus forecast of $12.5 million and $11.6 million in 2003. This proﬁt includes gain on sale of assets of $1.7 million (before tax) compared to the Prospectus forecast of $0.1 million and $2.7 million in 2003. Reﬁnancing costs during the year were $Nil compared to $2.1 million (before tax) in 2003. – Revenues from operating activities were $148.3 million, an increase of 5.7% over the previous year and 2.8% higher than the Prospectus forecast. The increases are attributable to a combination of a higher number of deaths, higher average prices and a small improvement in market share. – Earnings per share (basic) were 18.1 cents per share (2003: 12.0 cents per share) compared to the Prospectus forecast of 13.3 cents per share. Details InvoCare is Australia’s leading private provider of are set out in Note 30 of the ﬁnancial statements. services to the funeral industry. There were no signiﬁcant changes in the nature of these activities during the year. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS There have been no signiﬁcant changes in the state of the Company’s affairs during the ﬁnancial year. – InvoCare has continued implementation of its new Guardian branding and marketing strategy in the Sydney market during 2004 to complement the strong branding position already in place of its national brands, White Lady and Simplicity. 18 – Marketing of prepaid funerals continued during FUTURE DEVELOPMENTS AND RESULTS the year and at December 2004 InvoCare had Information on likely developments in the operations $198.6 million (2003: $169.5 million) of funds in of the consolidated entity and the expected results trust for prepaid funerals and prepaid cemetery and of operations have not been included in this report crematoria services. This is an increase of 17.2% because the Directors believe it would be likely to compared to December 2003. During 2004, 13% result in unreasonable prejudice to the consolidated of funerals performed were previously prepaid with entity. InvoCare. – Signiﬁcant progress was made in the development ENVIRONMENTAL REGULATION AND PERFORMANCE and implementation of new IT systems for the InvoCare is committed to the protection of the ﬁnancial and operational aspects of the business. environment, the health and safety of its employees, These are on track to be ﬁnalised in 2005, or in the customers and the general public, as well as case of prepaid funerals, in 2006. DIVIDENDS An interim fully franked dividend for the year ended 31 December 2004 of $6,080,191 (6.4 cents per fully paid share) was paid on 12 October 2004. compliance with all applicable environmental laws, rules and regulations in the jurisdictions in which the consolidated entity operates its business. The consolidated entity is subject to environmental regulation in respect of its operations, including some regulations covering the disposal of mortuary and Since the end of the ﬁnancial year, the Directors have pathological waste and the storage of hazardous recommended on 12 April 2005 the payment of a materials. InvoCare has Environmental Risk ﬁnal fully franked ordinary dividend of $8,550,268 Management Systems in place at its appropriate (9.0 cents per fully paid share) out of retained proﬁts at locations. 31 December 2004. There have been no claims during the year and The total of the interim and ﬁnal dividends relating the Directors believe InvoCare has complied with to the year ended 31 December 2004 is consistent all relevant environmental regulations and holds all with the Directors’ intention to maintain a dividend relevant licences. INFORMATION ON DIRECTORS Details of the Directors’ qualiﬁcations and experience are set out on the following pages. payout ratio of 75% of net proﬁt after tax before goodwill amortisation, which is the maximum normally permitted under the terms of the Company’s debt facility agreements. SIGNIFICANT EVENTS AFTER THE BALANCE DATE There have been no signiﬁcant events occurring after balance date which have signiﬁcantly affected or may signiﬁcantly affect either InvoCare’s operations or results of those operations or InvoCare’s state of affairs in future ﬁnancial years. 19 InvoCare Annual Report 2004 Directors’ Report continued Mr Ian Ferrier CA Chairman of the Board Chairman of Remuneration Committee Member of Risk Committee Mr Richard Davis BEc Chief Executive Ofﬁcer Mr Michael Grehan BAcc, MBA Chief Operating Ofﬁcer Ian Ferrier has held the position Richard has held the position of Michael Grehan has held the of Chairman of InvoCare Limited Chief Executive Ofﬁcer of InvoCare position of Chief Operating Ofﬁcer since 2001. Ian is a Senior Founding Partner of Ferrier Limited since 1995. Richard is a of InvoCare Limited since March Director of The Over 50s Guardian 2000 and was appointed as a Hodgson Accountants, Australia’s Friendly Society Limited. Richard Director of InvoCare Limited on largest ﬁrm of reconstruction accountants. Ian is Chairman of Port Douglas Reef Resorts was recruited to the position of 24 October 2003. Prior to joining Chief Financial Ofﬁcer of Chase InvoCare, Michael held senior Corporation’s funeral business management positions across and a Non-Executive Director of in 1989 and stayed on in this a number of different industries. McGuigan Simeon Wines Limited, position when the business was These included Managing Director Macquarie Goodman Management acquired by Industrial Equity of National Jet Systems, Group Limited and Reckon Limited. As Limited, following which he Financial Controller overseeing all senior partner of Ferrier Hodgson, became Chief Executive Ofﬁcer. ﬁnancial and commercial activities Ian has gained vast experience in numerous commercial ﬁelds. Ian is a Fellow of the Institute of Prior to joining the funeral industry, of Qantas’ subsidiary businesses, Richard worked in venture capital including Regional Airlines, and as an accounting partner of Flight Catering, Resorts, Freight Chartered Accountants in Australia Bird Cameron. Richard holds a and Property, and a long-term and a Member of the Hong Kong Bachelor of Economics from the secondment as General Manager Society of Accountants. University of Sydney. Purchasing, Distribution with Carrier Air-conditioning. Prior to moving into management, Michael was a chartered accountant specialising in insolvency with KPMG, including two years spent in the United States with the ﬁrm. Michael holds a Bachelor of Business Accountancy and a Master of Business Administration from the Queensland University of Technology. 20 Mr Roger Penman BEC FCA FTIA Non-Executive Director Chairman of Audit Committee (from 28 February 2005) Member of Remuneration Committee (from 28 February 2005) Dr Christine (Tina) Clifton MB BS (HONS), BHA, FRACMA Non-Executive Director Chairman of Risk Committee Member of Audit Committee Mr Richard Fisher MEc, LLB Non-Executive Director Member of Risk Committee Member of Audit Committee Roger Penman was appointed as Tina Clifton is a registered medical Richard Fisher is a partner at Blake a Director of InvoCare Limited on practitioner. Tina has been a Dawson Waldron specialising in 1 January 2005 and commenced Director of InvoCare Limited since corporate law, and also holds the his roles on the Audit Committee 24 October 2003 and her other position of Chairman of Partners. and Remuneration Committee on current directorships include HCF, He has been a Director of InvoCare 28 February 2005. Roger has been Ambri Limited and IWPE Nominees Limited since 24 October 2003. a partner of WHK Greenwoods Pty Limited. Tina was formerly a Richard is a former part-time (part of the Investor Group Director of the Garvan Institute Limited) since 1986. Previously of Medical Research, the Victor Commissioner at the Australian Law Reform Commission and is he was a senior tax manager Chang Cardiac Research Institute a current International Consultant in the tax consulting division of and St Vincents Hospitals. Prior to for the Asian Development Bank Arthur Andersen for 11 years. 2001 Tina held various positions in and Member of the Library Council He is a Fellow of the Institute of the public and private healthcare of NSW. Richard holds a Master Chartered Accountants and the sectors including Chief Executive of Economics from the University Taxation Institute of Australia with Ofﬁcer of the Sisters of Charity of New England and a Bachelor over 30 years tax consulting and Health Service in New South Wales of Laws from the University of general business experience. and deputy Chief Executive Ofﬁcer Sydney. Roger has extensive experience of the Northern Sydney Area with mergers, acquisitions, Health Service. From 1980 to 1988 complex taxation and other tax Tina was a general practitioner. issues. He is also a specialist Tina holds degrees in medicine adviser to many professional and health administration and practices on tax, accounting and specialist qualiﬁcations in medical general business matters. administration. 21 InvoCare Annual Report 2004 Directors’ Report continued MR JOHN MURPHY BComm, MComm, CA, FCPA Non-Executive Director Chairman of Audit Committee (until 28 February 2005) Member of Remuneration Committee (until 28 February 2005) COMPANY SECRETARY MR KENNETH MEALEY BComm, CPA Chief Financial Ofﬁcer Kenneth Mealey has held the position of Company Secretary and Chief Financial Ofﬁcer since joining the consolidated entity in 1994. Prior to joining the consolidated entity, Kenneth had considerable senior management and ﬁnancial experience across several industries, including ﬁve years as Finance Director and Company Secretary of previously listed company Hunter Douglas Limited, two years as Technology Division Finance Director for Lend Lease Corporation and ten years as Director of Finance and Administration at Otis Elevator Company Pty Limited. Kenneth holds a Bachelor of Commerce from the University of New South Wales and is a member of CPA Australia. John Murphy resigned as a Director of InvoCare Limited on 28 February 2005, having been appointed in May 2001. John is Managing Director of Investec Wentworth Private Equity Pty Limited, a leading Australian private equity ﬁrm, and sits on the Board of each of the fund’s seven investments. John is also a Director of Investec Bank (Australia) Limited, Southcorp Limited and the First Wine Fund Limited. Before founding the private equity business, ﬁve years ago, John spent 25 years with an international accounting ﬁrm including 14 years as a global partner. In that time John held a number of Australian and Asia Paciﬁc management roles and has extensive experience in the areas of Corporate Recovery, Corporate Finance and Mergers and Acquisitions. John holds a Bachelor and Master of Commerce from the University of New South Wales. John is a member of the Institute of Chartered Accountants in Australia and a Fellow of CPA Australia. MEETINGS OF DIRECTORS During the year ended 31 December 2004, the number of meetings of the Board of Directors and of each Board Committee and the number of meetings attended by each of the Directors are as follows: Full Board Meetings No. eligible No. attended to attend Audit No. eligible No. attended to attend Meetings of Committees Remuneration No. eligible No. attended to attend Risk No. eligible No. attended to attend Ian Ferrier Richard Davis John Murphy Michael Grehan Christine Clifton Richard Fisher 14 14 14 14 14 14 12 14 13 14 13 13 – – 6 – 6 6 – 6* 6 6* 6 5 6 – 6 – – – 6 6* 6 – – – 4 – – – 4 4 4 4* 1* 4* 4 3 * Attended as an invited guest of the Committee 22 RETIREMENT, ELECTION AND CONTINUATION IN OFFICE OF DIRECTORS In accordance with the Constitution of InvoCare Limited, at each Annual General Meeting the following Directors must retire from ofﬁce: ROUNDING The Company is of a kind referred to in Class Order 98/0100 issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the Directors’ Report and Financial – one-third (or a number nearest one-third) of the Report. Amounts in the Directors’ Report and Financial number of Directors (excluding from the number Report have been rounded off to the nearest thousand of Directors the Managing Director, who is exempt dollars (where rounding is applicable) in accordance from retirement by rotation, and any other Director with that Class Order. appointed by the Directors either to ﬁll a casual vacancy or as an addition to the existing Directors); and – any other Director who has held ofﬁce for three years or more since last being elected; and – any other Director appointed to ﬁll a casual vacancy CORPORATE GOVERNANCE In recognising the need for the highest standards of corporate behaviour and accountability, the Directors of InvoCare Limited support and have adhered to the principles of corporate governance. The Company’s corporate governance statement is contained in the or as an addition to the existing Directors. following section. Christine Clifton (by rotation) and Roger Penman This report is made in accordance with a resolution of (appointed by the Directors on 1 January 2005) will the Directors retire as Directors at the Annual General Meeting and, being eligible, offer themselves for re-election. DIRECTORS’ AND EXECUTIVES’ REMUNERATION, SHARES, OPTIONS AND OTHER TRANSACTIONS Details relating to Directors’ and executives’ remuneration, shares, options and other transactions are set out in Note 33 of the ﬁnancial statements. Ian Ferrier Director INDEMNIFICATION AND INSURANCE OF DIRECTORS During the ﬁnancial year, InvoCare paid a premium to insure Directors and ofﬁcers of the consolidated entity. The insurance policy speciﬁcally prohibits disclosure of the nature and liability covered and the amount of the premium paid. Richard Davis Director Sydney 30 March, 2005 23 InvoCare Annual Report 2004 Corporate Governance INVOCARE LIMITED (“the Company”) and the Board The Board has decided not to establish a Nomination are committed to achieving and demonstrating Committee in view of the relatively small number the highest standards of corporate governance. of Directors and that such a Committee would not The Company complies with the best practice be a more efﬁcient mechanism than the full Board recommendations released by the ASX Corporate for detailed selection and appointment practices. Governance Council in March 2003, unless otherwise New Directors are given an orientation regarding the stated. The relationship between the Board and Senior business including corporate governance policies, all other corporate policies and procedures, committee structures and responsibilities and reporting Management is important to InvoCare’s long-term procedures. success. Day to day management of InvoCare’s affairs and the implementation of the corporate strategy and The Chairman is elected by the full Board. policy initiatives are formally delegated by the Board InvoCare’s Constitution requires one third of the to the Chief Executive Ofﬁcer (“CEO”) and Senior Directors, any other Director who has held ofﬁce for Executives as set out in InvoCare’s delegations policy. three years or more since last being elected and any These delegations are reviewed regularly. Director who was appointed to either ﬁll a casual A description of InvoCare’s main corporate governance practices is set out below. All these practices, unless otherwise stated, were in place for the entire year. vacancy or as an addition to the existing Directors since the previous Annual General Meeting (“AGM”) must retire from ofﬁce at the conclusion of the AGM each year and may offer themselves for re-election THE BOARD OF DIRECTORS at that meeting. The Managing Director is exempt Board Composition from retirement by rotation and is not counted in The Board currently comprises six Directors, being determining the number of Directors to retire by four Non-Executive Directors (including the Chairman) rotation. and two Executive Directors. The roles of Chairman and CEO are separate. The skills, experience and expertise of each Director are set out in the Directors’ Report under the heading “Information on Directors”. The Board has assessed the independence of Non-Executive Directors in light of their interests and relationships and considers them all to be independent. There is and will at all times be a Non-Executive Chairman of the Board and a majority of Non-Executive Directors. 24 Responsibilities – ratifying the appointment and/or removal and The Board of Directors is responsible for reviewing contributing to the performance assessment of the and approving the strategic direction of InvoCare members of the Senior Management team including and for overseeing and monitoring its business and the Chief Operating Ofﬁcer (COO), Chief Financial affairs including maintenance of sound corporate Ofﬁcer (CFO) and the Company Secretary governance. – ensuring there are effective management processes The Board reviews and approves InvoCare’s strategic in place and approving major corporate initiatives and business plans and guiding policies. Day to day management of InvoCare’s affairs is delegated to the CEO and Senior Executives. The responsibilities of the Board include: – enhancing and protecting the reputation of InvoCare – ensuring the signiﬁcant risks facing InvoCare, including those associated with its legal compliance obligations, have been identiﬁed and appropriate – contributing to the development of and approving and adequate control, monitoring, accountability and the corporate strategy reporting mechanisms are in place – reviewing and approving business plans, the annual – reporting to shareholders budget and ﬁnancial plans including available resources and major capital expenditure initiatives – overseeing and monitoring: – ensuring a high standard of corporate governance practice In fulﬁlling these functions, the Directors seek to – organisational performance and the achievement enhance shareholder value and protect the interests of InvoCare’s strategic goals and objectives of stakeholders. – compliance with InvoCare’s code of conduct Non-Executive Directors – progress of major capital expenditures and other signiﬁcant corporate projects including any acquisitions or divestments – capital management. The four Non-Executive Directors meet, as required, at the conclusion of scheduled Board meetings without the presence of management, to discuss the operation of the Board and a range of other matters. Relevant matters arising from these meetings are shared with – monitoring ﬁnancial performance including approval the full Board. of the annual and half-year Financial Reports and liaison with InvoCare’s auditors. – appointment, performance assessment and, if necessary, removal of the CEO 25 InvoCare Annual Report 2004 Corporate Governance continued Chairman and Chief Executive Officer (CEO) Independent Professional Advice The Chairman is responsible for leading the Board, Directors and Board Committees have the right, in ensuring that Board activities are organised and connection with their duties and responsibilities, to efﬁciently conducted and for ensuring Directors are seek independent professional advice at InvoCare’s properly briefed for meetings. The CEO is responsible expense. Prior written approval of the Chairman is for implementing InvoCare’s strategies and policies. required, but this will not be unreasonably withheld. The Board charter speciﬁes that these are separate roles to be undertaken by separate people. Commitments Performance Assessment The Chairman annually assesses the performance of individual Directors and meets with Directors to The Board holds at least eight meetings each discuss this assessment. The Chairman’s performance year. Additional meetings may be held as deemed is reviewed by the Board. Directors conform to the necessary to address signiﬁcant matters as they Board’s agreed performance criteria for Directors. arise. At least two of the meetings include visits to operations and meeting employees. Board Committees The Board has established a number of Committees The number of Board meetings and Committee to assist in the execution of its duties and to meetings and the number of meetings attended allow detailed consideration of complex issues. by each Director are disclosed in the Company’s Ultimate responsibility rests with the Board and the Directors’ Report under the heading “Meetings responsibilities of the Board and its members are not of Directors”. diminished through the existence of these committees. The Chairman and the CEO meet regularly to discuss Current Committees of the Board are the Audit key issues and performance trends of InvoCare. Committee, Risk Committee and Remuneration Other Directors maintain contact with relevant Senior Committee. Each is comprised entirely of Managers arising from dealings on Committees. Non-Executive Directors. The Committee structure Each month the Directors receive a detailed operating and membership is reviewed on an annual basis. review from the CEO regardless of whether or not a Each of these Committees has developed its own Board meeting is being held. written charter setting out its role and responsibilities, Conflict of Interests Potential conﬂicts of interest by Directors will be reported to the Board and if necessary Directors will be excluded from discussion of the relevant matter and will not vote on that matter. composition, structure, membership requirements and the manner in which the Committee is to operate. All of these charters will be reviewed on an annual basis. All matters determined by Committees are submitted to the full Board as recommendations for Board decision. 26 Minutes of Committee meetings are tabled at the The Committee also assumes responsibility for immediately subsequent Board meeting. Additional management of succession planning, including the requirements for speciﬁc reporting by the Committees implementation of appropriate Executive development to the Board are addressed in the charter of the programmes and ensuring adequate arrangements are individual Committees. in place, so that appropriate candidates are recruited Remuneration Committee for later promotion to senior positions. The Remuneration Committee comprises the Audit Committee Chairman of the Board, Ian Ferrier, and one other The Audit Committee comprises three Non-Executive Non-Executive Director, currently Roger Penman Directors. The committee is currently chaired by Roger who was appointed as a Director on 1 January 2005 Penman, with the other members being Christine and became a member of the committee upon the Clifton and Richard Fisher. John Murphy chaired the resignation of John Murphy on 28 February 2005. committee during the 2004 ﬁnancial year and up until John Murphy was a committee member during the his resignation as a Director on 28 February 2005. The 2004 ﬁnancial year and up until his resignation. members possess sufﬁcient technical expertise and The Committee, when deemed necessary, obtains independent advice on the appropriateness of remuneration packages. The Remuneration Committee advises the Board on remuneration policies and practices generally, and makes speciﬁc recommendations on remuneration knowledge of the industry to fulﬁl the functions of the Committee. The Committee meets at least four times each year. The Audit Committee operates in accordance with a charter which is reviewed annually. The main responsibilities of the Committee are to: packages and other terms of employment for – assist the Board in fulﬁlling its oversight of the Executive Directors, other Senior Executives and Non- reliability and integrity of ﬁnancial management, Executive Directors. accounting policies, asset management and ﬁnancial Executive remuneration and other terms of reporting, including annual and half yearly reports employment are reviewed annually by the Committee – advise the Board on internal control including relating having regard to personal and corporate performance, to ﬁnancial statements, due diligence, information contribution to long-term growth, relevant comparative technology and ﬁnancial systems integrity information and independent expert advice. As well as a base salary, remuneration packages include superannuation, performance-related bonuses and fringe beneﬁts. The Committee is responsible for reviewing and approving any long-term incentive plans for the Company’s employees. – establish and maintain an effective internal audit function, if necessary, outsourcing to independent professional internal auditors – oversee the scope of work, relationship with management, appointment, fees, independence and effectiveness of the external auditor – recommend the removal of the external auditor if appropriate – recommend improvements for the correlation between ﬁnancial and non-ﬁnancial information and reports 27 InvoCare Annual Report 2004 Corporate Governance continued – strengthen the role and inﬂuence of Non-Executive The Audit Committee has authority, within the scope of Directors its responsibilities, to seek any information it requires – review and monitor the propriety of any related party from any employee or external party. transactions External Auditor – review processes and controls for the identiﬁcation and management of strategic, ﬁnancial and information technology risks (“Financial Risks”) – review and monitor InvoCare’s compliance with the Corporations Act and ASX Listing Rules The policy of InvoCare and the Audit Committee is to appoint an external auditor which clearly demonstrates quality and independence. The performance of the external auditor is reviewed and assessed annually. PricewaterhouseCoopers was appointed as the external auditor in 1994. It is PricewaterhouseCoopers’ – report to the Board all matters relevant to the policy to rotate audit engagement partners on Committee’s responsibilities. In fulﬁlling its responsibilities, the Audit Committee: listed companies at least every seven years, and in accordance with that policy a new audit engagement partner was introduced for the year ended – receives regular reports from management and the 31 December 2000. This policy will be amended to a external auditor ﬁve year rotation to comply with the requirements – meets with the external auditor at least twice a year of CLERP 9. without the presence of management – requires the CEO and CFO to state in writing to the Board that InvoCare’s Financial Reports present a true and fair view, in all material respects, of InvoCare’s ﬁnancial condition and operational results An analysis of fees paid to the external auditor, including a break-down of fees for non-audit services, is provided in Note 34 – Remuneration of auditor. It is the policy of the external auditor to provide an annual declaration of its independence to the Audit and are in accordance with relevant accounting Committee. standards – reviews any signiﬁcant disagreements between the auditor and management, irrespective of whether they have been resolved – provides the external auditor with a clear line of direct communication at any time to either the Chairman of the Audit Committee or the Chairman of the Board. 28 Certification of Financial Reports – the management of operational and compliance The CEO and CFO have stated in writing to the risks, including but not limited to: Board that the Financial Report for the year ended 31 December 2004 is complete and presents a true and fair view, in all material respects, of the ﬁnancial – InvoCare’s insurance program – environmental policy and issues condition and operational results of the Company – occupational health and safety and the consolidated entity and is in accordance with relevant accounting standards. This statement is based on an operating system of – disaster recovery strategy – litigation against InvoCare risk management and internal compliance which – industry related regulatory compliance implements policies adopted by the Board. – compliance with the policy framework in place The Company adopted this reporting structure for the from time to time year ended 31 December 2004. Risk Committee – internal controls over operational risks – InvoCare’s overall operational risk management The Risk Committee comprises three Non-Executive program. Directors. It is chaired by Christine Clifton and the other members are Richard Fisher and Ian Ferrier. The members possess sufﬁcient technical expertise The Committee, when deemed necessary, obtains independent advice on risk management matters. and industry knowledge to fulﬁl the functions of the The Risk Committee does not have responsibility in Committee. The Committee meets at least twice relation to ﬁnancial and information technology risk each year. management, which is the focus of InvoCare’s Audit The Risk Committee operates in accordance with Committee. a charter which is reviewed annually. The main Code of Conduct responsibilities of the Committee are: InvoCare has developed a code of conduct (the code) – to establish a sound system of risk oversight and management and internal control under which InvoCare can identify, assess, monitor and manage risk – to inform investors of material changes to the risk proﬁle of InvoCare and maintain appropriate risk management practices and systems throughout the operations of InvoCare which applies to all Directors and employees. The code is updated as necessary to ensure it reﬂects the highest standards of behaviour and professionalism and the practices necessary to maintain conﬁdence in InvoCare’s integrity. In summary, the code requires that at all times all InvoCare personnel act with the utmost integrity, objectivity and in compliance with the letter and the spirit of the law and InvoCare policies. Securities Trading Policy The purchase and sale of InvoCare Limited securities by Directors and senior employees is only permitted during the 30 day period following release of the half-yearly and annual ﬁnancial results to the market and the AGM of InvoCare. Any transactions undertaken must be notiﬁed to the Company Secretary in advance. 29 InvoCare Annual Report 2004 Corporate Governance continued At the AGM, shareholders have the opportunity to direct any questions to the Board, and the external auditor is available to answer shareholder questions about the audit and auditor’s report. Continuous Disclosure and Shareholder Communication The CEO or Company Secretary have been nominated as responsible for communications with the shareholders and the ASX. This includes responsibility for ensuring compliance with the continuous disclosure requirements in the ASX listing rules and overseeing and co-ordinating information disclosure to the ASX, analysts, brokers, shareholders, the media and the public. All information disclosed to the ASX is posted on InvoCare’s web site as soon as it is disclosed to the ASX. When analysts are briefed on aspects of InvoCare’s operations, the material used in the presentation is released to the ASX and posted on InvoCare’s web site. Procedures have also been established for reviewing whether any price sensitive information has been inadvertently disclosed, and if so, this information is also immediately released to the market. All shareholders will receive a copy of InvoCare’s Annual Report and Half Yearly Report (unless a shareholder has speciﬁcally requested not to receive the document). In addition, InvoCare seeks to provide opportunities for shareholders to participate through electronic means. All recent InvoCare announcements, media brieﬁngs, details of InvoCare meetings, press releases and Financial Reports are available on InvoCare’s website www.invocare.com. au. Shareholders are also able to direct any questions relating to the Company’s securities to the share registry, ASX Perpetual Registrars Limited. 30 Statements of Financial Performance For the year ended 31 December 2004 Revenues from ordinary activities Finished goods and consumables used Salaries and employee benefits expenses Depreciation and amortisation expenses Interest expenses Refinancing costs Advertising and public relations expenses Occupancy and facilities expenses Motor vehicle expenses Written down value of assets sold or disposed and costs incurred Other expenses from ordinary activities Profit from ordinary activities before income tax expense Income tax expense relating to ordinary activities Profit from ordinary activities after income tax expense Net profit Net profit attributable to outside equity interest Net profit attributable to members of InvoCare Limited Total changes in equity attributable to members of InvoCare Limited other than those resulting from transactions with owners as owners Consolidated InvoCare Limited 2004 $’000 2003 $’000 2004 $’000 2003 $’000 Notes 2 3 3 3 3 155,271 150,758 23,754 25,590 (22,388) (53,431) (8,967) (11,895) – (5,539) (10,514) (3,343) (2,080) (11,060) (21,183) (50,536) (9,931) (14,115) (2,148) (5,722) (9,794) (3,204) (5,083) (11,442) – – – (11,160) – – – – – – – (13,337) (2,148) – – – – (767) – (722) 26,054 17,600 11,827 9,383 4 (8,909) (5,917) (1,700) (710) 17,145 11,683 10,127 8,673 17,145 11,683 10,127 8,673 25 (57) (45) – – 24 17,088 11,638 10,127 8,673 17,088 11,638 10,127 8,673 Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 30 30 Cents 18.1 17.8 Cents 12.0 11.7 The above statements of financial performance should be read in conjunction with the accompanying notes. 31 InvoCare Annual Report 2004 Statements of Financial Position As at 31 December 2004 Current assets Cash assets Receivables Inventories Property Other assets Total current assets Non-current assets Receivables Other financial assets Property, plant and equipment Deferred tax assets Intangible assets Other assets Total non-current assets Total assets Current liabilities Payables Interest-bearing liabilities Current tax liabilities Provisions Deferred revenue Total current liabilities Non-current liabilities Payables Interest-bearing liabilities Deferred tax liabilities Provisions Deferred revenue Total non-current liabilities Total liabilities Net assets Equity Parent entity interest Contributed equity Retained profits Total parent entity interest in equity Total outside equity interest Total equity Notes Consolidated InvoCare Limited 2004 $’000 2003 $’000 2004 $’000 2003 $’000 26 6 7 8 9 10 11 12 4 13 14 15 16 4 17 18 19 20 4 21 22 23 24 25 687 15,040 10,945 2,990 2,809 32,471 7,325 – 203,323 5,422 23,805 6,687 246,562 279,033 15,534 17 3,763 4,978 2,773 27,065 29 131,532 2,479 3,431 38,823 176,294 203,359 75,674 7,143 14,567 9,962 4,313 2,718 38,703 7,306 – 206,539 6,022 26,302 6,195 252,364 291,067 18,380 2,515 3,962 4,563 2,619 32,039 365 152,549 2,328 3,008 36,664 194,914 226,953 64,114 231 – – – 92 323 173,929 15,641 – 615 – – 190,185 190,508 222 – 450 – – 672 – 131,500 – – – 131,500 132,172 58,336 2,437 2,542 – – 92 5,071 189,782 15,641 – 637 – – 206,060 211,131 2,363 2,500 42 – – 4,905 – 152,500 – – – 152,500 157,405 53,726 52,589 22,041 74,630 1,044 75,674 52,026 11,033 63,059 1,055 64,114 52,589 5,747 58,336 – 58,336 52,026 1,700 53,726 – 53,726 The above statements of financial position should be read in conjunction with the accompanying notes. 32 Statements of Cash Flows For the year ended 31 December 2004 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Interest received Other revenue Dividend received Interest paid Refinancing costs paid Income tax paid Net cash flows from operating activities Notes Consolidated InvoCare Limited 2004 $’000 2003 $’000 2004 $’000 2003 $’000 168,824 (128,784) 494 2,741 – (12,007) – (8,357) 22,911 161,413 (119,266) 683 2,054 – (14,841) (2,148) (4,361) 23,534 960 (2,908) 16,714 – 6,080 (11,160) – (1,270) 8,416 480 (778) 18,110 – 7,000 (14,062) (2,148) (2,102) 6,500 26 Cash flows from investing activities Proceeds from sale of property, plant and equipment Purchase of property, plant and equipment Net cash flows (used in)/from investing activities Cash flows from financing activities Proceeds from issues of ordinary shares Payment for share buy-back Proceeds from borrowings Repayment of borrowings Repayment of convertible notes Payment of dividends – InvoCare Limited shareholders Payment of dividends – Outside Equity Interest Repayment of finance lease principal Proceeds from repayment of loan by controlled entity Net cash flows (used in) financing activities Net (decrease)/increase in cash held Cash at the beginning of the financial year Cash at the end of the financial year 26 3,744 (4,011) (267) 7,129 (6,054) 1,075 – – – – – – 563 – 2,000 (25,500) – (6,080) (68) (15) – (29,100) (6,456) 7,143 687 2,026 (25,000) 65,000 (19,580) (30,000) (15,000) (67) (41) – (22,662) 1,947 5,196 7,143 563 – 2,000 (25,500) – (6,080) – – 18,395 (10,622) (2,206) 2,437 231 2,026 (25,000) 65,000 (19,580) (30,000) (15,000) – – 18,444 (4,110) 2,390 47 2,437 The above statements of cash flows should be read in conjunction with the accompanying notes. 33 InvoCare Annual Report 2004 Notes to the Financial Statements For the year ended 31 December 2004 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of accounting This general purpose financial report has been prepared in accordance with the requirements of the Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Consensus Views and the Corporations Act 2001. It is prepared in accordance with the historical cost convention. Comparatives Where necessary, comparatives have been reclassified and repositioned for consistency with current year disclosures. Changes in accounting policies The accounting policies adopted are consistent with those of the previous financial year. Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all entities controlled by InvoCare Limited (the Company) and the results of all controlled entities. InvoCare Limited and its controlled entities together are referred to as the consolidated entity or InvoCare. The effects of all transactions between entities in the consolidated entity are fully eliminated. Outside equity interests in the results and equity of controlled entities are shown separately in the consolidated Statements of Financial Performance and Statements of Financial Position respectively. Where control of an entity is obtained during a financial year, its results are included in the consolidated Statements of Financial Performance from the date on which control commences. Where control of an entity ceases during a financial year its results are included for that part of the year during which control existed. Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the entity and the revenue can be reliably measured. Revenue is recognised as set out below: Funeral operations Revenue is recognised when the funeral service is performed. InvoCare enters into prepaid funeral contracts providing for future funeral services at prices prevailing when agreements are signed. Payments under these contracts are placed in trust (pursuant to InvoCare’s policy and, where relevant, state laws). The monies held in trust for individual prepaid funeral contracts are not controlled by InvoCare and are not recognised in the financial statements. Cemeteries and crematoria operations Sales of at-need and pre-need interment or inurnment rights are recognised immediately as revenue. Sales of associated memorials and other merchandise and burial and cremation services are recognised when the memorial or merchandise is determined as delivered or service is performed. Revenues relating to undelivered memorials and merchandise and unperformed services are deferred. Cash relating to recognised and deferred revenue on sale of rights, memorials and merchandise is recorded in the financial statements upon receipt. However, similarly to prepaid funeral services, monies for prepaid burial and cremation services are placed in trust until the service is performed. Deferred selling costs Selling costs applicable to prepaid funeral service contracts, net of any administrative fees recovered, are expensed as incurred. Direct selling costs applicable to deferred revenue on undelivered memorials and merchandise and unperformed burial and cremation services are deferred until the revenue is recognised. Income tax Tax effect accounting procedures are followed whereby the income tax expense in the Statements of Financial Performance is matched with the accounting profit after allowing for permanent differences. The future tax benefit relating to tax losses is not carried forward as an asset unless the benefit is virtually certain of realisation. Income tax on cumulative timing differences is set aside to the deferred income tax or the future income tax benefit accounts at the rates which are expected to apply when those timing differences reverse. Maintenance and repairs Maintenance, repair costs and minor renewals are charged as expenses as incurred, except where they relate to the replacement of a component of an asset, in which case the costs are capitalised and depreciated in accordance with Note 1 – Depreciation of property, plant and equipment, below. Goods and Services Tax (GST) Cash flows are included in the Statements of Cash Flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified as operating cash flows. Cash For the purposes of the Statements of Cash Flows, cash includes deposits at call with financial institutions and other highly liquid investments with short periods to maturity which are readily convertible to cash on hand and are subject to an insignificant risk of changes in value, net of any outstanding bank overdrafts. When in use, bank overdrafts are carried at the principal amount. Interest is charged as an expense as it accrues. 34 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Receivables All trade receivables are recognised at the amounts receivable from the date of recognition. Collectibility of trade debtors is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off. A provision for doubtful debts is raised when some doubt as to collection exists. Inventories Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where appropriate, a proportion of variable and fixed overhead. Costs are assigned to individual items of inventory predominantly on the basis of weighted average cost. Acquisition of assets The purchase method of accounting is used for all acquisitions of assets regardless of whether equity instruments or other assets are acquired. Cost is determined as the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition plus incidental costs directly attributable to the acquisition. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of the acquisition. The discount rate used is the incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Recoverable amount of non-current assets Non-current assets are valued at cost except where this exceeds the recoverable amount. The recoverable amount of an asset is the net amount expected to be recovered through the net cash inflows arising from its continued use and subsequent disposal. Where the carrying amount of a non-current asset is greater than its recoverable amount the asset is written down to its recoverable amount. Where net cash inflows are derived from a group of assets working together, recoverable amount is determined on the basis of the relevant group of assets. The decrement in the carrying amount is recognised as an expense in net profit or loss in the reporting period in which the recoverable amount write-down occurs. The expected net cash flows included in determining recoverable amounts of non-current assets are not discounted. Depreciation of property, plant and equipment Depreciation is calculated on a straight line basis to write off the net cost of each item of property, plant and equipment (excluding freehold land) over its expected useful life to the consolidated entity. Estimates of remaining useful lives are made on a regular basis for all assets, with annual reassessments for major items. The expected useful lives are as follows: Buildings Plant and equipment 40 years 3 – 10 years Cemetery land Cemetery land is carried at cost less accumulated amortisation. Cost includes the cost of acquisitions and improvements. The consolidated entity sells interment and inurnment rights in perpetuity, while retaining title to the property. Cemetery land is amortised, as the right to each plot is sold, to write off the net cost of the land over the period in which it is utilised and an economic benefit has been received. Leasehold improvements The cost of improvements to or on leasehold properties is amortised over the unexpired period of the lease or the estimated useful life of the improvement to the consolidated entity, whichever is the shorter. Leased non-current assets A distinction is made between finance leases which effectively transfer from the lessor to the lessee substantially all the risks and benefits incident to ownership of leased non-current assets, and operating leases under which the lessor effectively retains substantially all such risks and benefits. Finance leases are capitalised. A lease asset and liability are established at the present value of minimum lease payments. Lease payments are allocated between the principal component of the lease liability and the interest expense. The leased asset is amortised on a straight line basis over the term of the lease, or where it is likely that the consolidated entity will obtain ownership of the asset, the life of the asset. The leased asset held at the reporting date is being amortised over three years. Operating lease payments are charged to the Statements of Financial Performance in the period in which they are incurred, as this represents the pattern of benefits derived from the leased assets. Intangible assets – goodwill Where an entity or operation is acquired, the identifiable net assets acquired are measured at fair value. The excess of the fair value of the cost of acquisition over the fair value of the identifiable net assets acquired, including any liability for restructuring costs, is brought to account as goodwill and amortised on a straight line basis over 20 years, being the period during which the benefits are expected to arise. The cost of acquisition is discounted where settlement of any part of cash consideration is deferred. 35 InvoCare Annual Report 2004 Notes to the Financial Statements For the year ended 31 December 2004 Derivative financial instruments The consolidated entity enters into interest rate swap agreements. The net amount receivable or payable under interest rate swap agreements is progressively brought to account over the period to settlement. The amount recognised is accounted for as an adjustment to interest and finance charges during the period and included in other debtors or other creditors at each reporting date. When an interest rate swap is terminated early and the underlying hedged transactions are still expected to occur as designated, the gains or losses arising on the swap upon its early termination continue to be deferred and are progressively brought to account over the period during which the hedged transactions are recognised. When an interest rate swap is terminated early and the underlying hedged transactions are no longer expected to occur as designated, the gains or losses arising on the swap upon its early termination are recognised in the Statements of Financial Performance as at the date of the termination. Borrowing costs Borrowing costs are recognised as expenses in the period in which they are incurred. Earnings per share (EPS) Basic EPS is calculated as net profit after tax attributable to members, divided by the weighted average number of ordinary shares outstanding during the financial year. The weighted average number of ordinary shares for 2003 has been adjusted for the effects of the share split. Diluted EPS is calculated as net profit after tax attributable to members divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, for 2003 adjusted for the effects of the share split. Dividends When necessary, provision is made for the amount of any dividend declared, determined or publicly recommended by the Directors on or before the end of the financial year but not distributed at balance date. Interest-bearing liabilities Interest-bearing liabilities are carried at their principal amounts which represent the present value of future cash flows associated with servicing the debt. Interest is accrued over the period it becomes due and is recorded as part of other creditors. Employee benefits Wages and salaries, annual leave and sick leave Liabilities for wages and salaries, annual leave and, where applicable, accumulating sick leave are recognised in respect of employees’ services up to the reporting date, and are measured at the amounts expected to be paid when the liabilities are settled, plus appropriate on-costs. Liabilities for non-accumulating sick leave are recognised when the leave is taken and measured at the rates paid or payable. Long service leave A liability for long service leave is recognised, and is measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date, including appropriate on-costs. Consideration is given to expected future wage and salary levels, experience of employee departures and period of service. Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity and currency to match, as closely as possible, the estimated future cash outflows. Bonus plans A liability for employee benefits in the form of bonus plans is recognised in other creditors when there is no realistic alternative but to settle the liability and at least one of the following conditions is met: – there are formal terms in the plan for determining the amount of the benefit – the amounts to be paid are determined before the time of completion of the financial report, or – past practice gives clear evidence of the amount of the obligation. Liabilities for bonus plans are expected to be settled within 12 months and are measured at the amounts expected to be paid when they are settled. Employee Share Option Plan Information relating to the Employee Share Option Plan is set out in Note 28 – Employee Benefits. No accounting entries are made in relation to the Employee Share Option Plan until options are exercised, at which time the amounts receivable from participants are recognised in the Statements of Financial Position as share capital. The amounts disclosed for remuneration of Directors and Executives in Note 33 – Director and Executive Disclosures include the assessed fair values of options at the date they were granted, allocated equally over the period from grant date to vesting date. 36 Notes Consolidated InvoCare Limited 2004 $’000 2003 $’000 2004 $’000 2003 $’000 2. REVENUES FROM ORDINARY ACTIVITIES Revenues from operating activities Revenues from sale of goods Revenues from services Management fees Total revenues from operating activities Revenues from outside the operating activities Rent Administration fees Sundry income Dividends and distributions 77,847 70,445 – 148,292 74,027 66,260 – 140,287 35 187 1,441 1,113 164 1,385 505 – – 960 960 – – – – – 480 480 – – – Wholly owned group – controlled entities – – 6,080 7,000 Interest revenues Other persons/corporations Wholly owned group – controlled entities Proceeds on the sale of non-current assets Total revenues from outside the operating activities Total revenues from ordinary activities 35 494 – 3,744 6,979 155,271 683 – 7,734 10,471 150,758 – 16,714 – 22,794 23,754 – 18,110 – 25,110 25,590 3. EXPENSES AND GAINS Expenses Cost of goods sold Depreciation of non-current assets Buildings Property, plant and equipment Total depreciation of non-current assets Amortisation of non-current assets Goodwill Cemetery land Leasehold land and buildings Leasehold improvements Plant and equipment under lease Total amortisation of non-current assets Total depreciation and amortisation expenses 22,388 21,183 2,087 3,700 5,787 2,497 400 128 130 25 3,180 8,967 2,124 4,651 6,775 2,497 380 129 137 13 3,156 9,931 – – – – – – – – – – – – – – – – – – – – – – 37 InvoCare Annual Report 2004 Notes to the Financial Statements For the year ended 31 December 2004 Consolidated InvoCare Limited 2004 $’000 2003 $’000 2004 $’000 2003 $’000 5 11,160 – 730 11,895 – 11,895 64 3,494 4 9,941 3,394 776 14,115 2,148 16,263 407 3,310 – 11,160 – – 11,160 – 11,160 – – – 9,941 3,394 2 13,337 2,148 15,485 – – 1,664 2,651 – – 3. EXPENSES AND GAINS (CONTINUED) Borrowing costs Interest expenses Finance lease Debentures Convertible notes Other interest Total interest expenses Refinancing costs Total borrowing costs Bad and doubtful debts – trade debtors Operating lease rental – minimum lease payments Gains Net gain on disposal of non-current assets 4. INCOME TAX The income tax expense for the financial year differs from the amount calculated on profit. The differences are reconciled as follows: Prima facie tax on profit from ordinary activities 7,816 5,280 3,548 2,815 Tax effect of permanent differences Amortisation of cemetery land Depreciation and amortisation of buildings Amortisation of goodwill Non-assessable capital gain Tax credit for intercorporate dividend Other items (net) Income tax expense attributable to ordinary activities Tax assets/(liabilities) Current tax payable Provision for deferred income tax – non-current Future income tax benefit – non-current 120 346 749 (263) – 141 113 344 749 (273) – (296) – – – – (1,824) (24) – – – – (2,100) (5) 8,909 5,917 1,700 710 (3,763) (2,479) 5,422 (3,962) (2,328) 6,022 (450) – 615 (42) – 637 Income tax losses No part of the future income tax benefit shown above is attributable to operating tax losses or capital tax losses. The consolidated entity had no operating tax losses as at either 31 December 2004 or 31 December 2003. 38 Consolidated InvoCare Limited 2004 $’000 2003 $’000 2004 $’000 2003 $’000 4. INCOME TAX (CONTINUED) Potential future income tax benefit as at 31 December 2004 in respect of capital tax losses not brought to account, as realisation of the benefit is not regarded as virtually certain, is: – 60 – – This future income tax benefit will only be obtained if: (a) future assessable income is derived of a nature and of an amount sufficient to enable the benefit of the capital losses to be realised, or (b) the losses are transferred to an eligible entity in the consolidated entity, (c) the conditions for deductibility imposed by tax legislation continue to be complied with, and (d) no changes in tax legislation adversely affect the consolidated entity in realising the benefit. Tax consolidation InvoCare Limited and its wholly owned subsidiaries have the option of implementing the tax consolidation legislation. At the date of this report no decision has been taken although it is anticipated the legislation will be adopted from 1 January 2004. This is not expected to have any significant impact on the consolidated assets, liabilities and results. 5. DIVIDENDS PAID OR PROVIDED FOR Dividends paid during the year Dividend paid to InvoCare Limited shareholders Interim dividend for the year ended 31 December 2004 of 6.4 cents paid 12 April 2004 – fully franked based on tax paid @ 30% Dividend of 20 cents paid 27 March 2003 prior to listing – fully franked based on tax paid @ 30% Dividend paid to Outside Equity Interest Dividend of 8.4 cents paid 21 May 2004 (2003: 11 September 2003) – fully franked based on tax paid @ 30% Dividends proposed and not recognised as a liability In addition to the above dividends, since the end of the financial year, the Directors have recommended the payment of a final dividend to InvoCare Limited shareholders of 9 cents per fully paid ordinary share, fully franked based on tax paid at 30%. The aggregate amount of the proposed dividend expected to be paid on 12 April 2005 out of retained profits at 31 December 2004, but not recognised as a liability at year end, is Franking credit balance The amount of franking credits available for subsequent financial years are: – franking account balance as at the end of the financial year at 30% – franking credits that will arise from the payment of income tax payable as at the end of the financial year 6,080 – 6,080 – – 15,000 – 15,000 68 6,148 67 15,067 – 6,080 – 15,000 8,550 – 8,550 – 10,722 4,854 2,636 1,366 3,763 14,485 3,962 8,816 450 3,086 42 1,408 The consolidated amounts include franking credits that would be available to the parent entity if distributable profits of controlled entities were paid as dividends. 39 InvoCare Annual Report 2004 Notes to the Financial Statements For the year ended 31 December 2004 Notes Consolidated InvoCare Limited 2004 $’000 2003 $’000 2004 $’000 2003 $’000 6. RECEIVABLES (CURRENT) Trade debtors Provision for doubtful debts Other debtors Loan to controlled entity (i) 10 15,941 (1,366) 14,575 465 – 15,040 15,759 (1,536) 14,223 344 – 14,567 Terms and conditions (i) Details of the terms and conditions relating to the above financial instrument are set out in Note 10 – Receivables (non-current). 7. INVENTORIES (CURRENT) Work in progress – at cost Finished goods – at cost 8. PROPERTY (CURRENT) Land and buildings Freehold land – at cost Buildings – at cost Accumulated depreciation Total written down amount 823 10,122 10,945 – 9,962 9,962 1,394 1,921 1,970 (374) 1,596 2,990 2,845 (453) 2,392 4,313 – – – – – – – – – – – – – – – – – – 2,542 2,542 – – – – – – – – Freehold land and buildings Land and buildings held for sale are classified as current assets as they are expected to be sold within 12 months of year end. 9. OTHER ASSETS (CURRENT) Prepayments Deferred selling costs 2,331 478 2,809 2,276 442 2,718 92 – 92 92 – 92 40 10. RECEIVABLES (NON-CURRENT) Trade debtors (i) Provision for doubtful debts Security deposits Other debtor Loan to controlled entity (ii) Consolidated InvoCare Limited 2004 $’000 2003 $’000 2004 $’000 2003 $’000 7,357 (490) 6,867 58 400 – 7,325 7,732 (887) 6,845 61 400 – 7,306 – – – – – – – – 173,929 173,929 – – 189,782 189,782 Terms and conditions (i) Trade debtors are non-interest bearing and are receivable through regular instalments within a maximum period of 60 months from the original invoice date. (ii) The loan to a controlled entity bears interest at 9% (2003: 9%) and has no fixed terms of repayment. 11. OTHER FINANCIAL ASSETS (NON-CURRENT) Shares in controlled entity – unlisted (i) – – 15,641 15,641 (i) The unlisted shares at cost relate to InvoCare Limited’s 100% (2003: 100%) ownership interest in InvoCare Australia Pty Limited (formerly Service Corporation International Australia Pty Limited). All the shares held are classified as ordinary shares. Refer Note 36 – Investment in controlled entities for details of controlled entities. 12. PROPERTY, PLANT AND EQUIPMENT (NON-CURRENT) Land and buildings Cemetery land – at cost Accumulated amortisation 106,022 (3,436) 102,586 106,017 (3,036) 102,981 Freehold land – at cost Buildings – at cost Accumulated depreciation Leasehold land and buildings – at cost Accumulated amortisation Leasehold improvements – at cost Accumulated amortisation Total land and buildings 32,976 33,393 66,487 (16,564) 49,923 4,470 (1,454) 3,016 1,392 (842) 550 189,051 66,412 (14,725) 51,687 4,470 (1,326) 3,144 1,438 (747) 691 191,896 – – – – – – – – – – – – – – – – – – – – – – – – – – – – 41 InvoCare Annual Report 2004 Notes to the Financial Statements For the year ended 31 December 2004 12. PROPERTY, PLANT AND EQUIPMENT (NON-CURRENT) (CONTINUED) Plant and equipment Operating plant and equipment – at cost Accumulated depreciation Plant and equipment under lease – at cost Accumulated amortisation Total plant and equipment Assets under construction Assets under construction – at cost Total property, plant and equipment At cost Accumulated depreciation and amortisation Total written down amount Consolidated InvoCare Limited 2004 $’000 2003 $’000 2004 $’000 2003 $’000 50,184 (36,829) 13,355 73 (31) 42 13,397 48,280 (35,961) 12,319 73 (6) 67 12,386 875 2,257 262,479 (59,156) 203,323 262,340 (55,801) 206,539 – – – – – – – – – – – – – – – – – – – – – – Current valuation of land and buildings The Directors’ valuation of land and buildings as at 31 December 2004 amounted to $225.8 million. As land and buildings are measured on the cost basis, the valuation has not been brought to account. The basis of the valuation of land and buildings, except cemetery and crematorium properties, was fair value being the amounts for which the assets could be exchanged between willing parties in an arm’s length transaction, based on an active market for similar properties in the same location and condition. The basis of valuation of cemetery and crematorium properties is historic cost, being the price at which the properties were acquired by InvoCare, less accumulated depreciation and amortisation since acquisition. The Directors believe this is a reasonable valuation due to there being no active market in cemetery and crematorium properties. Assets pledged as security Details of the non-current assets pledged as security are set out in Note 20 – Interest-bearing liabilities (non-current). 42 12. PROPERTY, PLANT AND EQUIPMENT (NON-CURRENT) (CONTINUED) Reconciliations Reconciliations of the carrying amounts of each class of property, plant and equipment at the beginning and end of the current financial year are set out below for the consolidated entity. The parent entity does not hold any property, plant and equipment. Cemetery land $’000 Freehold land $’000 land and Buildings buildings $’000 $’000 ments equipment $’000 $’000 Leasehold Leasehold Plant and improve- Plant and equipment Assets under leased construction $’000 $’000 Total $’000 Carrying amount 1 January 2004 Current Non-current Total opening amount Additions Disposals Depreciation/ amortisation expense Transfers Total closing amount Representing closing amount Current Non-current – 102,981 1,921 33,393 2,392 51,687 – 3,144 – 691 – 12,319 102,981 – – 35,314 – (944) 54,079 493 (961) 3,144 – – 691 2 (13) 12,319 3,516 (162) – 67 67 – – – 4,313 2,257 206,539 2,257 210,852 4,011 (2,080) – – (400) 5 – – (2,087) (5) (128) – (130) – (3,700) 1,382 (25) – – (1,382) (6,470) – 102,586 34,370 51,519 3,016 550 13,355 42 875 206,313 – 102,586 102,586 1,394 32,976 34,370 1,596 49,923 51,519 – 3,016 3,016 – 550 550 – 13,355 13,355 – 42 42 – 2,990 875 203,323 875 206,313 Consolidated InvoCare Limited 2004 $’000 2003 $’000 2004 $’000 2003 $’000 13. INTANGIBLES Goodwill Accumulated amortisation 49,976 (26,171) 23,805 49,976 (23,674) 26,302 14. OTHER ASSETS (NON-CURRENT) Deferred selling costs 6,687 6,195 15. PAYABLES (CURRENT) Trade creditors Other creditors and accruals Deferred cash settlement for business interests acquired 3,089 12,145 300 15,534 4,375 13,447 558 18,380 – – – – – 222 – 222 – – – – – 2,363 – 2,363 Terms and conditions Trade and other creditors are non-interest bearing and are normally settled on 30 – 60 day terms 43 InvoCare Annual Report 2004 Notes to the Financial Statements For the year ended 31 December 2004 Notes Consolidated InvoCare Limited 2004 $’000 2003 $’000 2004 $’000 2003 $’000 16. INTEREST-BEARING LIABILITIES (CURRENT) Secured Borrowings secured by fixed and floating charges – cash advance facility Lease liability secured by charge over leased assets – 17 17 2,500 15 2,515 – – – 2,500 – 2,500 Terms and conditions Details of the terms and conditions of the above financial instruments are set out in Note 20 – Interest-bearing liabilities (non-current). 17. PROVISIONS (CURRENT) Employee entitlements 28 4,978 4,563 18. DEFERRED REVENUE (CURRENT) Prepaid crematorium and cemetery revenue 2,773 2,619 19. PAYABLES (NON-CURRENT) Deferred cash settlement for business interests acquired 29 365 – – – – – – Terms and conditions At balance date, InvoCare had a deferred cash settlement representing the present value of the remaining consideration payable for the acquisition of business interests, discounted at the prevailing commercial borrowing rate of 9% at the time the business interests were acquired. 20. INTEREST-BEARING LIABILITIES (NON-CURRENT) Secured Borrowings secured by fixed and floating charges – debentures – cash advance facility Lease liability secured by charge over leased assets 109,000 22,500 32 131,532 130,000 22,500 109,000 22,500 130,000 22,500 49 152,549 – 131,500 – 152,500 Terms and conditions InvoCare executed revised financing agreements with a syndicate of bankers in December 2003 providing total borrowing facilities of $165 million, including a debenture stock facility of $130 million, cash advance facility of $30 million and a working capital facility of $5 million. As at 31 December 2004, the available borrowing facilities amounted to $157.5 million and $131.8 million (2003: $155 million) had been drawn down on these facilities. (i) Debentures Debentures issued at balance date amount to $109 million (2003: $130 million) and bear interest at a variable rate (based on BBR) plus a margin of 1.80% (2003: 2.05%). The interest rate at 31 December 2004 was 7.5% (2003: 7.6%) paid quarterly in arrears with a maturity date of 30 September 2006. Separate interest rate swap contracts apply to no less than 75% of the debentures. After making a compulsory repayment of $5 million in 2004, the remaining debentures have no set repayment terms, apart from repayment at the maturity date, 30 September 2006. Due to strong positive cash flows during the financial year, by 31 December 2004 InvoCare Limited had made $16 million voluntary, early, redrawable debt repayments on the debenture facility. These early repayments may be applied against $10 million compulsory repayment obligations on the cash advance facility during 2005. 44 20. INTEREST-BEARING LIABILITIES (NON-CURRENT) (CONTINUED) (i) Debentures (continued) The debentures are secured by fixed and floating charges over all the assets and undertakings of the consolidated entity, except those of Oakwood Funerals Pty Limited and Macquarie Memorial Park Pty Limited. The aggregate total assets of these two companies are $6.7 million (2003: $6.6 million). The debentures require compliance with a number of covenants which were met as at 31 December 2004 (and 31 December 2003). (ii) Cash advance facility The cash advance facility at balance date bears interest at a variable rate (based on BBR) plus a margin of 1.80% (2003: 2.05%). The interest rate at 31 December 2004 was 7.6% (2003: 7.7%) paid quarterly in arrears with a maturity date of 30 September 2006. Separate interest rate swap contracts apply to no less than 75% of the closing balance. The cash advance facility has two components. The bullet repayment facility amounts to $10 million and at 31 December 2004 $5 million (2003: $5 million) had been drawn down. This amount is not repayable until the maturity date, 30 September 2006. The amortising facility amounts to $20 million and at 31 December 2004 $17.5 million (2003: $20 million) had been drawn down. Repayments on the amortising facility are $2.5 million in 2004, $10 million in 2005 and $7.5 million in 2006. The cash advance facility is secured in the same manner as the debenture stock facility. Due to strong positive cash flows during the financial year, by 31 December 2004 InvoCare Limited had made $16 million voluntary, early, redrawable debt repayments on the debenture facility. These repayments may be applied against $10 million compulsory repayment obligations on the cash advance facility during 2005. Accordingly, the total amount of the cash advance facility has been classified as a non-current liability in the Statements of Financial Position. (iii) Finance leases Finance leases have an average lease term of three years with the option to purchase the asset at the completion of the lease term for the asset’s market value. The average discount rate implicit in the leases is 9.1% (2003: 9.1%). Lease liabilities are secured by a charge over the leased assets. Consolidated InvoCare Limited 2004 $’000 2003 $’000 2004 $’000 2003 $’000 Financing facilities available Unrestricted access was available at balance date to the following lines of credit: Total facilities – working capital facility – debenture stock facility – cash advance facilities Used at balance date – working capital facility – debenture stock facility – cash advance facilities Unused at balance date – working capital facility – debenture stock facility – cash advance facilities 5,000 125,000 27,500 157,500 319 109,000 22,500 131,819 4,681 16,000 5,000 25,681 5,000 130,000 30,000 165,000 – 130,000 25,000 155,000 5,000 – 5,000 10,000 5,000 125,000 27,500 157,500 5,000 130,000 30,000 165,000 319 109,000 22,500 131,819 – 130,000 25,000 155,000 4,681 16,000 5,000 25,681 5,000 – 5,000 10,000 The working capital facility may be drawn at any time. The interest rate on this facility is variable. 45 InvoCare Annual Report 2004 Notes to the Financial Statements For the year ended 31 December 2004 Notes Consolidated InvoCare Limited 2004 $’000 2003 $’000 2004 $’000 2003 $’000 21. PROVISIONS (NON-CURRENT) Employee entitlements 28 3,431 3,008 22. DEFERRED REVENUE (NON-CURRENT) Prepaid crematorium and cemetery revenue 38,823 36,664 – – – – In addition to deferred crematorium and cemetery revenue, monies held in trust not controlled by InvoCare for prepaid funeral contracts and prepaid burial and cremation services amounted to $198.6 million (2003: $169.5 million). The monies held in trust will only be recognised as revenue when the services are performed (refer “Revenue recognition” in Note 1 – Summary of significant accounting policies). 23. CONTRIBUTED EQUITY Issued and paid up capital Ordinary shares fully paid 52,589 52,026 52,589 52,026 2004 2003 Number of shares $’000 Number of shares $’000 Movements in ordinary shares on issue Beginning of the financial year Movement prior to listing – bought back during the year prior to listing (i) – issued prior to listing – conversion of preference shares to ordinary shares (ii) Total before share split Total after share split and at date of listing (ii) 93,918,733 52,026 15,000,000 15,000 – – – – – (3,125,000) – – 1,985,000 – 47,500,000 – 61,360,000 – 93,753,273 (5,000) 1,943 40,000 51,943 51,943 Movement after listing – issued pursuant to exercise of share options (note 28) End of the financial year 1,084,245 95,002,978 563 165,460 52,589 93,918,733 83 52,026 Movements in preference shares on issue Beginning of the financial year Movement prior to listing – bought back during the year prior to listing (i) – conversion to ordinary shares prior to listing (ii) End of the financial year – – – – – 60,000,000 60,000 – – – (12,500,000) (47,500,000) – (20,000) (40,000) – (i) After 31 December 2002 the Directors reviewed InvoCare’s financial position and capital structure and noted the significant reduction in bank loans achieved by accelerated repayments since the loans were originally advanced in May 2001. The Directors concluded that additional debt finance to pay a fully franked dividend and share buy-back would not materially prejudice InvoCare’s creditors. On 28 March 2003, 3,125,000 ordinary shares fully paid to $1 (representing 21% of ordinary shares) and 12,500,000 preference shares fully paid to $1 (representing 21% of preference shares) were bought back. The ordinary and preference shares were repurchased for $1.60 per share for a total cost of $25,000,000. (ii) Immediately prior to the IPO pursuant to a Prospectus dated 31 October 2003, all the preference shares were converted to ordinary share status on 2 December 2003. All ordinary shares were then subject to a share split of approximately 1.528 new ordinary shares for each existing ordinary share resulting in a total of 93,753,273 ordinary shares at a total paid up value of $51,942,900. The holders of 93,142,105 ordinary shares offered a 100% sell down of their respective interests in InvoCare Limited and received all the sale proceeds, less applicable costs. InvoCare Limited did not raise any capital from the IPO. Terms and conditions Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. 46 23. CONTRIBUTED EQUITY (CONTINUED) Terms and conditions (continued) Preference shares entitled the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held. Rights on winding up ranked higher than those ordinary shares. On a show of hands every holder of preference shares present at a meeting in person or by proxy, was entitled to one vote, and upon a poll each share was entitled to one vote. Preference shares were converted to ordinary shares on 2 December 2003. Share options Information relating to the share options is included in Note 28 – Employee Benefits. 24. RETAINED PROFITS Retained profits Balance at the beginning of the year Net profit attributable to members of InvoCare Limited Total available for appropriation Dividends paid Balance at the end of the year 25. OUTSIDE EQUITY INTEREST Reconciliation of outside equity interest in controlled entities: Share capital Opening balance of retained earnings Add share of operating profit Less dividends paid Closing balance of retained earnings Reserves Closing balance Consolidated InvoCare Limited 2004 $’000 2003 $’000 2004 $’000 2003 $’000 11,033 14,395 1,700 8,027 17,088 28,121 (6,080) 22,041 11,638 26,033 (15,000) 11,033 10,127 11,827 (6,080) 5,747 8,673 16,700 (15,000) 1,700 800 156 57 (68) 145 99 1,044 800 178 45 (67) 156 99 1,055 26. STATEMENTS OF CASH FLOWS Reconciliation of the net profit after income tax to the net cash flows from operations Net profit after tax Non-cash or non-operating items Depreciation of non-current assets Amortisation of non-current assets Net (profit) on disposal of property, plant and equipment Changes in operating assets and liabilities (Increase)/decrease in trade and other receivables (Increase)/decrease in inventory (Increase)/decrease in future income tax benefit (Increase)/decrease in other operating assets (Decrease)/increase in trade and other creditors (Decrease)/increase in deferred revenue (Decrease)/increase in tax provision (Decrease)/increase in deferred income tax liability (Decrease)/increase in provisions Net cash flow from operating activities 17,145 11,683 10,127 8,673 3 3 3 5,787 3,180 6,775 3,156 (1,664) (2,651) (492) (983) 600 (583) (3,182) 2,313 (199) 151 838 22,911 479 (621) (1,224) (1,102) 1,576 3,027 2,530 250 (344) 23,534 47 – – – – – – 22 (2,141) – – 408 – – 8,416 – – – – – (637) (59) (722) – (755) – – 6,500 InvoCare Annual Report 2004 Notes to the Financial Statements For the year ended 31 December 2004 Consolidated InvoCare Limited 2004 $’000 2003 $’000 2004 $’000 2003 $’000 26. STATEMENTS OF CASH FLOWS (CONTINUED) Reconciliation of cash Cash balance comprises: Cash on hand Cash at bank Closing cash balance 47 640 687 47 7,096 7,143 – 231 231 – 2,437 2,437 27. EXPENDITURE COMMITMENTS Capital expenditure commitments Commitments for the acquisition of property, plant and equipment contracted for at the reporting date but not recognised as liabilities payable: – within one year Other expenditure commitments Commitments for the construction of crypts, contracted for at the reporting date but not recognised as liabilities payable: – within one year Lease expenditure commitments Operating leases Commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows: – within one year – later than one year and not later than five years – later than five years Aggregate lease expenditure contracted for at balance date 1,803 260 788 2,286 2,878 6,781 13,633 2,534 5,144 13,244 23,292 20,922 – – – – – – Assets that are the subject of operating leases include property, motor vehicles and office equipment. 28. EMPLOYEE BENEFITS Employee benefit and related on-costs liabilities Included in other creditors and accruals – current (Note 15) Provisions for employee entitlements – current (Note 17) Provisions for employee entitlements – non-current (Note 21) Aggregate employee benefit and related on-costs liabilities 2,817 2,693 4,978 4,563 3,431 3,008 11,226 10,264 – – – – – – – – – – – – – – 48 Consolidated InvoCare Limited 2004 No. 2003 No. 2004 No. 2003 No. 28. EMPLOYEE BENEFITS (CONTINUED) Employee numbers Number of full-time equivalent employees at the reporting date 809 806 – – Employee Share Options InvoCare Limited has options over unissued shares granted to: (a) a Non-Executive Director, Ian Ferrier, on 8 May 2001 under a letter dated 1 May 2001. These options vested on 8 May 2002 and were exercised during 2004. (b) executive management on 22 September 2003, including Michael Grehan, who was an Executive but not a Director at the time of grant, under the Employee Share Option Plan approved in a meeting of the Board of Directors. Further details are set out below. (c) an Executive Director, Richard Davis, on 8 May 2004 under a Service Agreement dated 8 May 2001. These options vested on the date of issue. Details of the movements in the numbers of options over ordinary shares in InvoCare Limited held by each Director and Specified Executive are set out in Note 33. Each option granted over unissued shares of InvoCare Limited entitles the holder to subscribe for one fully paid ordinary share in the capital of the Company. Options are granted for no consideration and carry no dividend or voting rights. No option holder has any rights under the options to participate in any other share issue of the Company or any other entity. The Directors have determined that a grant of options made to a participant in the Employee Share Option Plan will vest as follows: (a) for options with an exercise price of $0.50, one third of the number of options granted vested on 22 September 2003, a further one third vested on 1 May 2004 and the final one third will vest on 1 May 2005, (b) for options with an exercise price of $0.59, one third of the number of options granted vested on 1 May 2004, a further one third will vest on 1 May 2005 and the final one third will vest on 1 May 2006, and (c) for options with an exercise price of $1.07, one third of the number of options granted will vest on 1 May 2005, a further one third will vest on 1 May 2006 and the final one third will vest on 1 May 2007. No option can be exercised until it has vested. Unless otherwise determined, under the Employee Share Option Plan vested options of employees may be exercised at any time prior to the first to occur of: – The expiry of five years from the date of issue, – Expiry of three months after the date upon which the option holder dies or voluntarily or without cause ceases to be employed by the consolidated entity, and – Immediately upon the option holder’s employment by the consolidated entity being terminated with cause. If InvoCare Limited makes a bonus issue of shares or other securities pro rata to holders of shares (other than an issue in lieu, or in satisfaction, of dividends or by way of dividend reinvestment) and no shares have been allotted in respect of an option before the record date for determining entitlements to the bonus issue, then that option, when exercised in accordance with the Employee Share Option Plan, will entitle the option holder to receive the number of shares that the option holder would have been entitled to under the bonus issue as if the option had been exercised and the shares allotted before that record date. If InvoCare Limited makes a rights offer to all or most of the shareholders of the Company (other than in lieu of dividends or by way of dividend reinvestment) then the exercise price of the options will be reduced by the values of the theoretical rights of entitlement received in relation to each share (as determined by the formula expressed in the terms of the Plan). The total number of shares issued upon exercise of the options under the Plan must not exceed 10% of the total number of shares on issue in the capital of InvoCare Limited (or shares capable of being issued under an equity security). However, if an applicable law at any time imposes a lower limit, then that lower limit will apply. Once options issued under the Plan have reached their vesting dates options may be exercised in parcels of no less than 10,000 (or if the vested entitlement is less than 10,000 the full amount of that vested entitlement must be exercised) until the earlier of the fifth anniversary of the issue date, the date of sale of all the shares in InvoCare Limited and the occurrence of one of the events that causes the lapse of options. 49 InvoCare Annual Report 2004 Notes to the Financial Statements For the year ended 31 December 2004 28. EMPLOYEE BENEFITS (CONTINUED) Employee Share Options (continued) Set out below is a summary of the movement in options during the year, including those held by Directors. Grant date 8 May 2001* 22 September 2003** 22 September 2003** 22 September 2003** 8 May 2004*** Expiry date 1 May 2006 1 May 2006 1 May 2007 1 May 2008 8 May 2009 Exercise price $0.50 $0.50 $0.59 $1.07 $1.51 Balance at start of year Issued during year Exercised during year Lapsed during year Balance at end of year 302,401 904,084 702,843 1,123,019 – 3,032,347 302,401 547,566 234,278 – – – 356,518 – – 468,565 – – – 122,233 1,000,786 – 988,565 988,565 – – 988,565 1,084,245 122,233 2,814,434 * Options issued to a Director, Ian Ferrier, under a letter dated 8 May 2001 ** Options issued under the Employee Share Option Plan *** Options issued to Richard Davis under a Service Agreement dated 8 May 2001. Options exercised during the financial year and number of shares issued on the exercise of the options: Exercise date 2004 29 June 2004 29 June 2004 30 August 2004 31 August 2004 31 August 2004 1 September 2004 1 September 2004 Total 2003 24 October 2003** 29 December 2003 Total Exercise price Fair value of shares issued* Options exercised Number Proceed from shares issued $ $0.50 $0.59 $0.50 $0.50 $0.59 $0.50 $0.59 ** $0.50 $2.37 $2.37 $2.74 $2.80 $2.80 $2.84 $2.84 $1.88 $2.09 254,653 140,059 302,401 101,860 25,464 191,053 68,755 1,084,245 3,032,912 165,460 3,198,372 127,327 82,636 151,201 50,930 15,024 95,526 40,566 563,210 1,942,900 82,730 2,025,630 * ** The fair value of shares issued on the exercise of options after the Company listed on 4 December 2003 is the closing price at which the Company’s shares were traded on the ASX on the day of the exercise of the options. The fair values of shares issued before initial listing of the Company’s shares has been estimated as the closing price at which the Company’s shares were traded on the ASX on 4 December 2003. The number of options exercised on 24 October 2003 and the exercise price of those options have been disclosed as post share split amounts. These options, originally issued to a Director, Richard Davis, and exercised prior to the capital restructure and listing of InvoCare Limited, were not all exercised by Richard Davis. Richard Davis exercised 400,000 (611,168 post share split) options at $0.76 per share which increased net assets by $304,000. By agreement Macquarie Direct Investment A Limited, a former shareholder of InvoCare Limited, purchased and exercised 1,585,000 (2,421,744 post share split) options at $0.76 per share for 725,000 options, $0.90 per share for 430,000 options and $1.63 per share for 430,000 options which increased net assets by $1,638,900. The aggregate number of shares issued to, and proceeds received from, employees on the conversion of options to shares during the financial year were 781,844 and $412,009 respectively (2003: 776,628 and $386,730). Options vested at the reporting date: Issued to employees (including Executive Directors) Issued to Non-Executive Directors 50 2004 Number 2003 Number 988,565 – 988,565 191,055 302,401 493,456 29. CONTINGENT LIABILITIES The parent entity and consolidated entity had contingent liabilities at 31 December 2004 in respect of bank guarantees given in respect of leased premises of controlled entities to a maximum amount of: Consolidated InvoCare Limited 2004 $’000 2003 $’000 2004 $’000 2003 $’000 143 225 143 225 No material losses are anticipated in respect of the above contingent liabilities. 30. EARNINGS PER SHARE Reconciliation of earnings used in calculating basic and diluted earnings per share Net profit Adjustments: Net profit attributable to outside equity interest Earnings used in calculating basic and diluted earnings per share 17,145 11,683 (57) (45) 17,088 11,638 Number of shares 2004 Number of shares 2003 Weighted average number of shares used as the denominator Weighted average number of ordinary shares used in calculating basic earnings per share: 94,399,665 96,920,114 Weighted average number of ordinary shares and potential ordinary shares used in calculating diluted earnings per share 96,235,120 99,228,347 The average market price utilised in calculating the weighted average number of shares used in calculating diluted earnings per share was $2.56 (2003: $2.02). Information concerning the classification of securities Ordinary shares In determining the 2003 weighted average number of shares for basic and diluted earnings per share the preference shares on issue (up to the listing in 2003) have been treated as ordinary shares as they fall within the definition of ordinary shares. In addition, the 2003 weighted average number of ordinary shares used to calculate the basic and diluted earnings per share has been adjusted for the change in the number of ordinary shares which occurred as a result of the share split in December 2003. The number of ordinary shares outstanding before the share split has been adjusted for the proportionate change in the number of ordinary shares outstanding as if the share split had occurred at the beginning of the 2003 year. Options Options granted are considered to be potential ordinary shares and have been included in the determination of diluted earnings per share. The options have not been included in the determination of basic earnings per share. Details relating to the options are set out in Note 28 – Employee Benefits. Subsequent movements in contributed equity Since the end of the financial year, no ordinary shares have been issued pursuant to the Employee Share Option Plan. There have been no other conversions to, calls of, or subscriptions for ordinary shares or issues of potential ordinary shares since the reporting date and before the completion of this financial report. 51 InvoCare Annual Report 2004 Notes to the Financial Statements For the year ended 31 December 2004 31. SUBSEQUENT EVENTS There have been no significant events that have occurred subsequent to 31 December 2004. 32. SEGMENT INFORMATION InvoCare operates in one industry, being the funeral industry, and in one geographical location, being Australia. 33. DIRECTOR AND EXECUTIVE DISCLOSURES (a) Directors The following persons were Directors of the Company during the financial year: Chairman – Non-Executive Ian Ferrier Executive Directors Richard Davis Managing Director and Chief Executive Officer Michael Grehan Chief Operating Officer Non-Executive Directors Christine Clifton Richard Fisher John Murphy (resigned 28 February 2005) Roger Penman was appointed a Non-Executive Director on 1 January 2005. (b) Specified Executives The following persons were the five executives, other than Directors, with the greatest authority for the strategic direction and management of the consolidated entity (“Specified Executives”) during the financial year: Name Position Employer Kenneth Mealey Phillip Friery Jacobus Adrichem Armen Mikaelian John Fowler Chief Financial Officer Group Finance Manager National Operations Manager Cemeteries & Crematoria National Sales Manager Cemeteries & Crematoria General Manager Funerals Vic (c) Remuneration of Directors and Executives Principles used to determine the nature and amount of remuneration InvoCare Australia Pty Limited InvoCare Australia Pty Limited InvoCare Australia Pty Limited InvoCare Australia Pty Limited InvoCare Australia Pty Limited Non-Executive Directors Policy The Board’s primary focus is on the long term strategic direction and overall performance of the Company. Accordingly, Non-Executive Director remuneration is not targeted to short term results. Fees paid to Non-Executive Directors are determined with the assistance of independent external advisers. The remuneration policy is designed: – to attract and retain competent and suitably qualified Non-Executive Directors; – to motivate Non-Executive Directors to achieve InvoCare’s long term strategic objectives; – to align the interests of Non-Executive Directors with the long term interests of shareholders. Fee pool and other fees Non-Executive Directors’ base fees for services as Directors are determined within an aggregate Directors’ fee pool limit, which is periodically approved by shareholders. At the date of this report the pool limit is $400,000, being the amount approved by shareholders at the Annual General Meeting held on 31 May 2004. This remuneration is to be divided among the Non-Executive Directors in such proportion as the Board determines. During the year ended 31 December 2004, $265,000 of the fee pool was utilised, consistent with an undertaking made by the Chairman to shareholders at the Annual General Meeting held on 31 May 2004. Currently fees for Non-Executive Directors are $100,000 for the Chairman of the Board and $65,000 for each of the other three Non-Executive Directors. 52 33. DIRECTOR AND EXECUTIVE DISCLOSURES (CONTINUED) Fee pool and other fees (continued) This excludes any remuneration determined by the Directors where a Director performs additional or special duties for the Company. If a Director performs additional or special duties for the Company they may be remunerated as determined by the Directors and that remuneration can be in addition to the limit mentioned above. No fees for additional or special duties were paid to Non-Executive Directors during the year ended 31 December 2004. Directors are entitled to be reimbursed for all reasonable costs and expenses incurred by them in the performance of their duties as Directors. Equity participation Non-Executive Directors may receive options as part of their remuneration, subject only to shareholder approval. No options are held by any Non-Executive Director at the date of this report. Retiring allowances No retiring allowances are paid to Non-Executive Directors. Superannuation Where relevant, total fees paid to Non-Executive Directors are inclusive of any superannuation guarantee charge and, at the discretion of each Non-Executive Director, may be paid into superannuation funds. Executive Directors and Executive Management Policy The guiding principle underlying InvoCare’s executive remuneration philosophy is to ensure rewards are fair and reasonable having regard to both internal and external relativities and appropriately balanced between fixed and variable components and that all variable components are commensurate with performance and results delivered. InvoCare’s remuneration policy is that: – for each role, the balance between fixed and variable components should reflect market conditions; – individual objectives should reflect the need for sustainable outcomes; – all variable pay should be tightly linked to measurable personal and business group performance; – total compensation be market competitive. Approval The Board Remuneration Committee makes recommendations to the Board of Directors in relation to the remuneration of the Chief Executive Officer (“CEO”). The CEO recommends and the Remuneration Committee approves all executive remuneration within a defined budget, approved by the Board of Directors. Fixed remuneration Executives are offered market competitive base salary (including benefits). Base salary is reviewed on a regular basis against market data for comparable positions provided by independent remuneration consultants and selected survey data. Adjustments to base salary are made based on increases in role scope or responsibility, pay position relative to market and relative performance in the role. Short term incentives Short term incentives in the form of cash bonuses are paid to selected executives based on measured performance against a range of mainly quantitative financial performance measures. These include EBIT targets, income accretion targets, debt reduction targets, qualitative measures of customer satisfaction and debtor days outstanding targets. Performance targets are agreed with each executive at the beginning of the period and performance measured against targets set determining the value of cash bonus paid. As executives gain seniority, the balance between fixed and variable components shifts to a higher percentage of “at risk” remuneration. Long term incentives InvoCare’s long term incentive policy aims to create a balance between corporate performance and retention of key executives. The equity compensation provided to selected executives was initiated prior to the Initial Public Offering of InvoCare and was provided in the form of share options. Details are set out below under “Share-based compensation – options”. InvoCare’s long term incentive practices have been reviewed in detail and proposed changes will be presented to shareholders for approval. 53 InvoCare Annual Report 2004 Notes to the Financial Statements For the year ended 31 December 2004 33. DIRECTOR AND EXECUTIVE DISCLOSURES (CONTINUED) Service agreements Chief Executive Officer – Remuneration and other terms of employment for the CEO were formalised in a service agreement dated 8 May 2001 with an initial term of two years, renewable each year for a further twelve months at the discretion of the Board of Directors. – The agreement provides for the provision of salary, short term performance related cash bonuses, superannuation and other benefits to be reviewed annually. – Termination may be effected with either six month’s notice or by payment of six month’s remuneration. In the event of termination, the agreement provides normal commercial restraint conditions for a period of twelve months after termination. – The agreement also provided for long term performance incentives by the grant of options over unissued shares in InvoCare Limited on 8 May 2004. Details of the share options are set out in Note 28. Other executives – Remuneration and other terms of employment for the Specified Executives and other executives are formalised in letters of appointment. – Each of these appointments provide for the provision of base salary, short term performance related cash bonuses, superannuation and other benefits. – In addition, selected senior executives receive long term performance incentives and participate in the Company’s Employee Share Option Plan. Options were granted to them in September 2003. Details of these options are set in Note 28. Details of remuneration Details of the remuneration of each Director of InvoCare Limited and each of the five Specified Executives of the consolidated entity are set out in the following tables. Primary Salary & Fees $ 95,872 55,000 50,459 – Cash bonus $ Non monetary benefits $ Post Employment Equity Total Super- Retirement benefits $ annuation $ Options $ $ – – – – – – – – 4,128 – 4,541 55,000 – – – – – – – – 100,000 55,000 55,000 55,000 400,000 200,000 300,000 150,000 901,331 350,000 28,896 8,997 36,000 27,676 37,893 127,345 – 721,652 1,386,548 – 580,831 1,067,504 – 1,302,483 2,719,052 18,000 200,000 80,000 13,500 150,000 60,000 14,634 22,650 151,000 30,367 168,294 110,775 140,000 13,404 16,800 809,294 290,225 114,762 89,905 25,940 34,017 7,934 19,516 27,355 623,733 – 299,793 323,695 66,178 – 249,151 52,933 – 366,096 37,144 – – 271,570 74,011 – 530,059 1,834,245 189,343 – 41,892 19,598 – 74,011 324,844 Non-Executive Directors Ian Ferrier John Murphy Christine Clifton Richard Fisher Executive Directors Richard Davis Michael Grehan Total Specified Executives Kenneth Mealey Phillip Friery Jacobus Adrichem Armen Mikaelian John Fowler Total Other senior executive Colin Purslowe* * Colin Purslowe, General Manager Funerals WA, has been included in the above table in order that the remuneration of the five most highly paid executives is disclosed. The salary includes payout of leave entitlements. 54 33. DIRECTOR AND EXECUTIVE DISCLOSURES (CONTINUED) Comparative information on either an individual or aggregate basis in respect of the remuneration of Directors and Specified Executives of InvoCare Limited for the year ended 31 December 2003 is not shown as this is the first financial report prepared since the issue of AASB 1046 “Director and Executive Disclosures by Disclosing Entities”. Share-based compensation – options The terms and conditions of each grant of options affecting remuneration in this or future reporting periods are as follows: Grant date Expiry date Exercise price Value per option at grant date Date exercisable 22 September 2003* 1 May 2006 $0.50 $1.32 22 September 2003* 1 May 2007 $0.59 $1.18 22 September 2003* 1 May 2008 $1.07 $0.69 8 May 2004** 8 May 2009 $1.51 $0.73 1/3 on 22 September 2003, 1/3 on 1 May 2004, 1/3 on 1 May 2005 1/3 on 1 May 2004, 1/3 on 1 May 2005, 1/3 on 1 May 2006 1/3 on 1 May 2005, 1/3 on 1 May 2006, 1/3 on 1 May 2007 Upon release of audited results for the year ended 31 December 2004 * ** Options granted at the discretion of the Directors to senior executives of the consolidated entity for no consideration under the Employee Share Option Plan. The options vest in 1/3 portions at various dates. When exercised, each option entitles the participant to acquire one fully paid ordinary share of the Company. Options granted for no consideration on 8 May 2004 to Richard Davis, Director and Chief Executive Officer, under a Service Agreement dated 8 May 2001. These options vested upon issue. When exercised, each option entitles Mr Davis to acquire one fully paid ordinary share of the Company. Under a voluntary escrow arrangement, Mr Davis agreed he would not dispose or otherwise deal in these options until the Company reports its audited financial results for the year ended 31 December 2004. (d) Equity instrument disclosures relating to Directors and Specified Executives Options provided as remuneration Details of options over unissued ordinary shares in InvoCare Limited provided as remuneration to each Director and each of the five Specified Executives of the consolidated entity are set out below. Further information on the options is set out in Note 28. The amounts disclosed for remuneration relating to options is the assessed fair value at grant date allocated equally over the period from grant date to vesting date. Fair values at grant date have been independently determined using a binomial option pricing model that takes into account the exercise price, the expected life of the option, the vesting and performance criteria, the impact of dilution, the non-tradeable nature of the option, the share price on grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the expected life of the option. No amounts are unpaid on any shares issued on the exercise of options. 55 InvoCare Annual Report 2004 Notes to the Financial Statements For the year ended 31 December 2004 33. DIRECTOR AND EXECUTIVE DISCLOSURES (CONTINUED) Option holdings Details of the movements in the number of options over ordinary shares in InvoCare Limited held during the financial year by each Director and each of the five Specified Executives of the consolidated entity, including their personally- related entities, are set out below: Name Directors Ian Ferrier Richard Davis* Michael Grehan* Specified Executives Kenneth Mealey Phillip Friery Jacobus Adrichem Armen Mikaelian John Fowler Balance at start of year Granted Exercised during during year at exercise year as price $0.50 remuneration Exercised during year at exercise price $0.59 Balance at end of year Vested and exercisable at end of year Vested during year 302,401 – 1,222,336 – 988,565 – 302,401 – – – 254,653 140,059 – 988,565 827,624 – – 988,565 988,565 – 267,386 483,868 140,092 81,494 122,233 152,792 – – – – – 127,353 12,765 25,470 – 50,930 38,198 12,732 5,093 – 12,732 318,317 114,595 50,931 122,233 89,130 165,524 25,465 30,558 – 38,198 – – – – – * Under voluntary escrow arrangements, Richard Davis and Michael Grehan agreed they would not dispose or otherwise deal in these options until the Company reports its audited financial results for the year ended 31 December 2004. No options are vested and unexercisable at the end of the year. Share holdings Details of the movements in the number of ordinary shares in InvoCare Limited held during the financial year by each Director and each of the five Specified Executives of the consolidated entity, including their personally-related entities, are set out below: Directors Ian Ferrier Richard Davis* Michael Grehan* John Murphy Christine Clifton Richard Fisher Specified Executives Kenneth Mealey Phillip Friery Jacobus Adrichem Armen Mikaelian John Fowler Balance at start of year Received during year on exercise of option Other changes during year Balance at end of year – 611,168 – 56,417 110,000 – 302,401 – 394,712 – – – (150,000) 152,401 – 611,168 – 394,712 56,417 – (10,000) 100,000 5,000 5,000 – 250 1,000 – – 165,551 25,497 30,563 – 63,662 (65,551) 100,000 10,747 (15,000) – (31,563) – – 63,662 – * Under voluntary escrow arrangements, Richard Davis and Michael Grehan agreed they would not dispose or otherwise deal in ordinary shares until the Company reports its audited financial results for the year ended 31 December 2004. 56 33. DIRECTOR AND EXECUTIVE DISCLOSURES (CONTINUED) (e) Loans to Directors and Executives No loans have been made to Directors of InvoCare Limited or to any of the five Specified Executives of the consolidated entity, including their personally-related entities. (f) Other transactions with Directors and Specified Executives During the year, Investec Wentworth Pty Limited, of which John Murphy is a Director, provided professional advisory services to the consolidated entity on normal commercial terms and conditions amounting to $103,148. During the year, Blake Dawson Waldron, of which Richard Fisher is a partner, provided professional legal services to the consolidated entity on normal commercial terms and conditions amounting to $31,097. During the year, Hillmir Pty Ltd, an entity significantly influenced by a relative of Michael Grehan, provided professional advisory services to the consolidated entity on normal commercial terms and conditions amounting to $46,436. The aggregate amount of the above transactions with Director-related entities recognised as an expense during the financial year was $180,681. 34. REMUNERATION OF AUDITOR During the year the auditor of the parent entity and its related practices earned the following remuneration: PricewaterhouseCoopers – Australian firm Audit of financial reports of the entity or any entity in the consolidated entity Review of financial report of the consolidated entity Other audit-related work Total audit and other assurance services Advisory services Taxation Total other services Total remuneration of PricewaterhouseCoopers Related practices of PricewaterhouseCoopers Australian firm PricewaterhouseCoopers Legal PricewaterhouseCoopers Securities Total remuneration of related practices Total remuneration of auditors and related practices Consolidated InvoCare Limited 2004 $'000 2003 $'000 2004 $'000 2003 $'000 124,000 40,000 92,900 256,900 23,187 152,500 175,687 432,587 110,000 40,000 66,650 216,650 56,593 157,082 213,675 430,325 335,673 45,000 380,673 159,039 207,800 366,839 813,260 797,164 – – – – – – – – – – – – – – – – – – – – – – – – It is InvoCare’s policy to employ PricewaterhouseCoopers on assignments additional to their statutory audit duties where PricewaterhouseCoopers’ expertise and experience with the consolidated entity are important. These assignments are principally tax advice and advisory services, or where PricewaterhouseCoopers is awarded assignments on a competitive basis. It is InvoCare’s policy to seek competitive tenders for any major consulting projects. 57 InvoCare Annual Report 2004 Notes to the Financial Statements For the year ended 31 December 2004 35. RELATED PARTY DISCLOSURES Directors and Specified Executives Disclosures relating to Directors and Specified Executives are set out in Note 33. Transactions between InvoCare Limited and its controlled entities consist of: (a) Loan advanced by InvoCare Limited (b) Loan repaid to InvoCare Limited (c) The payment of interest on the above loan (d) The payment of dividends to InvoCare Limited, and (e) The payment of a management fee to InvoCare Limited. Loan The loan made by InvoCare Limited to a controlled entity has no fixed terms of repayment. The aggregate amount receivable included in Note 6 – Receivables (current) and Note 10 – Receivables (non-current) totalled $173,929,000 (2003: $192,324,000). Interest on the loan is charged at 9% (2003: 9%). Repayments totalling $18,395,000 (2003: $16,303,000) were made during the year. In addition, interest revenue included in the determination of operating profit before income tax that resulted from transactions with the entity in the wholly owned group totalled $16,714,000 (2003: $18,110,000). Dividends A fully franked dividend of $6,080,191 (2003: $7,000,000) was received by InvoCare Limited from a controlled entity. This amount has been included in the determination of operating profit before income tax. Management Fee A management fee was charged by InvoCare Limited to a controlled entity during the year totalling $960,000 (2003: $480,000). This amount is included in the determination of operating profit before income tax. Former shareholder transactions A former shareholder provided a loan of $30,000,000 in the form of convertible notes to InvoCare Limited until 10 December 2003 when the convertible notes were repaid in full. The interest expense for the year ended 31 December 2003 included $3,394,000 on the convertible notes. 58 36. INVESTMENTS IN CONTROLLED ENTITIES The consolidated entity comprises the parent entity and the entities it controlled at the end of, or during, the financial year. Parent Entity InvoCare Limited Name of entity Equity holding 2004 % 2003 % Cost of parent entity's investment 2004 $’000 2003 $’000 InvoCare Australia Pty Limited (formerly Service Corporation International Australia Pty Limited) New South Wales Cremation Company Pty Limited Cremations (Newcastle) Holdings Pty Limited Cremations (Newcastle) Pty Limited Macquarie Memorial Park Pty Limited Macquarie Funeral Service Pty Limited Novocastrian Funerals Pty Limited Novocastrian Funerals Unit Trust Catholic Funerals Newcastle Pty Limited Mead & Purslowe Pty Limited Mead & Purslowe Trading Trust Oakwood Funerals Pty Limited^^ Dignity Pre-Arranged Funerals Pty Limited Memorial Guardian Plan Pty Limited Pine Grove Forest Lawn Funeral Benefit Company Pty Limited Kitleaf Pty Limited The Australian Cremation Society Pty Limited Metropolitan Burial and Cremation Society Funeral Contribution Fund Pty Limited Labor Funerals Contribution Fund Pty Limited Purslowe Custodians Pty Limited Beresfield Funerals Pty Limited 100 100 100 100 83.14 83.14 100 100 100 100 100 50 100 100 100 100 100 100 100 100 100 100 100 100 100 83.14 83.14 100 100 100 100 100 50 100 100 100 100 100 100 100 100 100 15,641 – – – – – – – – – – – – – – – – – – – – 15,641 15,641 – – – – – – – – – – – – – – – – – – – – 15,641 All entities are incorporated and domiciled in Australia. ^^ InvoCare Australia Pty Limited holds 50% of the shares in Oakwood Funerals Pty Limited, which is a controlling interest as it has the capacity to dominate decision making and operations of the company’s business activities. 59 4.4 4.5 n/a n/a 9.0 n/a 7.5 7.6 n/a 9.1 # 3.7^ 4.5 n/a 3.8 9.0 n/a 7.6 7.7 12.0 9.1 # InvoCare Annual Report 2004 Notes to the Financial Statements For the year ended 31 December 2004 37. FINANCIAL INSTRUMENTS (a) Interest rate risk exposures The consolidated entity’s exposure to interest rate risks and the effective interest rates of financial assets and financial liabilities, both recognised and unrecognised at the reporting date, are as follows: Floating interest rate Fixed interest rate maturing in: Over 1 to 1 year 5 years or less Notes 2004 $’000 2003 $’000 2004 $’000 2003 $’000 2004 $’000 2003 $’000 Non-interest- bearing 2004 $’000 2003 $’000 2004 $’000 Weighted average Total 2003 2004 $’000 % interest rate 2003 % Financial assets Cash Cash Trade and other debtors Security deposit 26 26 6,10 10 461 5,002 – – – – – – – 19 226 2,141 – – – – Total financial assets 461 5,021 226 2,141 – – – – – – – – – – – 461 226 5,002 2,141 – 22,307 21,812 22,307 21,812 – 58 42 58 61 – 22,365 21,854 23,052 29,016 Financial liabilities Trade and other creditors Deferred revenue Debentures 15,19 18,22 – – – – 16,20 109,000 130,000 Cash advance facility 16,20 22,500 25,000 Convertible notes Lease liability Interest rate swap* 20 16,20 – – – – 282 524 29 307 15,252 17,914 15,563 18,745 – 41,596 39,283 41,596 39,283 – – – – – – – – – – – – – – – 17 15 32 49 – – – – – – 109,000 130,000 – – – – 22,500 25,000 – 49 – – 64 – (119,425) (136,000) 27,899 20,994 91,526 115,006 Total financial liabilities 12,075 19,000 28,198 21,533 91,587 115,362 56,848 57,197 188,708 213,092 Net financial assets/(liabilities) (11,614) (13,979) (27,972) (19,392) (91,587) (115,362) (34,483) (35,343) (165,656) (184,076) n/a Not applicable for non-interest-bearing financial instruments. ^ Account is the aggregate of nine bank accounts. Where the aggregate balance is greater than $5,000,000 a premium interest rate is received. When the aggregate balance is overdrawn a rate of 9.1% (2003: 8.6%) is charged. Notional principal amounts. Not recognised in financial statements. The disclosure of effective interest rates is not applicable to derivative financial instruments. For information on interest rates see below. * # (b) Net fair value of financial assets and liabilities On-balance sheet The carrying amount of financial assets and liabilities approximates their fair value. (c) Off-balance sheet derivative instruments InvoCare Limited is party to derivative financial instruments in the normal course of business in order to hedge exposure to fluctuations in interest rates. Carrying amount Fair value 2004 $'000 2003 $'000 2004 $'000 2003 $'000 Financial liabilities Interest rate swaps, net liability – – 2,459 780 60 37. FINANCIAL INSTRUMENTS (CONTINUED) Interest rate swap contracts The debentures and cash advance facility currently bear an average variable interest rate of 7.50% (2003: 7.64%). It is policy to protect the majority of the loan agreement from exposure to increasing interest rates. In addition, the loan agreement requires at least 75% of the principal be covered by interest rate swaps. Accordingly, InvoCare has entered into interest rate swap contracts to reduce its exposure to adverse fluctuations in interest rates on debentures and cash advance facility. Swaps currently in place cover 91% (2003: 85%) of the debenture and cash advance facility principal outstanding. Under the contracts, interest is paid at fixed rates and received at variable rates. The fixed weighted average interest rate is 5.757% (2003: 5.639%) and the variable rate is based on the BBSW which at the balance date was 5.600% (5.515%). The contracts have notional principal amounts with a similar maturity profile to the debentures and cash advance facility and require settlement of net interest receivable or payable each quarter coinciding with the dates on which interest is payable on the debentures and cash advance facility. There was no net amount receivable or payable on the swap contracts at the reporting date. (d) Credit risk exposures The credit risk on financial assets of the consolidated entity which have been recognised on the statement of financial position, other than investment in shares, is generally the carrying amount, net of any provision for doubtful debts. 38. IMPACT OF ADOPTING AASB EQUIVALENTS TO IASB STANDARDS The Australian Accounting Standards Board (AASB) is adopting IFRS for application to reporting periods beginning on or after 1 January 2005. The AASB has issued Australian equivalents to IFRS, and the Urgent Issues Group is in the process of issuing interpretations corresponding to IASB interpretations originated by the International Financial Reporting Interpretations Committee or the former Standing Interpretations Committee. The adoption of Australian equivalents to IFRS will be first reflected in InvoCare’s financial statements for the half year ending 30 June 2005 and the year ending 31 December 2005. Entities complying with Australian equivalents to IFRS for the first time will be required to restate their comparative financial statements to amounts reflecting the application of IFRS to that comparative period. Most adjustments required on transition to IFRS will be made, retrospectively, against opening retained earnings as at 1 January 2004. InvoCare has established a project team to manage the transition to Australian equivalents to IFRS, including training of staff as well as system and internal control changes necessary to gather all the required financial information. The project team is chaired by the Chief Financial Officer and reports to the Audit Committee. To date, the project team with the help of external advisers, has analysed most of the Australian equivalents to IFRS and has identified a number of accounting policy changes that will be required. In some cases choices of accounting policies are available, including elective exemptions under Accounting Standard AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards. Major changes that will be required to InvoCare’s existing accounting policies include the following (references to new AASB standards below are to the Australian equivalents to IFRS issued in July 2004): Income Tax Under AASB 112 Income Taxes, deferred tax balances are determined using the balance sheet method which calculates temporary differences based on the carrying amounts of an entity’s assets and liabilities in the statement of financial position and their associated tax bases. In addition, current and deferred taxes attributable to amounts recognised directly in equity are also recognised directly in equity. This will result in a change to the current accounting policy, under which deferred tax balances are determined using the income statement method, under which items are only tax effected if they are included in the determination of pre-tax accounting profit or loss and/or taxable income or loss and current and deferred taxes cannot be recognised directly in equity. 61 InvoCare Annual Report 2004 Notes to the Financial Statements For the year ended 31 December 2004 38. IMPACT OF ADOPTING AASB EQUIVALENTS TO IASB STANDARDS (CONTINUED) Intangible assets – goodwill Under AASB 3 Business Combinations, amortisation of goodwill will be prohibited and will be replaced by annual impairment testing focusing on the cash flows of the related cash generating unit. This will result in a change to the current accounting policy, under which goodwill is amortised on a straight line basis over the period during which the benefits are expected to arise and not exceeding 20 years. Equity-based compensation benefits Under AASB 2 Share-based Payments, equity-based compensation to employees will be recognised as an expense in respect of the services received. This will result in a change to the current accounting policy, under which no expense is recognised for equity-based compensation. Financial Instruments Under AASB 139 Financial Instruments: Recognition and Measurement there may be impacts as a result of financial assets held by the Company being subjected to classification as either held for trading, held-to-maturity, available for sale or loans and receivables and, depending upon classification, measured at fair value or amortised cost. The interest rate swap contracts will be carried at fair value on InvoCare’s balance sheet. Where hedge effectiveness tests are met, changes in the fair value of the swap contracts will be recognised in equity and released to the income statement over the term of the contract. Where hedge effectiveness tests are not met or the swaps are not designated in a hedging relationship, changes in the fair value of the swap contracts will be recognised in the income statement. This may result in increased volatility in the income statement. Other Changes The above should not be regarded as a complete list of changes in accounting policies that will result from the transition to Australian equivalents to IFRS. 62 Directors’ Declaration In the Directors’ opinion: (a) the ﬁnancial statements and notes are in accordance with the Corporations Act 2001 including: (i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and (ii) giving a true and fair view of the Company’s and consolidated entity’s ﬁnancial position as at 31 December 2004 and of their performance, as represented by the results of their operations and their cash ﬂows, for the ﬁnancial year ended on that date; and (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. This declaration is made in accordance with a resolution of the Directors. Ian Ferrier Director Sydney 30 March 2005 Richard Davis Director 63 InvoCare Annual Report 2004 Independent Audit Report to the members of InvoCare Limited AUDIT OPINION In our opinion, the ﬁnancial report of InvoCare Limited: – gives a true and fair view, as required by the Corporations Act 2001 in Australia, of the ﬁnancial position of InvoCare Limited and the InvoCare Group (deﬁned below) as at 31 December 2004, and of their performance for the year ended on that date, and – is presented in accordance with the Corporations Act 2001, Accounting Standards and other mandatory ﬁnancial reporting requirements in Australia, and the Corporations Regulations 2001. This opinion must be read in conjunction with the rest of our audit report. SCOPE The Financial Report and Directors’ Responsibility The ﬁnancial report comprises the statement of ﬁnancial position, statement of ﬁnancial performance, statement of cash ﬂows, accompanying notes to the ﬁnancial statements, and the directors’ declaration for both InvoCare Limited (the company) and the InvoCare Group (the consolidated entity), for the year ended 31 December 2004. The consolidated entity comprises both the company and the entities it controlled during that year. The directors of the company are responsible for the preparation and true and fair presentation of the ﬁnancial report in accordance with the Corporations Act 2001. This includes responsibility for the maintenance of adequate accounting records and internal controls that are designed to prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the ﬁnancial report. Audit Approach We conducted an independent audit in order to express an opinion to the members of the company. Our audit was conducted in accordance with Australian Auditing Standards, in order to provide reasonable assurance as to whether the ﬁnancial report is free of material misstatement. The nature of an audit is inﬂuenced by factors such as the use of professional judgement, selective testing, the inherent limitations of internal control, and the availability of persuasive rather than conclusive evidence. Therefore, an audit cannot guarantee that all material misstatements have been detected. For further explanation of an audit, visit our website http://www.pwc.com/au/ﬁnancialstatementaudit. We performed procedures to assess whether in all material respects the ﬁnancial report presents fairly, in accordance with the Corporations Act 2001, Accounting Standards and other mandatory ﬁnancial reporting requirements in Australia, a view which is consistent with our understanding of the company’s and the consolidated entity’s ﬁnancial position, and of their performance as represented by the results of their operations and cash ﬂows. We formed our audit opinion on the basis of these procedures, which included: – examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the ﬁnancial report, and – assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of signiﬁcant accounting estimates made by the directors. Our procedures include reading the other information in the Annual Report to determine whether it contains any material inconsistencies with the ﬁnancial report. While we considered the effectiveness of management’s internal controls over ﬁnancial reporting when determining the nature and extent of our procedures, our audit was not designed to provide assurance on internal controls. Our audit did not involve an analysis of the prudence of business decisions made by directors or management. 64 INDEPENDENCE In conducting our audit, we followed applicable independence requirements of Australian professional ethical pronouncements and the Corporations Act 2001. PricewaterhouseCoopers John Gordon Partner Sydney 30 March 2005 Liability is limited by the Accountant’s Scheme under the Professional Standards Act 1994 (NSW) 65 InvoCare Annual Report 2004 Shareholder Information The shareholder information set out below was applicable as at 14 March 2005. DISTRIBUTION OF EQUITY SECURITIES Analysis of numbers of equity security holders by size of holding: 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Class of equity securities Options over ordinary shares Ordinary shares 1,075 3,246 1,167 724 44 6,256 - - - 5 6 11 There were 13 holders of less than a marketable parcel of ordinary shares (being 130 at a market price of $3.85 on 14 March 2005) who hold a total of 671 ordinary shares. EQUITY SECURITY HOLDERS 20 largest quoted equity security holders The names of the 20 largest holders of quoted equity securities are listed below: Name Westpac Custodian Nominees Ltd J P Morgan Nominees Australia Limited National Nominees Limited RBC Global Services Australia Nominees Pty Limited Equity Trustees Limited Government Superannuation Office Bond Street Custodians Limited Victorian Workcover Authority Queensland Investment Corporation UBS Private Clients Australia Nominees Pty Ltd ANZ Nominees Limited Transport Accident Commission IOOF Investment Management Limited Argo Investments Limited Citicorp Nominees Pty Limited Mr Richard H Davis AMP Life Limited Cogent Nominees Pty Limited The University of Melbourne Australian Executor Trustees Limited 66 Ordinary shares Number held Percentage of issued shares 11,022,872 10,536,995 9,920,440 6,337,370 2,661,917 2,500,115 2,495,236 1,675,719 1,604,120 1,579,532 1,375,168 1,333,387 728,768 660,000 630,467 611,168 596,851 535,037 11.60% 11.09% 10.44% 6.67% 2.80% 2.63% 2.63% 1.76% 1.69% 1.66% 1.45% 1.40% 0.77% 0.69% 0.66% 0.64% 0.63% 0.56% 528,737 516,440 57,850,339 0.56% 0.54% 60.89% EQUITY SECURITY HOLDERS (CONTINUED) Unquoted equity securities Options issued under the Employee Share Option Plan to take up ordinary shares Options issued to the Chief Executive Officer under a Service Agreement to take up ordinary shares Substantial holders Substantial holders in the Company are set out below: J P Morgan Chase & Co Deutsche Bank AG National Australia Bank Limited Group Goldman Sachs JBWere Group Number on issue Number of holders 1,825,869 988,565 10 1 Number shares held Percentage 9,444,268 7,870,930 7,507,151 5,740,449 9.94 8.28 7.90 6.04 VOTING RIGHTS The voting rights attaching to each class of security are set out below: Ordinary shares On a show of hands, each member present in person and each other person present as a proxy of a member, has one vote. On a poll each member present in person has one vote for each fully paid share held by the member and each person present as a proxy of a member has one vote for each fully paid share held by the member that the proxy represents. Options Options have no voting rights. 67 InvoCare Annual Report 2004 Corporate Information ABN 42 096 437 393 InvoCare Limited Directors Ian Ferrier (Chairman) Richard Davis (Managing Director and Chief Executive Officer) Michael Grehan (Chief Operating Officer) Roger Penman (Non-Executive Director) Christine Clifton (Non-Executive Director) Richard Fisher (Non-Executive Director) Company Secretary Kenneth Mealey (Chief Financial Officer) Annual General Meeting The Annual General Meeting of InvoCare Limited will be held at The Westin Sydney, 1 Martin Place, Sydney on Thursday 19 May, 2005 Registered Office Share Register Level 4, 153 Walker Street North Sydney NSW 2060 Telephone: 02 9978 5200 Facsimile: 02 9978 5299 Website: www.invocare.com.au ASX Perpetual Registrars Limited Level 8, 580 George Street Sydney NSW 2000 Toll free: 1300 854 911 Facsimile: 02 9287 0303 website: www.asxperpetual.com.au Stock Exchange Listing InvoCare Limited is a company limited by shares that is incorporated and domiciled in Australia. InvoCare Limited’s shares are listed on the Australian Stock Exchange only. ASX code is IVC. Auditors Solicitors Bankers PricewaterhouseCoopers Darling Park Tower 2 201 Sussex Street Sydney NSW 1171 Coudert Brothers Level 8 Gateway 1 Macquarie Place Sydney NSW 2000 Australia and New Zealand Banking Group Limited 20 Martin Place Sydney NSW 2000 68 InvoCare Locations InvoCare Funeral Homes Twin Towns Funerals Tweed Heads William Riley Funerals Lismore Sydney Allan Drew Funerals Castle Hill Economy Funerals All areas Guardian Funeral providers A F Anderson Funerals Granville Allen Matthews Funerals Cremorne North Ryde Bruce Maurer Funerals Crows Nest Butler Funerals Camden Campbelltown Dignified Funerals Burwood Five Dock Guardian Funerals Blacktown J & C Hardy Funerals Hurstville Rockdale J.W. Chandler Funerals Richmond Windsor Labor Funerals Bankstown Macarthur District Funerals Leppington Metcalfe & Morris Funerals Parramatta Metropolitan Funeral Homes Bankstown Rockdale Parkway Funerals Dee Why Sydney Funeral Services Minchinbury ACT Guardian Funeral providers Tobin Brothers Funerals (ACT) Belconnen Kingston Queanbeyan White Lady Funerals Belconnen Kingston NSW Central Coast Simplicity Funerals Bateau Bay Erina Toukley East Woy Woy White Lady Funerals Wyoming Illawarra Economy Funerals All areas Guardian Funeral providers Hansen & Cole Funerals Bulli Kembla Grange Wollongong Newcastle & Hunter David Lloyd Funerals – incorporating Beresfield and Parsons Funerals Adamstown Belmont Beresfield Economy Funerals All areas White Lady Funerals Charlestown Mayfield North Coast Casino Funerals Casino Kevin Geaghan Funerals Ballina Simplicity Funerals Tweed Heads InvoCare Cemeteries and Crematoria NSW Castlebrook Memorial Park Rouse Hill Forest Lawn Memorial Park Leppington Lake Macquarie Memorial Park Ryhope Lakeside Memorial Park Dapto Lung Po Shan Information Centre Haymarket Newcastle Memorial Park Beresfield Northern Suburbs Memorial Gardens and Crematorium North Ryde Simplicity Funerals Balgowlah Chatswood Liverpool Mascot Miranda Newtown Paddington Randwick Smithfield Warrawee Universal Chung Wah Funerals Fairfield White Lady Funerals Bankstown Bondi Junction Eastwood Manly Mosman Narrabeen Pennant Hills Penrith Roseville Sutherland QLD George Hartnett Funerals Cleveland Holland Park Redcliffe Sandgate Wynnum Cannon & Cripps Funerals – A George Hartnett Funeral Home Kelvin Grove J & H Reed | O. Bottcher & Son Funerals Ipswich Simplicity Funerals Buranda Kedron Miami Parkwood Somerville Funerals Nerang Southport White Lady Funerals Chelmer Gold Coast Kelvin Grove Tanah Merah Value Funerals All areas Pinegrove Memorial Park Eastern Creek Po Fook Shan Information Centre Cabramatta Rookwood Memorial Gardens and Crematorium Rookwood Provinciale Servizio Funebre Coburg Simplicity Funerals Carnegie Frankston Reservoir Sunshine Value Funerals All areas White Lady Funerals Caulfield South Heidelberg South Melbourne WA Mareena Purslowe & Associates Funerals Subiaco Willetton Oakwood Funeral Home Booragoon Rockingham Purslowe Funerals Midland North Perth Northam South Fremantle Victoria Park Wangara Simplicity Funerals Kelmscott Osborne Park Value Funerals All areas SA Blackwell Funerals Morphett Vale Payneham Prospect Torrensville Pengelley & Knabe Funerals – Member of the Blackwell Funerals Group Glenside Simplicity Funerals Black Forest Enfield Victor Harbor Value Funerals All areas White Lady Funerals Hillcrest Plympton VIC Le Pine Funerals Box Hill Camberwell Dandenong Eltham Glen Waverley Greensborough Ivanhoe Kew East Mordialloc Oakleigh St Kilda Thornbury Le Pine Heritage Funerals Croydon Ferntree Gully Healesville Lilydale Le Pine Asian Funerals Glen Waverley Mulqueen Funerals Coburg Epping Greensborough QLD Albany Creek Memorial Park Bridgeman Downs Allambe Memorial Park Nerang Mt Thompson Memorial Gardens Holland Park Tweed Heads Memorial Gardens Tweed Heads South 69 For more details visit www.invocare.com.au . i g n h c a e b l r o f e n i r o h c l l a t n e m e e l D E T M L I I Contents Financial Highlights 2 Chairman’s Message 3 Simplicity Funerals 4 White Lady Funerals 6 Traditional Funeral Brands 8 Cemeteries and Crematoria 10 CEO Review 12 Directors’ and Financial Reports 17 Shareholder Information 66 Corporate Information 68 InvoCare Locations 69 I Y T P S E T A C O S S A & R R A B S S O R Y B D E C U D O R P D N A D E N G S E D I o n s e s u d n a l a i r e t a m d e c y c e r l % 0 5 m o r f e d a m r e p a p n o d e t n i r p s i t r o p e r i s h T I n v o C a r e L m i i t e d A n n u a l R e p o r t 2 0 0 4 ANNUAL REPORT 2004

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