I N V O C A R E L I M I T E D A N N U A L R E P O R T 2 0 1 2 Annual Report 2012 Realising possibilities Contents 2 Performance highlights 3 Chairman’s message 6 Chief Executive Officer’s review 12 Key strategies 13 Management team 14 Community, people and environment 18 Digital business 19 Group financial and operating review 22 Financial Report 24 Directors’ Report 28 Board of Directors 30 Corporate Governance Statement 35 Remuneration Report 48 Auditor’s Independence Declaration 98 Directors’ Declaration 99 Independent Auditor’s Report 101 Shareholder information 102 InvoCare locations 104 Glossary IBC Corporate information A “Personal Details” guide has been included in the back of this document to assist our stakeholders. White Lady Funerals The new White Lady Funerals uniforms introduced in 2012 on show at St David’s Uniting Church, Haberfield, NSW. 3 Singapore 19 Western Australia 43 5 Queensland 81 9 15 South Australia 47 New South Wales and Australian Capital Territory Growing network Victoria 1 18 Tasmania New Zealand 4 InvoCare’s growing network of locations across Australia, New Zealand and Singapore ensures we continue to provide committed care with a personalised touch to the communities we are part of. Funeral locations Memorial Parks Tuckers funeral home at Barrabool Hills, Geelong, Victoria. Pellows Funeral Directors location in Hamilton, New Zealand. The entrance to Hanson & Cole Funerals at Kembla Grange, Wollongong, New South Wales. Key Funeral Brands Cemeteries and Crematoria New South Wales and Australian Capital Territory 18 White Lady Funerals is a dedicated team of women offering a unique service for our client families. The life of the loved one is honoured with special nurturing, sensitivity, warmth and care, with a woman’s understanding. There are 44 White Lady locations throughout Australia. Flexible and less traditional, Simplicity Funerals offers practical, dignified, respectful and affordable funeral services. Steadily expanding, there are 47 Simplicity Funeral locations throughout Australia and one in Singapore, and another, opened in 2012, in Auckland, New Zealand. Singapore Casket Company has been offering caring and professional services to client families, of all denominations, since 1920. Its current facilities include nine air-conditioned parlours offering a bright, clean and tranquil environment for the comfort of families. Contemporary and Heritage Funerals InvoCare’s over 60 contemporary-style brands of funeral homes maintain the service approach respected by families over many generations. The service is personal and professional, gently guiding families through the arrangement process. With one major brand in each Australian state and a number of smaller heritage brands serving local communities, there are 149 InvoCare contemporary- style and heritage funeral homes in Australia and New Zealand. We were proud to celebrate 120 years of the WN Bull brand during 2012 along with milestones for Boland Funerals, Somerville Funerals, Mulqueen Funerals and Academy Funeral Services. Lung Po Shan Chinese Memorial Garden we listen, we care, we serve InvoCare operates 14 cemeteries and crematoria in Australia. The multicultural nature of Australia is recognised with burial, cremation and memorial options, including Asian sections designed by Feng Shui advisers, and the availability of architecturally designed crypts, vaults and family mausoleums preferred by many European communities. We’ll know what to do. A full list of brands and locations is set out on pages 102-103. Realising possibilities Completing the integration of the Bledisloe operations during the year with annualised synergy benefits of $3.5 million. Key growth strategies remains unaltered and focus on the revenue pillars of growth and driving operating leverage. Our aim is to provide outstanding service to our client families while contributing to the communities we serve and delivering solid returns to our shareholders. A major new initiative in 2012 was to leverage the possibilities of the digital age to improve our services. Pink Common Heath The Epacris impressa, also known as common heath, is endemic to the Geelong region. Its pink colours symbolise compassion, hope and caring. Update about the market The Tuckers acquisition in December 2012 saw InvoCare enter the Geelong market for the first time and the Resthaven acquisition in February 2013 expanded our presence in Auckland. AFE Award In 2012 InvoCare won the coveted AFE Award for Professionalism and Leadership at the Asian Funerals Expo in Hong Kong. 1 INVOCARE ANNUAL REPORT 2012 Performance highlights InvoCare’s sound financial performance confirms the continuing effectiveness of the business model. 368.7 321.1 93.0 321.100006 81.8 42.5 92.999937 34.0 42.499954 36.4 29.8 28.3 36.428532 267.4 255.7 244.2 275.228577 79.714231 70.4 64.3 61.9 229.357147 28.3 32.9 30.6 25.3 66.428526 23.5 48.1 33.999951 29.142815 44.5 30.357110 24.285680 28 27.4 27 183.485718 53.142821 24.285688 19.428544 137.614288 39.857116 18.214266 14.571408 91.742859 26.571410 12.142844 9.714272 48.099972 41.228548 34.357123 27.485698 20.614274 13.742849 45.871429 13.285705 6.071422 4.857136 6.871425 08 09 10 11 12 08 09 10 11 0.000000 12 08 09 10 0.000000 11 12 08 09 10 11 12 0.000000 08 09 10 11 12 0.000000 0.000000 Revenue from external customers $ million Operating EBITDA $ million Operating earnings after tax $ million Ordinary dividends per share $ million Profit after tax attributable to members $ million Five year financials $’000 2012 2011 2010 2009 2008 Revenue from external customers 368,652 321,113 267,449 255,676 244,215 Operating EBITDA Operating EBITDA margin Operating earnings after tax Operating earnings per share (cents) Profit after tax attributable to members Earnings per share (cents) Dividend paid in respect of the financial year (cents) Ungeared, tax free operating cash flow Proportion of EBITDA converted to cash Actual capital expenditure Net debt Operating EBITDA/Net interest (times) Net debt/EBITDA (times) Funeral homes (number) Cemeteries and crematoria (number) Employees (full-time equivalents) Prepaid contract sales/prepaid redemptions 93,026 25.2% 42,479 38.8 44,479 40.6 34.00 88,542 95% 81,802 70,411 64,273 61,874 25.5% 26.3% 25.1% 25.3% 36,406 32,928 30,607 28,342 34.5 32.4 30.3 28.3 27,012 27,366 48,141 28,026 25.6 29.75 26.9 28.25 47.7 25.25 28.0 23.50 75,411 69,059 63,094 60,495 92% 98% 98% 98% 18,412 16,723 14,266 13,846 16,359 217,136 209,114 147,538 148,358 152,452 6.3 2.4 231 14 1,470 17.7% 6.5 2.6 226 14 1,430 16.5% 7.1 2.1 177 12 1,112 16.8% 6.6 2.3 173 12 1,101 17.9% 6.2 2.5 163 12 1,052 6.9% Operating earnings excludes the net gain/(loss) on undelivered prepaid contracts, acquisition related costs, prior period tax movements, investment allowance benefits, non-cash interest rate swap movements, gain/(loss) on sale, disposal or impairment of non-current assets and non-controlling interests. 2 INVOCARE ANNUAL REPORT 2012 Chairman’s message InvoCare has delivered another sound financial performance by realising the possibilities presented by the markets in which it operates. InvoCare continued to grow in 2012 by realising the opportunities of the Bledisloe acquisition and focusing on the core strategic growth pillars embodied in InvoCare’s operational strategy. Operating earnings after tax were $42.5 million for the year, an increase of 16.7% on 2011. Statutory profit after tax, which includes asset sale gains and the non-cash impact of movements in prepaid contracts funds under management and associated liabilities, increased 64.7% from $27.0 million to $44.5 million. The most significant reason for this was the non-cash investment returns from prepaid contract funds under management rose from $2.1 million in 2011 to $17.6 million in 2012. The integration of Bledisloe was completed during 2012 and this saw the realisation of an annualised $3.5 million in synergies since acquisition in June 2011. Growth continues with the acquisition of Tuckers in December 2012 which sees InvoCare enter the Geelong market for the first time. Early in 2013 the Resthaven acquisition saw two new locations added in the key Auckland market where InvoCare is currently under-represented. Three new locations in Australasia were added in 2012 and both the Simplicity and White Lady brands were introduced into the New Zealand market. Given the success of 2012, the Board declared a fully franked final dividend of 19 cents per share. Total dividends for the year total 34 cents per share, an increase of 14.3% on 2011. The 2012 dividends represent a payout ratio of 88% (2011: 89%) of operating earnings after tax. Total shareholder returns (price movement plus cash dividends) since the initial public offering in late 2003 now stands at more than 22% compound annual growth. A major focus of 2012 was the development of the digital strategy which includes enhanced tools to improve the client interface with front line staff, new online offerings and improvements in the core operational and financial systems. On behalf of the Board and all shareholders I congratulate the management and staff of InvoCare under Andrew Smith’s leadership on realising the possibilities presented by the Bledisloe acquisition and the solid operational and financial results. The Board conducts twice yearly operational site visits and continues to be impressed by the professionalism and dedication demonstrated by all of InvoCare’s personnel. I look forward to InvoCare’s continued successful growth of the core business operations in Australia, New Zealand and Singapore. Ian Ferrier CHAIRMAN 3 INVOCARE ANNUAL REPORT 2012 An industry leader InvoCare is committed to maintaining the highest standards of professionalism and service within both its own operations and the industry more generally. One effective way of ensuring standards are maintained is by working with other industry players on matters of key concerns to the industry at large. As a consequence many InvoCare employees are involved with the key industry groups being the Australian Funeral Directors Association, the Australasian Cemeteries & Crematoria Association, the Funeral Directors Association of New Zealand, Funeral Directors Association (Singapore), Australian Institute of Embalming and the New Zealand Embalmers Association. 4 Armen Mikaelian, National President of the Australasian Cemeteries and Cremation Association with his chains of office at Northern Suburbs Memorial Gardens and Crematorium. INVOCARE ANNUAL REPORT 2012 Warwick Hansen OAM Warwick is the President of the NSW Division of the Australian Funeral Directors Association and celebrated his 45th year in the industry during 2012. He was award the Order of Australia Medal in 2013 for services to the industry and community. InvoCare employees holding senior industry positions include: Armen Mikaelian National General Manager Cemeteries/ Crematoria President Australasian Cemeteries & Crematoria Association John Fowler General Manager – Victorian Funerals National Senior Vice President Australian Funeral Directors Association Jason Maher General Manager – South Australian Funerals National Councillor Australian Funeral Directors Association Daniel McKeig Regional Manager Western Australia Divisional President WA Funeral Directors Association Doris Zagdanski General Manager – Corporate Projects Divisional President QLD Funeral Directors Association Warwick Hansen Regional Manager NSW Country Divisional President NSW Australian Funeral Directors Association Gavin Murphy Operations Manager New Zealand Vice President Funeral Directors Association of New Zealand National Examiner New Zealand Embalmers Association Rachel Benns Founder of Resthaven Executive Member Funeral Directors Association of New Zealand Tony Garing Regional Manager Executive Member Funeral Directors Association of New Zealand A total of 13 other InvoCare staff members serve on various committees of these industry associations. 5 INVOCARE ANNUAL REPORT 2012 Chief Executive Officer’s review InvoCare has realised the possibilities presented by the Bledisloe acquisition in 2012 while continuing to focus on the core operations. InvoCare has consolidated the Bledisloe business and continued its focus on the core business. This ensured InvoCare delivered growth in gross sales of 14.9% to $368.7 million (2011: $321.1 million) combined with strong growth in operating EBITDA which grew 13.7% to $93.0 million (2011: $81.8 million). The outcome is a tribute to all our staff and the continued focus on the pillars of growth. The result highlights include: • A positive contribution of $13.0 million EBITDA from the Bledisloe business which saw $3.0 million in synergy benefits delivered; • Normal annual price increases against a backdrop of subdued growth in the number of deaths; • An improvement in the margin leverage of comparable businesses despite continued strong investments in marketing, digital business initiatives and management capabilities; • Continued strong growth in the sale of new prepaid contracts; Andrew Smith CHIEF EXECUTIVE OFFICER 6 INVOCARE ANNUAL REPORT 2012 The Gee & Hickton location in Lower Hutt, New Zealand. • A significant improvement in prepaid contract funds returns which saw the returns in line with the impact of price increases on the future liabilities; • We continue our community support programmes with many of our staff contributing personal time to community activities; • Continued strong brand awareness with all key brands maintaining or increasing unprompted brand recall; and • The full year dividends total 34 cents per share representing an increase of 14.3% and an 88% payout of operating earnings after tax (2011: 89%). Acquisitions The integration of the Bledisloe acquisition was completed during 2012 with a total annualised synergy benefit of $3.5 million. $3.0 million of these benefits were achieved during 2012. The Bledisloe results will no longer be separately reported as the Bledisloe brands have been fully integrated into the InvoCare structure. In 2012 Bledisloe’s sales revenue was $69.3 million and estimated annualised EBITDA is $13.5 million inclusive of total synergy benefits. The entry into the New Zealand market via the Bledisloe acquisition has also allowed the launch of InvoCare’s Simplicity and White Lady brands in New Zealand. Late in 2012 InvoCare entered the Geelong market for the first time with the acquisition of Tuckers Funeral & Bereavement Services. Tuckers, a household name in Geelong, has been in continuous operation since 1893 and operates from four locations in the Geelong region. Early in 2013 the Resthaven funeral business in Auckland New Zealand was acquired. Resthaven, which was established in 2000, operates from two locations in Auckland where InvoCare is currently under-represented. It gives me great pleasure to welcome the staff of these businesses to the InvoCare fold. A tranquil garden at Toowoomba Garden of Remembrance, Toowoomba, Queensland. Realising the possibilities of our service culture In Australia funeral sales were up 6.3% to $226.8 million on a growth of 1.5% in case volumes. This is a pleasing outcome given the estimated number of deaths has only increased by 0.9% in InvoCare’s Australian markets. As a consequence market share increases have been achieved. Case averages were impacted by both geographic and brand mix. The number of deaths in Victoria, which has a higher case average, were lower than anticipated compared to Queensland which has a lower case average. The continued success of Simplicity has also impacted brand mix. Sales revenue in New Zealand was $30.2 million with operating EBITDA of $6.2 million. Market share has grown in the key Auckland market and is improving in Christchurch where the key Rhind’s location was impacted by earthquake damage late in 2011. In constant dollars the Singapore revenue grew by 11.3% despite little change in case volumes. Singapore has expanded its product offering to include funeral accessories in addition to the core services. These additional product areas have a lower margin but provide a far more seamless service to its client families. Cemeteries and crematoria comparable sales revenues rose by 4.5% with increased volumes due to an increase in the number of deaths in InvoCare’s markets. Memorial sales, most of which are initially deferred, rose in the year with major contracts (greater than $15,000) up 6% on the prior period. 7 INVOCARE ANNUAL REPORT 2012 Chief Executive Officer’s review continued Bruce Knight, Operations Manager with the parks and garden staff from Lake Macquarie Memorial Park this year’s winner of the Parks and Gardens Award. Pleasingly, customer surveys across Australia showed that more than 97% of families would recommend InvoCare’s services and most considered they received excellent value for money. InvoCare is committed to introducing new and innovative service improvements to enhance the customer experience. During 2012 we continued to roll out tablets and smart phones to client facing teams to enable them to more efficiently support families in their time of need. We launched the online funeralorganiser.com. au and mymemorial.com.au. In addition, the investment in www.heavenaddress.com was increased to enable it to continue to develop its online memorial presence. Realising the future InvoCare continues to invest to improve the quality of services provided with more than $18 million in capital expenditure in 2012 including more than $6 million spent on building refurbishments and upgrades. The $7 million catering facility at Northern Suburbs Memorial Gardens and Crematorium in Sydney was officially opened by Her Excellency Professor Marie Bashir AC CVO Governor of New South Wales. This facility enables families to continue the celebration of a life against the tranquil backdrop of the Lane Cove National Park. In New Zealand key locations at Papakura and Browns Bay underwent substantial renovation and upgrading. Building works have finally begun at Rhinds in Christchurch which suffered material damage in the multiple earthquakes that have struck the region over the last two and half years. The development of a digital strategy aimed at interfacing with client families, improving InvoCare’s social media presence, offering new digital client solutions and business process improvement was developed during the year. This was led by Andi Luiskandl who joined the Group in March 2012 as Chief Information Officer. Engagement with the community InvoCare’s ongoing support and engagement with the community continued in 2012. One highlight was the support for the Australian pilgrimage of a relic of St Francis Xavier between September and December 2012. Funeral staff in many locations assisted with logistical support for the tour around Australia. Many other organisations around Australia from sporting clubs to community organisations were again supported. The Lions Recycle for Sight programme continued to be a success along with the support we provided to the likes of Legacy, Westpac Rescue Helicopter Service, Jeans for Genes and Daffodil Day. Many of our staff also donated time to local groups to provide grief counselling and other advice on dealing with other debilitating conditions such as Alzheimer’s. Commitment to our people Our training programmes continued during 2012 via both internally delivered professional development and through the support given to our people undertaking external training programmes. Congratulations go to Sue Eustace from Sibuns Funeral Directors and Advisors in Auckland who was awarded the Top Overall Student and Top Funeral Directing Student at the graduation ceremony of the Funeral Services Training Trust of New Zealand. 8 The relic of St Francis Xavier on display at St Mary’s North Sydney during the pilgrimage to Australia in 2012. Our staff also continue to be shareholders with more than 25% of InvoCare employees participating in the Company’s Deferred Employee Share Plan, Exempt Employee Share Plan or through direct ownership of shares in the Company. Looking ahead InvoCare’s strong brands, commitment to service excellence and its focus on the communities in which we operate position the Group for sustainable growth into the future. Our underlying strategic focus on the pillars of growth ensures that, as in 2012, InvoCare will for the foreseeable future, continue to realise the possibilities available within InvoCare’s growing sphere of operation. In closing, I would like to thank the commitment demonstrated by all InvoCare employees to the communities in which they operate and their continued desire to deliver the highest standard of services to our client families. INVOCARE ANNUAL REPORT 2012 A tranquil memorial garden at Lake Macquarie Memorial Park at Ryhope, New South Wales. 9 INVOCARE ANNUAL REPORT 2012 A tradition of service delivered by our people InvoCare is committed to developing its multi-cultural workforce and supporting the Federal Government’s Mature Aged Workers Initiative. Training remains a major priority to ensure the highest level of care is delivered to families at their time of need and our people are conversant with the new and emerging technologies and positioned to take the next steps in their career as opportunities arise. During 2012 more than 6,500 hours of classroom training was provided in addition to the on-the-job coaching and training that is constantly provided to support all our staff. Patsy Healy and her team at WN Bull Funerals celebrated 120 years of continuous operation during 2012. WN Bull has always been at the forefront of industry development and in 1914 was the first funeral company to use a motorised hearse. In 1940 it filed a patent application for a device for the hermetic sealing of coffins. Over the years WN Bull has conducted services for many prominent Australians including Hon Frank Walker, a former NSW Attorney General, who died in June 2012. We attempt to honour the achievements of all our staff but this year it is with great pleasure we announce that Warwick Hansen, who has 45 years in the industry, was awarded an Order of Australia Medal for services to the community and the funeral industry. Warwick started his career in the industry when, after a short stint with a bank he joined the family business. He has served as a director of the Australian Cemeteries & Crematoria Association and is currently President of the NSW Division of the Australian Funeral Directors Association. 10 Staff at Lake Macquarie Memorial Park, Ryhope, NSW at the opening of the Natural Memorial Reserve. INVOCARE ANNUAL REPORT 2012 Patsy Healy Patsy Healy with a WN Bull hearse at Waverley Cemetery, New South Wales. The team at Tuckers Geelong outside the main West Geelong location shortly after InvoCare’s acquisition of the business. The chapel at WN Bull Funerals, Newtown which has been providing services to the Sydney community since 1892. 11 INVOCARE ANNUAL REPORT 2012 Key strategies InvoCare successfully integrated the sizable Bledisloe business since acquisition in June 2011. The success of the business model in delivering sustained growth has again been confirmed in 2012. Demographics The gradual increase in the number of deaths in InvoCare’s key markets continues to create possibilities for the business. With a change in attitudes to funerals with more people wanting an involved and celebratory experience, InvoCare key brands such as White Lady Funerals will continue to grow. Brand Awareness InvoCare aims to sustain and improve brand awareness by running integrated TV, radio, press and billboard campaigns. White Lady Funerals once again achieved aided brand awareness scores above 90% in InvoCare’s research. All other brands researched, including Guardian Funerals, Simplicity, Le Pine and Metropolitan, achieved brand awareness scores equal to or better than prior years. The many hours our people devote to community and social organisations is a critical component of building the brand awareness. New or replacement sites are selected in high visibility locations as a cost effective means to promote brand awareness. New Locations and Acquisitions Building on InvoCare’s robust business model we continue to seek new locations and acquisitions within the footprint of established shared service functions. The model is based on personal service supported by highly efficient back end processes to ensure client families receive the most professional service possible. As InvoCare has continued to grow, more geographically dispersed locations have been acquired or examined. For example, in 2012 InvoCare entered the Geelong market for the first time with the acquisition of Tuckers. A mobile arranger trial has taken place with Simplicity Funerals on the Sunshine Coast, where the arranger visits families in a specially designed vehicle rather than being based in a physical location. People The professionalism of our staff is constantly being enhanced by investment in training and other learning opportunities presented by InvoCare’s learning and development team. During 2012 a key focus of training was on developing the skills of InvoCare’s personnel to embrace the increasing use of digital technologies. Additionally the core operational programmes continued in 2012, including various induction, customer service, staff management and occupational health and safety modules. Unlike most of our competitors, who are often family owned, we are able to offer our staff career advancement in the industry, as well as an opportunity to own shares in the Company. Facilities Our focus is to continue to invest in enhancing and improving the facilities available. We aim to ensure that the ambience of our locations continues to meet client expectations and that the most modern facilities, such as audio visual systems and web-casting, are available for those who choose them. We also continue to expend substantial sums maintaining our many heritage listed assets, especially in our locations where many generations of individual families are memorialised. Future Income Streams The number and value of prepaid contracts continues to grow, providing our clients with the peace of knowing that when the time comes their families are protected from unexpected burdens. We work with our investment managers to ensure that investment strategies will continue to ensure good returns are delivered from our preneed contracts. InvoCare also continues to expand the range of memorialisation options available to our client families ensuring valuable future revenue streams as these products are delivered. Capital Management InvoCare’s capital management initiatives are designed to ensure that an appropriate mix of debt and equity is maintained to maximise returns to shareholders while ensuring adequate funds are available to support growth and expansion. The Company is in a healthy financial position and its strong operating cash flows provide necessary funds to pay at least 75% of operating earnings after tax to shareholders as dividends, meet debt servicing obligations, and invest in property, plant and equipment, as well as fund smaller, new business acquisitions. The Company’s Dividend Reinvestment Plan has been supported by up to 25% of shareholders. In the event opportunities become limited for investing in the growth of the business, the Company will consider making alternative returns to shareholders. 12 INVOCARE ANNUAL REPORT 2012 Management team The management team at InvoCare has more than 70 years combined relevant industry experience and many team members have held senior executive roles in other industries. Each operational area is supported by a network of general and regional managers and other specialist staff. All operations are supported by specialist back office management in the areas of Marketing & Communications, Prepaid Funeral Administration, Human Resources, Digital Business, Property & Facilities, Finance, Internal Audit, and Risk Management. Andrew Smith CHIEF EXECUTIVE OFFICER Industry experience 7 years Phillip Friery CHIEF FINANCIAL OFFICER AND COMPANY SECRETARY Industry experience 18 years Greg Bisset CHIEF OPERATING OFFICER, AUSTRALIA Industry experience 5 years Wee Leng Goh CHIEF EXECUTIVE OFFICER SINGAPORE Industry experience 5 years Graeme Rhind CHIEF OPERATING OFFICER, NEW ZEALAND Industry experience 36 years Andi Luiskandl CHIEF INFORMATION OFFICER Industry experience 1 year 13 INVOCARE ANNUAL REPORT 2012 Community, people and environment InvoCare is committed to the communities it serves and actively supports its people, both in their professional development and also with the myriad of community activities undertaken. Community InvoCare and its people are involved in many community events and organisations both large and small. During 2012 a major undertaking was the support of the pilgrimage of a relic of St Francis Xavier, who was a Jesuit missionary during the 1500s. WN Bull Funerals was the primary supporter of this pilgrimage but funeral homes in all Australian mainland states provided logistical support for this event which ran from September to December 2012. As in prior years Simplicity supported the Lions Recycle for Sight programme which collects, repairs and collates discarded glasses and provides them to disadvantaged groups around Asia and Africa. Another project which is much more low key is the sponsorship of the Mount Carmel Waterloo Primary School Breakfast Club which came about from a casual conversation between a staff member at Simplicity Mascot and a mother of children at the school. This project has now expanded to include many other local businesses. The Biggest Morning Tea, which provides funds for cancer research, was supported by many locations but perhaps the biggest supporter was Christian Funerals in Perth. The staff turned the chapel into a café for the occasion. Many other organisations benefit from the generous support of InvoCare’s people with Legacy, the Mary MacKillop Foundation and many others were supported in 2012. Once again several senior staff participated in the St Vincent de Paul CEO Sleep Out. People Within the InvoCare group, recruitment and development of our people remains a key ingredient to our business success. We have realised the possibility for individual career development, cross training of skills and promotion internally to enhance the performance of our business. Our focus on learning and development continues, particularly in providing our employees with support and skills to work nimbly and with a high level of comfort with technology. This utilisation of technology will continue to set us apart, both as a market leader and an employer of choice. We continue to be actively engaged with the Federal Government’s Mature Age Workers Initiative as a Corporate Champion, which involves looking at how we retain the skills of our employees transitioning to retirement, reshaping roles, and adjusting for flexible working patterns. We must continue to match the needs of our client families with the right level of maturity and life experience of our employees. This is not just part of a social or employee benefit initiative for InvoCare; it makes sound and practical business sense. We developed internally an extensive training programme to equip our managers to deal proactively with workplace issues. This programme is being progressively rolled out to every manager with people responsibility in Australia and New Zealand. In Queensland, a group of high performing employees participated in our inaugural Management Development Programme, designed to provide management skills to potential managers of the future. This programme has also been implemented in Victoria and is key to underpinning the potential of InvoCare’s growth strategy with strong managers who can lead our business, in this age of increasing complexity. We also took advantage of financial support from the government to assist in the provision of management skills training, specifically in New South Wales and Western Australia. We have promoted internally a number of Location Managers across the business, expanded the roles of current Regional and Area Managers, and moved Regional Managers across brands to expand their experience in the business. We have also focused on identifying the potential of people to not only be promoted internally, but to move cross functionally within the organisation. Employees who have moved include a Regional Manager in Funerals moved into a General Manager role in NSW Cemeteries and Crematoria, a Graphic Designer from LifeArt to a centralised Marketing role and a Regional Manager from NSW Funerals into a key role in Human Resources. These opportunities will increase as the size of the InvoCare business grows. 14 INVOCARE ANNUAL REPORT 2012 1 1. The dedication stone of the Natural Memorial Reserve at Lake Macquarie Memorial Park at Ryhope, NSW. 2. Buddist monks at the Chung Yeung celebrated at the Lung Po Shan Chinese Memorial Garden at Minchinbury, NSW. 3. Wicker coffins on display at the launch of Green Endings. 2 3 Environment Every year InvoCare parks and gardens staff vie to win the coveted Parks and Gardens Award which acknowledges the best parks and gardens in InvoCare’s network of cemeteries and crematoria. InvoCare maintains over 250 hectares of parks and gardens which provide a natural carbon sink. In 2012 Oakwood Funerals in partnership with the Metropolitan Cemeteries Board launched Green Endings which aims to provide the first environmentally friendly funeral service in Australia. It is often not recognised that, depending on the choices made, embalming fluids, paints and resins used in preparing the body and the coffin may not have the best environmental outcomes. Green Endings supplies LifeArt coffins, wicker coffins and even wool coffins for the service. Any residual carbon emissions are offset by tree plantings performed by the not-for-profit Carbon Neutral. Lake Macquarie Memorial Park opened a natural memorial reserve dedicated to Mike Leyland during the year. To use this reserve families must make environmentally responsible choices right through the funeral, burial or cremation process and only natural materials worked by local suppliers can be used for memorialisation. The peaceful outlook from the Natural Memorial Reserve at Lake Macquarie Memorial Park at Ryhope, New South Wales. 15 INVOCARE ANNUAL REPORT 2012 Ensuring the highest level of service Each year InvoCare spends considerable sums developing new facilities and renovating existing facilities to ensure the highest level of service is provided to client families. We aim to ensure that our many heritage listed buildings are maintained to the highest standards but are also in the position to provide for the current needs of client families. In the case of heritage listed buildings it can prove especially challenging to incorporate new technologies in a manner sympathic to the original design of the building. In 2012 a video wall was installed in the North Chapel of Northern Suburbs Memorial Gardens and Crematorium in Sydney which has received many compliments from client families. The new catering lounge at Northern Suburbs Memorial Gardens and Crematorium was opened by Her Excellency Professor Marie Bashir AC CVO Governor of New South Wales. This facility enables families to continue the celebration of a life against the tranquil backdrop of the Lane Cove National Park. In both Australia and New Zealand new locations were opened to improve the availability of InvoCare’s services to client families. These locations are often in high visibility positions to aid brand awareness. In New Zealand a process of upgrading a number of key locations has begun. Fountain’s Funeral Services in Papakura, which is in the southern part of Auckland, and Forrest Funeral Services in Browns Bay in northern part of Auckland were upgraded during 2012. This continues InvoCare’s focus on the key New Zealand market of Auckland. Fountain’s Funeral Services in Papakura, Auckland, New Zealand which was refurbished in 2012. 16 INVOCARE ANNUAL REPORT 2012 The serene surroundings of the Northern Suburbs Memorial Gardens and Crematorium at Ryde in NSW provide quiet space to reflect on the life of a loved one. The new catering lounge at Northern Suburbs Memorial Gardens and Crematorium, Sydney which was built at a cost of over $7 million. The Guardian Funeral home on the corner of the busy Pacific Highway and Mowbray Road, Chatswood NSW opened in 2012. 17 INVOCARE ANNUAL REPORT 2012 Digital business During 2012 InvoCare developed and commenced implementing a customer-centric digital business strategy. InvoCare’s Digital Business vision is grounded in the emergence of new digital business models that are shaping the deeper structures of the funeral services industry. As the market leader, InvoCare is determined to be pro-active digitising its business strategically, aimed at driving higher levels of business excellence, customer service and shareholder value. To be able to achieve these outcomes our digital business is being constructed by applying, unifying and integrating the following five capabilities with our traditional way of doing business: Embracing digital solutions to better serve our clients Websites and Search Enabling our customers to find and learn more about us Social Media Enabling InvoCare to amplify its innovation, vocation and care Electronic Business Enabling our customers to do business with us electronically Customer Relationship Management (CRM) Enabling deeper relationships with our customers before, during and after the funeral service Enterprise Resource Planning (ERP) Enabling our business to be more efficient and responsive to meet our customers’ needs My Memorial Allowing our clients to review and select memorials and memorial parks, and receive advice and quotations provided by our Cemeteries & Crematoria Team www.mymemorial.com.au Funeral Organiser Enabling our clients to review and select funeral packages, or plan a funeral step-by-step, with advice and quotations provided by our Funeral Directors www.funeralorganiser.com.au Epicor InvoCare is optimising key business processes by enhancing its ERP platform Facebook and Twitter During 2012 InvoCare launched a number of new social media channels including Facebook pages for Simplicity Funerals, White Lady Funerals and Metropolitan Funerals HeavenAddress Families can now celebrate a loved one’s life through online memorials using HeavenAddress.com Salesforce InvoCare employees are championing the use of iPads to better serve our clients through digital customer relationship management systems 18 INVOCARE ANNUAL REPORT 2012 Group financial and operating review The successful integration of the Bledisloe business combined with continued strong performance from the core business produced another sound financial result. Financial Highlights Full year, first half and second half financial results are summarised in the following table. First Half Second Half Full Year 2012 Actual $m 2011 Actual $m Change $m Change % 2012 Actual $m 2011 Actual $m Change $m Change % 2012 Actual $m 2011 Actual $m Change $m Change % Total sales to external customers 174.8 140.5 34.4 24.5% 193.8 180.7 13.2 7.3% 368.7 321.1 47.5 14.9% Other revenue 3.4 2.8 0.6 21.6% 3.5 3.6 Operating expenses(i) (135.5) (108.1) (27.5) 25.4% (146.9) (137.6) (0.1) (9.3) (3.5%) 6.9 6.4 0.5 7.3% 6.8% (282.5) (245.7) (36.8) 15.0% Operating EBITDA(i) 42.6 35.1 7.5 21.3% 50.4 46.7 3.7 8.0% 93.0 81.8 11.2 13.7% Operating EBITDA Margin(i) 24.4% 25.0% (0.6%) 26.0% 25.8% 0.2% 25.2% 25.5% (0.3%) Depreciation and amortisation (8.0) (5.9) (2.0) 34.3% (8.4) (7.8) (0.6) 7.4% (16.4) (13.7) (2.6) 19.0% Finance costs Interest income (8.1) (6.3) (1.8) 28.0% (8.2) (8.8) 0.6 (6.8%) (16.3) (15.1) (1.2) 7.8% 0.4 0.4 0.1 16.5% 0.3 0.3 (0.0) (3.7%) 0.8 0.7 0.0 7.0% Business acquisition costs 0.0 (1.0) 1.0 (102.0%) (0.8) (0.3) (0.4) 131.8% (0.7) (1.3) 0.6 (44.2%) Operating earnings before tax(i) 27.0 22.3 4.7 21.3% 33.4 30.1 3.3 11.1% 60.5 52.4 8.1 15.4% Income tax expense (8.1) (6.9) (1.2) 17.0% (10.0) (9.1) (0.9) 9.3% (18.0) (16.0) (2.0) 12.5% Effective tax rate 29.8% 30.9% (1.1%) 29.9% 30.4% (0.5%) 29.7% 30.5% (0.8%) Operating earnings after tax(i) 19.0 15.4 3.6 23.2% 23.4 21.0 2.5 11.8% 42.5 36.4 6.1 16.7% Operating earnings per share (cents)(i) Net gain/(loss) on undelivered prepaid contracts after tax(i) 17.3¢ 15.0¢ 2.3¢ 15.3% 21.4¢ 19.5¢ 1.9¢ 9.8% 38.8¢ 34.5¢ 4.3¢ 12.5% (0.4) (0.9) 0.5 0.4 (8.5) 9.0 (0.0) (9.4) 9.4 Asset sale gains after tax(i) 1.8 0.0 1.8 0.4 0.2 Non-controlling interest (0.1) (0.1) (0.0) (0.0) (0.1) 0.2 0.0 2.1 0.1 2.0 (0.1) (0.1) – Net profit after tax attributable to InvoCare shareholders 20.3 14.5 5.9 40.4% 24.2 12.5 11.6 92.6% 44.5 27.0 17.5 64.7% Earnings per share (cents) 18.6¢ 14.1¢ 4.5¢ 31.9% 22.0¢ 11.5¢ 10.5¢ 91.3% 40.6¢ 25.6¢ 15.0¢ 58.5% Note: The data in this table has been calculated in thousands and presented in millions and as a consequence some totals, movements and percentages cannot be computed from the table as presented. (i) Operating earnings after tax, operating earnings per share and operating EBITDA are non-IFRS financial information. 19 INVOCARE ANNUAL REPORT 2012 Group financial and operating review continued Summary of financial performance Reported profit after tax and after non-controlling interests, which includes asset sale gains and non-cash movements in undelivered prepaid contract funds under management and associated liabilities, was $44.5 million compared to $27.0 million in the corresponding 2011 year. The increase was mainly attributed to a significant improvement in the investment returns from prepaid contract funds which increased to $17.6 million from $2.1 million in 2011. Operating earnings after tax increased by 16.7% or $6.1 million to $42.5 million (2011: $36.4 million). Operating earnings per share increased 12.5% to 38.8 cents per share which was lower than the percentage earnings increase due to shares being issued as part consideration for the Bledisloe acquisition in June 2011. Bledisloe’s contribution to this profit was $3.6 million or 3.3 cents per share (2011: $0.1 million or 0.1 cents per share). A final, fully franked dividend of 19.0 cents per share was paid on 5 April 2013. Total dividends for the year were 34.0 cents, being 4.2 cents or 14.3% higher than 2011, comparable to the 16.7% growth in operating earnings after tax. The full year dividend payout ratio of operating earnings after tax was 88% (2011: 89%). Sales revenue increased 14.9% to $368.7 million, including full year contribution of $69.3 million from Bledisloe (part year 2011: $38.1 million) and $0.4 million from the Tuckers business which was acquired on 10 December 2012. Excluding the acquisitions, comparable business sales grew by 5.6% to $298.9 million. This growth was driven by market share improvements, increased numbers of deaths, annual price changes and higher funeral disbursement revenues. Actual and projected fiscal and calendar year deaths – Australia Sales margins were slightly down on the previous year. This was due to a combination of lower margin acquisitions, increased investment in marketing to drive brand awareness and the annualised impact of new roles created to support the larger business and deliver growth objectives. Operating cash flows increased by $9.2 million to $53.2 million and operating EBITDA to cash conversion improved 3% to 95%, slightly below the desired trend of 98% – 100%. Capital expenditure was $18.4 million, compared to $16.7 million in the previous year, with $6.1 million (2011: $7.2 million) allocated to property refurbishments or upgrades and $6.0 million (2011: $5.0 million) to motor vehicles. Borrowings increased by $7.1 million to part fund payments of $9.3 million for business acquisitions. Dividends paid to shareholders amounted to $34.4 million during the year, $9.0 million higher than 2011. A key pillar of growth for the Group which operates in the funeral industry is the population’s increasing age and number of deaths. The following graph of Australian Bureau of Statistics (“ABS”) actual, estimated and longer term forecasts suggests, consistent with InvoCare’s experience in its markets, that the number of deaths appears to be reverting to the longer term trend after a short period of above average numbers. InvoCare performs approximately 26% of the nation’s funerals, or approximately 36% of the funerals in the Australian markets in which it operates. 165 160 155 150 145 140 135 130 125 120 115 ) 0 0 0 ’ ( r e b m u N 20 2 9 9 1 3 9 9 1 4 9 9 1 5 9 9 1 6 9 9 1 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 2 0 0 2 3 0 0 2 4 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 9 1 0 2 0 2 0 2 Actual national rolling annual deaths per ABS Estimated national rolling annual deaths per ABS ABS projected deaths 2006 Series B Trend plus/minus 3% Actual trend InvoCare estimate Years INVOCARE ANNUAL REPORT 2012 The following graph of data sourced from the relevant national statistical agency shows the actual and projected numbers of deaths in New Zealand. InvoCare performs approximately 17% of the nation’s funerals. Deaths by year – New Zealand Similar to Australia and New Zealand, Singapore is experiencing an increase in the number of deaths. InvoCare performs approximately 10% of funerals in that country. ) 0 0 0 ’ ( r e b m u N 38 36 34 32 30 28 26 24 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 2 0 0 2 3 0 0 2 4 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 9 1 0 2 0 2 0 2 1 2 0 2 2 2 0 2 3 2 0 2 4 2 0 2 5 2 0 2 6 2 0 2 Actual Deaths 2012 Forecast of Deaths – median probability Actual trend Source: Statistics New Zealand Years to 31 December Capital management At 31 December 2012, gross borrowings from the Group’s total $255 million bank debt facilities were $224 million, compared to $225 million at 30 June 2012 and $215 million at 31 December 2011. The drawings comprised AUD182 million, SGD27 million and NZD27 million. The foreign currency drawings naturally hedge InvoCare’s investments in its foreign Singapore and New Zealand markets. Financial covenant ratios on these facilities were comfortably met at 31 December 2012. There has been no change to InvoCare’s capital management plans. Sufficient funds are expected to be available from debt facilities and free cash flows for capital expenditure and smaller “bolt on” acquisitions. If a more substantial opportunity arises, alternative funding sources, such as an equity raising, would be considered. It remains the policy of the Board to distribute at least 75% of operating earnings after tax as dividends, as well as increase the quantum of those dividends year on year. Shareholder value An investment of $1 in InvoCare at 31 December 2003, just after ASX listing, would have increased in value, excluding dividends, by more than the S&P/ASX 200 index as shown in the graph below. Conclusion InvoCare has had yet another successful year with the completion of the integration of Bledisloe, improvement in returns on funds under management and continued growth in the core business through the pillars of higher number of deaths, selling price increase, prepaid contracts, growing share in existing markets, business acquisitions and opening new locations. Return on $1 – InvoCare Limited against S&P/ASX 200 Index (XJO) $5.00 $4.00 1 $ n o n r u t e R $3.00 $2.00 $1.00 $0.00 3 0 c e D 4 0 r p A 4 0 g u A 4 0 c e D 5 0 r p A 5 0 g u A 5 0 c e D 6 0 r p A 6 0 g u A 6 0 c e D 7 0 r p A 7 0 g u A 7 0 c e D 8 0 r p A 8 0 g u A 8 0 c e D 9 0 r p A 9 0 g u A 9 0 c e D 0 1 r p A 0 1 g u A 0 1 c e D 1 1 r p A 1 1 g u A 1 1 c e D 2 1 r p A 2 1 g u A 2 1 c e D InvoCare Limited Share Price S&P/ASX 200 (XJO) 21 INVOCARE ANNUAL REPORT 2012 Financial Report InvoCare Limited and Controlled Entities Financial Report for the financial year ended 31 December 2012 The financial report covers the consolidated financial statements for the consolidated entity consisting of InvoCare Limited and its subsidiaries. The financial report is presented in the Australian currency. InvoCare Limited (ABN 42 096 437 393) is a company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Level 4, 153 Walker Street, North Sydney NSW 2060 A description of the nature of the consolidated entity’s operations and its principal activities is included in the Directors’ Report. The financial report was authorised for issue by the directors on 19 February 2013. The Company has power to amend and reissue the financial report. Through the use of the Internet, InvoCare ensures corporate reporting is timely, complete, and available globally at minimum cost to the Company. All press releases, financial reports and other information are available on the Company’s website: www. invocare.com.au. 22 INVOCARE ANNUAL REPORT 2012 Contents Directors’ Report Corporate Governance Statement Remuneration Report Auditor’s Independence Declaration Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Financial Statements Directors’ Declaration Independent Auditor’s Report Shareholder Information InvoCare Locations Glossary Personal details guide Corporate Information 24 30 35 48 49 50 51 52 53 54 98 99 101 102 104 IBC Notes to the Financial Statements Note 1 Summary of Significant Accounting Policies Note 2 Financial Risk Management Note 3 Segment Information Note 4 Revenue from Continuing Operations Note 5 Expenses Note 6 Income Tax Note 7 Key Management Personnel Disclosures Note 8 Share-based Payments Note 9 Remuneration of Auditors Note 10 Dividends Note 11 Earnings per Share Note 12 Cash and Cash Equivalents Note 13 Trade and Other Receivables Note 14 Inventories Note 15 Prepaid Contracts Note 16 Subsidiaries Note 17 Equity Accounted Investments Note 18 Property, Plant and Equipment Note 19 Intangible Assets Note 20 Derivative Financial Instruments Note 21 Trade and Other Payables Note 22 Borrowings Note 23 Provisions for Employee Benefits Note 24 Current Liabilities expected to be Settled within 12 Months Note 25 Contributed Equity Note 26 Reserves and Retained Profits Note 27 Non-controlling Interests Note 28 Capital and Leasing Commitments Note 29 Business Combinations Note 30 Contingent Liabilities and Contingent Assets Note 31 Cash Flow Information Note 32 Deed of Cross Guarantee Note 33 Events after the Balance Sheet Date Note 34 Related Party Transactions Note 35 Parent Entity Financial Information Note 36 Economic Dependence Note 37 Critical Accounting Estimates and Judgements Note 38 Company Details Note 39 Authorisation of the Financial Report 54 60 67 68 69 69 71 72 74 75 75 76 76 77 77 79 80 81 83 84 84 84 85 85 85 87 88 88 89 91 91 92 94 94 95 96 96 97 97 23 INVOCARE ANNUAL REPORT 2012 Directors’ Report The directors submit their report on the consolidated entity consisting of InvoCare Limited (the “Company”) and the entities it controlled for the year ended 31 December 2012. InvoCare Limited and its controlled entities together are referred to as “InvoCare”, the “Group” or the “consolidated entity” in this Directors’ Report. Principal activities The Group is the leading provider of services in the funeral industry in Australia, New Zealand and Singapore. Other than disclosed in this report there were no significant changes in the nature of these activities during the year. Directors The following persons were directors of InvoCare Limited during the whole of the financial year and until the date of this report: Significant changes in the state of affairs There have been no significant changes in the state of the Group’s affairs during the financial year. Ian Ferrier Andrew Smith Christine Clifton Roger Penman Benjamin Chow Richard Fisher Aliza Knox Mr Richard Davis was appointed as a director on 21 February 2012 and continues in office at the date of this report. Operating results The operating earnings after tax for the year was $42,479,000 (2011: $36,406,000) as reconciled on page 25. The consolidated after tax profit of the Group attributable to shareholders was $44,479,000 (2011: $27,012,000). Dividends The directors have recommended a final, fully franked dividend of 19.0 cents per share payable on 5 April 2013. Total full year dividends are 34.0 cents, being 4.25 cents or 14.3% higher than 2011 which is comparable to the 16.7% growth in operating earnings after tax per share. The full year dividend payout ratio is 88% (2011: 89%) of operating earnings after tax. Dividends to ordinary shareholders of the Company have been paid or declared as follows: Interim ordinary dividend of 15.0 cents (2011: 13.5 cents) per fully paid share paid on 5 October 2012 Final ordinary dividend of 19.0 cents (2011: 16.25 cents) per fully paid share has been recommended by directors on 19 February 2013 to be paid on 5 April 2013 Total ordinary dividends of 34.0 cents (2011: 29.75 cents) All dividends are fully franked at the company tax rate of 30%. 2012 $’000 2011 $’000 16,505 14,568 20,906 37,411 17,880 32,448 The Dividend Reinvestment Plan (“DRP”) was available for the 2012 interim dividend and $12,587,969 (2011: $14,128,009) was paid in cash and $3,916,575 (2011: $3,335,371) through the issue of 466,077 (2011: 484,715) shares at $8.40 (2011: $6.88) per share via the DRP. The shortfall in the DRP take-up was not underwritten in 2012 and shares were not issued at a discount. In 2011 the DRP was underwritten and 1,632,686 shares issued at a 2% discount. The DRP will apply to the final 2012 dividend which is not being underwritten and no discount to the market price will apply. 24 INVOCARE ANNUAL REPORT 2012 Review of operations Operating EBITDA and operating earnings are financial measures which are not prescribed by Australian equivalents to International Financial Reporting Standards (“AIFRS”) and represent the earnings under AIFRS adjusted for specific non-cash items and significant items. The following table summarises the key reconciling items between net profit after tax attributable to InvoCare shareholders and operating EBITDA and operating earnings before and after tax. The operating EBITDA and operating earnings before and after tax information included in the table below has not been subject to any specific audit or review procedures by our auditor but has been extracted from the accompanying financial report. Results highlights: Total sales to external customers Other revenue Operating expenses(i) Operating EBITDA(i) Operating Margin Depreciation, amortisation and impairment Finance costs(ii) Interest income Business acquisition costs Operating earnings before tax(i) Income tax expense(i) Effective tax rate Operating earnings after tax(i) Operating earnings after tax per share Net gain/(loss) on undelivered prepaid contracts after tax(i),(iii) Asset sale gains after tax(i) Non-controlling interest Net profit after tax attributable to InvoCare shareholders Basic earnings per share Dividends Interim ordinary dividend per share Final ordinary dividend per share Total ordinary dividend per share (i) Non-IFRS financial information. 2012 $’000 2011 $’000 Change $’000 368,652 6,852 (282,478) 321,113 6,383 (245,694) 93,026 25.2% (16,360) (16,262) 780 (731) 60,453 (17,974) 29.7% 81,802 25.5% (13,746) (15,092) 729 (1,309) 52,383 (15,977) 30.5% 47,539 469 (36,784) 11,224 (2,614) (1,170) 51 578 8,070 (1,997) 42,479 38.8 cents (13) 2,116 (103) 36,406 34.5 cents (9,434) 142 (103) 6,073 4.3 cents 9,421 1,974 – 44,479 40.6 cents 27,012 25.6 cents 17,467 15.0 cents 15.00 cents 19.00 cents 34.00 cents 13.50 cents 16.25 cents 29.75 cents 1.50 cents 2.75 cents 4.25 cents % 14.9% 7.3% 15.0% 13.7% (0.3%) 19.0% 7.8% 7.0% (44.2%) 15.4% 12.5% (0.8%) 16.7% 12.5% (99.9%) – 64.7% 58.5% 11.1% 16.9% 14.3% (ii) Finance costs exclude non-cash fair value movements on financial instruments (e.g. interest rate swaps). (iii) The net loss on undelivered prepaid contracts is explained in Note 1(n): Accounting Policies. 25 INVOCARE ANNUAL REPORT 2012 Directors’ Report continued Overview 2012 was a year of consolidation and growth for InvoCare as the integration of the Bledisloe business across Australia and New Zealand was finalised. In addition InvoCare expanded into regional Victoria with the acquisition of the Tuckers Funeral & Bereavement Services (Tuckers) business in December 2012. Tuckers brings over 100 years of tradition in servicing the Geelong regional market and positions InvoCare as market leader in a new market segment. Reported profit after tax and after non-controlling interests, which includes net gains and losses from undelivered prepaid contracts and asset sales, was $44.5 million compared to $27.0 million in the corresponding 2011 year. Operating earnings after tax and before non-controlling interests1 increased by 16.7% or $6.1 million to $42.5 million (2011: $36.4 million). Operating earnings after tax per share increased 12.5% to 38.8 cents per share with the dilution effect due to the Bledisloe acquisition in 2011 being partly funded by the issue of ordinary shares in InvoCare. Sales revenue increased 14.8% to $368.7 million, including a full year contribution of $69.3 million from Bledisloe (2011: $38.0 million) which was acquired on 15 June 2011. The Tuckers business which was acquired on 10 December 2012 contributed $0.4 million of sales revenue. Excluding the acquisitions, comparable business sales grew by 5.6% to $298.9 million. This growth was driven by market share improvements, increased numbers of deaths, annual price changes and higher funeral disbursement revenues. Operating EBITDA2 was up 13.7% to $93.0 million, including an estimated full year contribution of $13.0 million from Bledisloe and part year contribution of $0.1 million from Tuckers. Excluding these acquisitions, comparable business EBITDA grew by 6.2% to $80.0 million. Sales margins in comparable businesses grew despite increased investment in marketing to drive brand awareness and the annualised impact of new roles created to support the larger business and deliver growth objectives. During the year the non-cash fair value movements (i.e. investment earnings) of $17.6 million in prepaid contract funds under management (2011: $2.1 million) matched the non-cash growth due to selling price increases of $17.6 million in the liability for future service delivery obligations (2011: $15.5 million). The improvement in the investment earnings reflected the full year impact of decisions taken in the second half of 2011 to change the asset allocations in the main prepaid fund. The increase in the liability included a one off adjustment of $2.8 million booked in H1 relating to a change in the way price increases are applied in calculating the liability estimate. Under these changes the price rises are now applied gradually over the course of the year instead of the actual date of the price increase. A final, fully franked dividend of 19.0 cents per share will be paid on 5 April 2013. Total dividends for the year are 34.0 cents, being 4.25 cents or 14.3% higher than 2011, comparable to the 16.7% growth in operating earnings. The full year dividend payout ratio of operating earnings after tax is 88% (2011: 89%). 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 the results of those operations or InvoCare’s state of affairs in future financial years. Subsequent to the end of the financial period a further investment has been made in HeavenAddress and Resthaven, a small funeral business in New Zealand, has been acquired. Future developments and results Case volumes in the first six weeks of 2013 have been flat year on year. This trend seems to be industry wide and appears to be driven by number of deaths as opposed to market share. Consistent with past practice, funeral prices were increased as planned in late 2012 and cemetery and crematoria prices are scheduled to be increased during the first quarter of 2013. As always indicated to the market, InvoCare’s sales revenue is significantly affected by changes in the numbers of deaths and, as such, the early weeks of 2013 cannot and should not be used as an indicator of future 2013 results. The integrated Bledisloe business realised synergies of $3.0 million in 2012 with an annualised impact of $3.5 million. Estimated annualised operating EBITDA for 2012 was $13.5 million. Returns on prepaid funeral funds under management are expected to improve in 2013. This follows a tactical tilt away from equities into more stable cash and property assets by the main prepaid fund which holds 73% of prepaid contract funds. As much of the asset base is held in high yielding fixed interest term deposits, the earnings are expected to remain relatively stable over 2013. Longer term challenges will be to find investments offering comparable returns as these deposits begin to roll over from late 2013. Recent acquisitions provide further opportunities for InvoCare to grow. Tuckers in Geelong has provided InvoCare with access to a whole new region whilst Resthaven in Auckland will help InvoCare build a larger footprint in the largest market in New Zealand. Collectively these two businesses are expected to generate approximately $8.3 million in sales and $1.6 million in EBITDA in 2013. Other expansion activities continue in Australia and abroad. Plans are currently in place to open four new sites across Sydney, Adelaide, Brisbane and New Zealand. In addition InvoCare continues to be in discussion with a number of potential vendors. The timing and size of any successful acquisition is uncertain, but InvoCare is confident of future acquisitions in Australia and abroad. Although regulatory competition barriers may be encountered in some Australian markets, as experienced with the Bledisloe acquisition, InvoCare is exploring opportunities in various markets, including some regional areas where it is currently unrepresented and the Tuckers acquisition is an example of the possible opportunities in those regional markets. 1 Operating earnings after tax and operating earnings per share are non-IFRS financial information. A reconciliation to IFRS financial information is set out in the results highlights on page 25. 2 Operating EBITDA is non-IFRS financial information and its components are set out in the results highlights on page 25. 26 INVOCARE ANNUAL REPORT 2012 The Group’s capital expenditure in 2013 is expected to be approximately $24 million. The main investments are focused on continuously improving service standards and offerings. This includes new condolence and chapel facilities in Sydney, upgrading shared service operations in Sydney and Brisbane, refurbishment of funeral homes to provide a more contemporary feel and the continued rollout of digital technology across major facilities. Plans are also in place to commence upgrading the company’s ageing ERP system in 2013. Offsetting the capital expenditure is the settlement of the Brunswick property sale in Melbourne. The proceeds of $4.7 million are expected to deliver a $1.8 million pre-tax gain upon settlement in quarter 2 2013. There has been no change to InvoCare’s capital management plans. Sufficient funds are expected to be available from debt facilities and free cash flows for capital expenditure and smaller “bolt on” acquisitions. If a more substantial opportunity arises, alternative funding sources, such as an equity raising, would be considered. It remains the policy of the Board to distribute at least 75% of operating earnings after tax3 as dividends, as well as increase the quantum of those dividends year on year. In January 2013, InvoCare invested $5.0 million in the HeavenAddress business. This investment will be used to finance the next phase of development which is aimed at making HeavenAddress.com a global online memorials website. Already the site attracts approximately one-third of all funeral internet traffic in Australia, New Zealand and Singapore. This is a great opportunity to get exposure to InvoCare brands as well as developing online funeral and memorial communities where families, friends and communities can share experiences. InvoCare has had yet another successful year with the completion of the integration of Bledisloe, improvement in returns on funds under management and continued growth in the core business through the pillars of higher number of deaths, selling price increase, prepaid contracts, growing share in existing markets, business acquisitions and opening new locations. Environmental regulation and performance InvoCare is committed to the protection of the environment, and the health and safety of its employees, customers and the general public, as well as 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 pathological waste and the storage of hazardous materials. InvoCare has appropriate risk management systems in place at its locations. There have been no claims during the year and the directors believe InvoCare has complied with all relevant environmental regulations and holds all relevant licences. InvoCare is currently co-operating with an investigation by the Environment Protection Authority into illegal depositing of building material and other general waste on InvoCare owned land by an unknown third party or parties. Any costs associated with the clean-up of the waste are not expected to be material. 3 Operating earnings after tax is non-IFRS financial information and its components are set out in the results highlights on page 25. 27 INVOCARE ANNUAL REPORT 2012 Board of Directors Left to right: Richard Fisher; Tina Clifton; Ian Ferrier; Andrew Smith; Roger Penman; Aliza Knox; Benjamin Chow; Richard Davis. Information on directors Details of the directors’ qualifications and experience follow. Mr Andrew Smith BCom MBA CA Chief Executive Officer Andrew joined InvoCare in January 2006 as Chief Financial Officer and was promoted to Chief Operating Officer in March 2007. On 1 January 2009, Andrew was promoted to Chief Executive Officer and Managing Director. Prior to joining InvoCare Andrew held the position of Chief Financial Officer with Brazin Limited and previously OrotonGroup Limited. Andrew was also Financial Controller for Sales and Marketing at a major international fast moving consumer goods company, an Internal Audit Manager for a global insurance company and an Audit Senior at KPMG. Andrew was appointed as a director of Over Fifty Guardian Friendly Society Limited on 24 March 2009. In December 2012 Andrew was appointed to the Government’s Interim NSW Cemeteries and Crematoria Board. He holds a Bachelor of Commerce from the University of Queensland, a Master of Business Administration from the University of New England and is a member of the Institute of Chartered Accountants in Australia. Interest in shares: 205,303 ordinary shares in InvoCare Limited Mr Ian Ferrier AM FCA Chairman of the Board Chairman of Nomination Committee Member of Remuneration Committee Member of Risk Committee Ian has held the position of Chairman of InvoCare Limited since 8 May 2001. He is a Fellow of The Institute of Chartered Accountants in Australia. Ian has had over 35 years of experience in company corporate recovery and turnaround practice in various industries including property and development, tourism, manufacturing, retail, hospitality and hotels, infrastructure and aviation. He is co-founder and Chairman of BRI Ferrier, a specialist corporate advisory firm and a director of a number of private and public companies. Ian is currently Chairman of InvoCare Limited, Goodman Limited and Australian Vintage Limited and a director of Energy One Limited and Reckon Limited. Other Public Company Directorships held in the last three years Australian Vintage Limited (appointed November 1991) Energy One Limited (appointed November 1996) Goodman International Limited (appointed September 2003) Reckon Limited (appointed August 2004) Interest in shares: 52,401 ordinary shares in InvoCare Limited 28 INVOCARE ANNUAL REPORT 2012 Dr Christine (Tina) Clifton MB BS (Hons) BHA Non-executive Director Chairman of Risk Committee Member of Audit Committee Member of Nomination Committee Tina Clifton has been a director of InvoCare Limited since 24 October 2003. She is a registered medical practitioner, a Councillor of the University of New South Wales and was formerly a director of various public and private companies largely in the healthcare sector, including HCF, Health Care Australia, Ambri Ltd, the Garvan Institute of Medical Research, the Victor Chang Cardiac Research Institute, and St Vincents Hospitals. Prior to 2001, Tina held various positions in the public and private healthcare sectors, including Chief Executive Officer of the Sisters of Charity Health Service in New South Wales and deputy Chief Executive Officer of the Northern Sydney Area Health Service. From 1980 to 1988 Tina was a general practitioner. She has also been President of the Doctors Health Advisory Service and active with Matthew Talbot, Amnesty International, NSW Mental Health Services Official Visitors’ programme and Bushcare. Tina holds degrees in medicine and health administration from the University of New South Wales and obtained a specialist qualification in medical administration (FRACMA). Interest in shares: 112,961 ordinary shares in InvoCare Limited Mr Roger Penman BEc FCA FTIA Non-executive Director Chairman of Audit Committee Chairman of Remuneration Committee Member of Nomination Committee Roger Penman was appointed as a director of InvoCare Limited on 1 January 2005 and joined both the Audit Committee, as its Chairman, and the Remuneration Committee in February 2005. He became Chairman of the Remuneration Committee in December 2009. Roger is a Principal in the Taxation Services division at Crowe Horwath Sydney, joining the firm in 1986. He has had over 30 years of high level specialist tax consulting and general business experience, including mergers, acquisitions, initial public offerings and group restructures. Roger holds a Bachelor of Economics from the Australian National University, is a Fellow of the Institute of Chartered Accountants in Australia, a Fellow of the Taxation Institute of Australia, a member of the Australian Institute of Company Directors and a member of the Crowe Horwath International Tax Committee. Interest in shares: 8,000 ordinary shares in InvoCare Limited Mr Benjamin Chow AO BE Non-executive Director Member of Risk Committee Member of Nomination Committee Member of Remuneration Committee Benjamin Chow was appointed as a director of InvoCare Limited on 22 February 2007 and became a member of the Risk Committee and the Nomination Committee at the same time. He joined the Remuneration Committee in September 2010. Benjamin has worked continuously in the land development industry both in Australia and South East Asia since 1968, having immigrated to Australia in 1962. He chaired the Council for Multicultural Australia which assists the Australian Government to implement its multicultural policies. He is the Deputy Chairman of the NSW Government Multicultural Business Advisory Panel, President of Sydney University Nerve Research Foundation, a Director of Chain Reaction Foundation and an Honorary Governor to the Council of Sydney Medical School Foundation, University of Sydney. During 2012 Benjamin was appointed as a non-executive director of the Western Sydney Wanderers Football Club. He served six years on the Council of the National Museum of Australia as well as Bond University. He served (and continues to serve) many leading Chinese community organisations in Sydney for over 30 years. He was awarded a Centenary Medal in 2001 and an Officer of the Order of Australia in 2007. Other Public Company Directorships held in the last three years Mindax Limited (appointed October 2009) Interest in shares: 10,821 ordinary shares in InvoCare Limited Mr Richard Fisher AM MEc LLB Non-executive Director Member of Risk Committee Member of Audit Committee Member of Nomination Committee Richard Fisher is General Counsel to The University of Sydney and is an Adjunct Professor in both its Graduate School of Government and Faculty of Law. Richard is the immediate past Chairman of Partners at Blake Dawson and specialised in corporate law during his 25 years as a partner of that firm. He has been a director of InvoCare Limited since 24 October 2003. He was appointed as a director of Sydney Water effective 1 January 2012 and is a Member of the Library Council of NSW. Richard is a former part- time Commissioner at the Australian Law Reform Commission and was an International Consultant for the Asian Development Bank. Richard holds a Master of Economics from the University of New England and a Bachelor of Laws from the University of Sydney. Interest in shares: 6,315 ordinary shares in InvoCare Limited Ms Aliza Knox BA MBA Non-executive Director Member of Nomination Committee Member of Risk Committee Aliza Knox was appointed as a director of InvoCare Limited on 1 October 2011 and became a member of the Risk Committee later that month. Aliza is a digital media and financial service executive with more than two decades of broad international marketing and management experience. Aliza joined Twitter in Asia Pacific as Managing Director Online Sales in November 2012. She was formerly Managing Director of the Online Sales Group for Google Asia Pacific and then the Managing Director Commerce for Google Asia Pacific, with responsibility for China, India, South East Asia, Japan, Australia and all other countries in the region. Her previous roles have included Senior Vice President with global payments technology company Visa International, with responsibility for commercial solutions and global product platforms; Senior Vice President with investing services and solutions provider Charles Schwab & Company, with responsibility for international wireless and Asian expansion; and Partner in Boston Consulting Group as head of its Asian Financial Services Practice. She is a board member of a workforce development NGO in the USA and an advisor to several organisations and a government committee in Singapore. Aliza holds a Bachelor of Arts (Applied Math and Economics) from Brown University (USA) and Masters of Business Administration (Marketing) from New York University Graduate School of Administration (USA). Interest in shares: 3,050 ordinary shares in InvoCare Limited 29 INVOCARE ANNUAL REPORT 2012 Directors’ Report continued Mr Richard Davis BEc Non-executive Director Member of Nomination Committee Richard Davis was appointed a non-executive director of InvoCare Limited on 21 February 2012. Richard previously retired as InvoCare’s Chief Executive Officer and Managing Director on 31 December 2008 after 20 years with InvoCare. For the majority of that time, he held the position of Chief Executive Officer and successfully initiated and managed the growth of the business through a number of ownership changes and over 20 acquisitions, including Singapore Casket Company (Private) Limited, the Company’s first international acquisition. Richard has been a non-executive director of Australian Vintage Limited since 5 May 2009 and is also Chairman of the Audit Committee of that company. Prior to joining the funeral industry, Richard worked in venture capital and as an accounting partner of Bird Cameron. Richard holds a Bachelor of Economics from the University of Sydney. Other Public Company Directorships held in the last three years Australian Vintage Limited (appointed May 2009) Interest in shares: 636,607 ordinary shares in InvoCare Limited Company Secretary Mr Phillip Friery BBus CA Phillip Friery was appointed Company Secretary in January 2007 and Chief Financial Officer in March 2007. Prior to joining the Group in 1994 as Accounting Manager, Phillip spent approximately 19 years with Coopers & Lybrand (before its merger with Price Waterhouse) in external audit, technical advisory and financial management consulting roles. Phillip joined the board of Over Fifty Guardian Friendly Society Limited on 24 March 2009. He holds a Bachelor of Business from the New South Wales Institute of Technology (now University of Technology Sydney) and is a member of the Institute of Chartered Accountants in Australia. Interest in shares: 98,899 ordinary shares in InvoCare Limited Meetings of directors Details of the meetings attended by each director during the year ended 31 December 2012 are set out in the Corporate Governance Statement on page 31. 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: – – – one-third (or a number nearest one-third) of the number of directors, excluding from the number of directors the Managing Director (i.e. the Chief Executive Officer), who is exempt from retirement by rotation, and any other director appointed by the directors either to fill a casual vacancy or as an addition to the existing directors; 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 or as an addition to the existing directors. Tina Clifton and Roger Penman will retire by rotation as directors at the Annual General Meeting on 24 May 2013 and, being eligible, offer themselves for re-election. Corporate governance The Directors’ Report continues with the Corporate Governance Statement. Corporate Governance Statement InvoCare Limited (the “Company”) and the Board of Directors (the “Board”) are committed to achieving and demonstrating the highest standards of corporate governance. The Company and its controlled entities together are referred to as “InvoCare” or the “Group” in this statement. This statement outlines the main corporate governance practices in place throughout the financial year, which comply with the ASX Corporate Governance Council’s principles and recommendations as issued in August 2007 and as amended in 2010, unless otherwise stated. Andrew Smith, who was formerly Chief Operating Officer, was appointed Chief Executive Officer (“CEO”) on 1 January 2009. Effective from 1 January 2012 the position of Chief Operating Officer Australia (“COO Australia”) was filled by Greg Bisset, formerly National General Manager Funerals Australia. Graeme Rhind who joined the Group in June 2011 following the acquisition of Bledisloe Group Holdings is Chief Operating Officer of New Zealand (“COO New Zealand”) and Singapore is under the control of Wee Leng Goh who is Chief Executive Officer of Singapore Casket Company (“CEO Singapore”). Together with the Chief Financial Officer (the “CFO”) and Chief Information Officer (the “CIO”), who was appointed in March 2012, these positions comprise the Other Key Management Personnel (“Other KMP”). For further information on the corporate governance policies adopted by InvoCare Limited, refer to the Company’s website: www. invocare.com.au Principle 1 – Lay Solid Foundations for Management and Oversight Functions of the Board and senior executives The Board of InvoCare Limited is responsible for guiding and monitoring the Group on behalf of the shareholders by whom they are elected and to whom they are accountable. The Board seeks to identify the expectations of the shareholders, as well as other regulatory and ethical expectations and obligations. In addition, the Board is responsible for identifying areas of significant business risk and ensuring arrangements are in place to adequately manage those risks. The responsibility for the operation and administration of the Group, including day-to-day management of the Group’s affairs and the implementation of the corporate strategy and policy initiatives, is delegated by the Board to the CEO, Other KMPs, and other management. Delegations are set out in the Group’s delegations policy and are reviewed regularly. Delegations, within defined authority limits, relate to various operational functions, including areas such as expenditure and commitments, employee matters (e.g. recruitment, termination, remuneration, discipline, training, development, health and safety), pricing, branding, investor and media communications. The Board ensures that the senior executives and the management team are appropriately qualified and experienced to discharge their responsibilities and has in place procedures to assess the performance of the CEO and the senior executives. In deciding which functions and activities the Board reserves to itself, it is guided by the overarching principle that the Board is charged with strategic responsibility, along with a management oversight function, and that the executive management have an implementation function. In fulfilling these functions, the directors seek to enhance shareholder value and protect the interests of stakeholders. 30 INVOCARE ANNUAL REPORT 2012 All Board members have formal letters of appointment which clearly articulate the roles, responsibilities, expectations and remuneration of directors. All employees, including the CEO and senior executives, have formal job descriptions. The level of seniority of the role determines whether a formally drafted contract of employment or a less complex letter of appointment is used to confirm employment. Regardless of type, all employment agreements clearly articulate duties and responsibilities and also rights and expectations. Standard letters of appointment were last reviewed and updated in 2007 and have been used for all appointments since that time. During 2013 the Human Resources team will undertake a review of standard employment terms and appropriate updates will be put in place at the end of this review. The Board Charter is available on the Company’s website: www. invocare.com.au Senior executive evaluation After the conclusion of each financial year the CEO evaluates and documents the performance of the Other KMPs. The results of this evaluation are reviewed by the Remuneration Committee with specific focus on achievements against targeted key performance indicators. Also at this time, key performance indicator targets for the ensuing year are established. The Remuneration Committee and the Board also review and determine the Other KMPs’ remuneration for the ensuing year. The Remuneration Committee evaluates the performance of the CEO against annual key performance indicators and reports to the Board its recommendations on performance appraisal and remuneration. In addition to a review of monthly financial results, at least quarterly the Board monitors the key performance indicators for the Group which provides the opportunity to more regularly evaluate the performance of senior executives outside the annual review process. covering the financial position, strategies and operations. This induction programme also focuses on the internal policies and procedures with a particular emphasis on the respective roles of the Board and its committees and those functions delegated to management. Principle 2 – Structure the Board to Add Value Board composition The Board comprises eight directors, being seven non-executive directors (including the Chairman) and one executive director, being the CEO. Any director appointed to fill a casual vacancy, except for the CEO, must stand for election by shareholders at the next Annual General Meeting. In addition, one-third of the non- executive directors, and any other director who has held office for three years or more since last being elected, must retire from office and, if eligible, may stand for re-election. The CEO is exempt from retirement by rotation and is not counted in determining the number of directors to retire by rotation. The majority of the Board must be independent directors, one of whom is the Chairman. A director is deemed to be “independent” if independent of management and free of any business or other relationship that could materially interfere with, or could reasonably be perceived to materially interfere with, the exercise of unfettered and independent judgement. The Board has assessed, using the criteria set out in the ASX Corporate Governance Principles and Recommendations, the independence of non-executive directors in light of their interests and relationships and considers them all to be independent. The Company will provide immediate notification to the market where the independence status of a director changes. The skills, experience and expertise relevant to the position of each director and their terms of office are set out starting on page 28 of the Directors’ Report. When appointed, all new senior executives receive an induction appropriate to their experience, which is designed to ensure they can quickly and effectively participate in decision making. The programme is also designed to ensure that the executive gains a good working knowledge of both the industry and the Group Meetings of directors During the year ended 31 December 2012, 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: Non-executive Directors Ian Ferrier Christine Clifton Roger Penman Benjamin Chow Richard Fisher Aliza Knox Richard Davis Executive Director Andrew Smith Board Chair B 11 11 11 11 11 11 10 11 A 10 10 10 11 10 10 11 11 Audit Committee Remuneration Committee Risk Committee Nomination Committee Member Chair Member A 2* 5 5 4* 5 3* 3* 5* B – 5 5 – 5 – – – Member Chair Member A 2 – 2 1 – – 1* 2* B 2 – 2 2 – – – – A 3 4 2* 4 3 4 1* 4* Member Chair Member Member Member Member B 4 4 – 4 4 4 – – A 1 1 1 1 1 1 1 – Chair Member Member Member Member B 1 1 1 1 1 1 1 – A = number of meetings attended. B = number of meetings held during the time the director held office or was a member of the committee during the year. * = includes meetings attended as an invited guest of the committee where the director was not a member of the relevant committee. 31 INVOCARE ANNUAL REPORT 2012 Directors’ access to independent professional advice and Company information To assist in the effective discharge of their duties, directors may, in consultation with the Chairman, seek independent legal or financial advice on their duties and responsibilities at the expense of the Company and, in due course, make all Board members aware of both instructions to advisers and the advice obtained. All directors have the right of access to all relevant Company information and to seek information from the Company Secretary and other senior executives. They also have a right to other records of the Company subject to these not being sought for personal purposes. All directors and former directors are entitled to inspect and copy the books of the Company for the purposes of legal proceedings, including situations where the director is a party to proceedings, where the director proposes in good faith to bring proceedings and where a director has reason to believe proceedings will be brought against him or her. In the case of former directors, this right of access continues for a period of seven years after the person ceases to be a director. Prior to each Board meeting, the Board is provided with management reports and information in a form, timeframe and quality that enables them to discharge their duties. If a board member considers this information to be insufficient to support informed decision making, then they are entitled to request additional information prior to, or at, Board meetings. Directors’ induction When appointed to the Board, all new directors receive an induction appropriate to their experience, which is designed to quickly allow them to participate fully and productively in Board decision making. The induction programme covers the Group’s structure and goals, financial, strategic, operational and risk management positions, the rights and duties of a director and the role and operation of the Board Committees. The Nomination Committee is responsible for reviewing the effectiveness of the director induction programme. New directors are given an orientation regarding the business including corporate governance policies, all other corporate policies and procedures, Committee structures and responsibilities and reporting procedures. Directors’ continuing education Directors are expected to undertake continuing education both as regards the normal discharge of their formal director duties, as well as ongoing developments within the Group and its operating environment. Directors typically attend courses and seminars relevant to the effective discharge of their duties. Directors’ Report continued Corporate Governance Statement continued The composition of the Board and Board Committees is a minimum of three directors. Board Committees consist entirely of independent non-executive directors. The CEO may attend all Board Committee meetings by invitation. The Other KMPs attend Board and Committee meetings by invitation. Nomination Committee The Nomination Committee critically reviews on an annual basis the corporate governance procedures of the Group and the composition and effectiveness of the Board. The Committee currently consists of the seven independent non-executive directors of the Board whose skills and experience cover finance and accounting, taxation, law, medicine and health administration, marketing, digital media, funeral industry, property development and community service with an emphasis on multiculturalism. The Committee is chaired by Ian Ferrier. The Committee believes that the Board has a healthy mix of skills to ensure the ongoing development and growth of the Group. In addition to its role in proposing candidates for director appointment for consideration by the Board, the Nomination Committee reviews and advises the Board in relation to Chief Executive Officer succession planning, Board succession planning and Board and Committees’ performance appraisals. InvoCare may utilise the professional advice of external consultants to find the best person for the position of Director of the company. These advisors seek applicants according to the Board’s skills requirements. The Board also acknowledges the benefits of a diverse Board and requires the advisors to present candidates with equal numbers of suitably qualified men and women and with some diversity in cultural background and age. The Board then selects the most suitable candidate(s) for the consideration of the shareholders. The Board is looking to achieve an appropriate mix of skills and diversity amongst directors. The Committee Charter is available on the Company’s website: www. invocare.com.au Directors’ performance evaluation The Board, through its Nomination Committee, undertakes an annual performance review of the full Board, its Committees and of the Chairman. The Chairman performs individual appraisals of each director. The evaluation process involves an assessment of Board and Committee performance by each director completing a confidential questionnaire. The questionnaire covers such matters as the role of the Board, the composition and structure of the Board and Committees, operation of the Board, Group behaviours and protocols and performance of the Board and Committees; and invites comments from each director. The results of the questionnaire are aggregated and discussed by the Board as a basis for collegiate consideration of Board performance and opportunities for enhancement. The individual appraisals between each director and the Chairman provide an opportunity for consideration of individual contributions, development plans and issues specific to the director. Performance evaluation reviews were undertaken during 2012. 32 INVOCARE ANNUAL REPORT 2012 Principle 3 – Promote Ethical and Responsible Decision Making Code of Conduct The Board, in recognition of the importance of ethical and responsible decision making, has adopted a Code of Conduct for all employees and directors which outlines the standards of ethical behaviour which are essential to maintain the trust of all stakeholders and the wider community. This code also mandates the avoidance of conflicts of interest and requires high standards of personal integrity, objectivity and honesty in the dealings of all directors, executives and staff, providing detailed guidelines to ensure the highest standards are maintained. InvoCare recognises that its clients may be vulnerable due to a recent bereavement and it requires all employees to be aware of their ethical and legal responsibilities. Accordingly, InvoCare requires all employees to behave according to this code, to maintain its reputation as a good corporate citizen. Such behaviours extend to areas such as confidentiality, Privacy Act obligations, communications with the media, occupational health and safety and drugs and alcohol. This code is provided to all directors and employees as part of their induction process and compliance is reviewed on a regular basis. It is subject to ongoing review and assessment to ensure it continues to be relevant to contemporary conditions. The code is available on the Company’s website: www. invocare.com.au Share Trading Policy The Company’s share trading policy is designed to minimise the risk that InvoCare, its directors and its employees will breach the insider trading provisions of the Corporations Act or compromise confidence in InvoCare’s practices in relation to securities trading. The policy prohibits directors and employees from trading in InvoCare securities when they are in possession of information not generally available to the investment community, and otherwise confines the opportunity for directors and employees to trade in InvoCare securities to certain limited periods. This policy applies to all senior staff, particularly those, such as finance team members, who have access to information which is not generally available. In addition, it applies to all the associates of these individuals. The policy prohibits trading in the Company’s shares except within narrow and specific windows when the Group believes the market is fully informed. There are limited procedural exceptions to the policy and in certain circumstances the Chairman has the ability to approve trading outside the policy prescriptions. The share trading policy is available on the Company’s website: www. invocare.com.au Diversity InvoCare serves a diverse range of communities across Australia, New Zealand and Singapore and believes it is very important to ensure that a diverse range of people, specifically suited to the community being served, are available for families in their time of need. This includes actively encouraging women at all levels of the organisation. Women currently comprise 25% of the Board, 20% of Other Key Management Personnel, 25% of operational general managers in Australia and 33% of support general managers. 53% of total staff are women. InvoCare’s aspirational target is to exceed 30% of women in all the senior management positions outlined above. Principle 4 – Safeguard Integrity in Financial Reporting Audit Committee The Audit Committee provides assistance to the Board in fulfilling its corporate governance, risk management and oversight responsibilities in relation to the Group’s financial reporting, internal control structure, interest rate and foreign currency risks and the internal and external audit functions. It is the responsibility of the Committee to maintain free and open communication between the Committee, the external auditor, the internal auditor and management of the Group. Both the internal and external auditors have a direct line of communication to the Chairman of the Audit Committee. The Audit Committee comprises three independent non-executive directors and is currently chaired by Roger Penman. Mr Penman is an FCA and brings a wealth of financial and taxation experience to the Committee. Other members are Christine Clifton and Richard Fisher. The external auditor met with the Audit Committee twice during the year without management being present. The Committee Charter is available on the Company’s website: www. invocare.com.au Principle 5 – Make Timely and Balanced Disclosure The Company has appropriate mechanisms in place to ensure all investors are provided with timely, complete and accurate information affecting the Group’s financial position, performance, ownership and governance. The Chairman, CEO, CFO or Company Secretary are responsible, as appropriate, for communication with shareholders and the Australian Securities Exchange (“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. Continuous disclosure obligations are well understood and upheld by the Board and senior executives. Formal and informal discussion and consideration of these obligations occurs as and when the need arises. The Group’s shareholder communication strategy is designed to ensure that all relevant information, especially market sensitive information, is made available to all shareholders and other stakeholders as soon as possible. InvoCare’s website is structured to ensure information is easily located and logically grouped. Those shareholders who have made the appropriate election receive email notification of all announcements. The Continuous Disclosure Policy and Shareholder Communication Strategy are available on the Company’s website: www. invocare.com.au 33 INVOCARE ANNUAL REPORT 2012 Directors’ Report continued Corporate Governance Statement continued Principle 6 – Respect the Rights of Shareholders The Board of Directors aims to ensure that the shareholders are informed of all major developments affecting the Group’s state of affairs. The Company uses its website to complement the official release of material information to the market. Shareholders may elect to receive email alerts when Company announcements are made. Notice of Annual General Meeting, half year and annual results announcements and financial reports, investor presentations, press releases and other ASX announcements can be found on the Company’s website: www. invocare.com.au The Board encourages full participation of shareholders at the Annual General Meeting. The Company’s external auditor attends the Annual General Meeting and is available to answer shareholder questions about the conduct of the audit and the preparation and content of the auditor’s report. The Chairman of the meeting encourages shareholders to ask reasonable questions of the auditor regarding the audit and auditor’s report. Questions for the auditor can be submitted prior to the Annual General Meeting by contacting the Company’s registered office. The next Annual General Meeting is scheduled to be held at 9.00am on Friday, 24 May 2013 at the offices of PricewaterhouseCoopers, 201 Sussex Street, Sydney. Shareholders are also able to direct any questions relating to the Company’s securities to the share registry, Link Market Services Limited. The Shareholder Communication Strategy is available on the Company’s website: www. invocare.com.au Principle 7 – Recognise and Manage Risk The Board, through the Risk Committee and Audit Committee, reviews and oversees the Group’s risk management systems. Risk Committee The Risk Committee determines the Group’s risk profile and is responsible for overseeing and approving risk management strategy and policies, internal compliance and internal control. The Risk Committee does not have responsibility for strategic (Board responsibility) or financial risk management, which is the focus of InvoCare’s Audit Committee. The Company’s approach to managing risk draws from the International Standard ISO 31000 and the Committee of Sponsoring Organisations of the Treadway Commission’s integrated framework for Enterprise Risk Management. Each senior executive, with input and assistance from their direct reports, identifies key risks for their areas of responsibility and function which are in turn aggregated into an overall corporate risk register. Each risk is assessed and assigned an inherent risk rating. The risk register is continuously reviewed and maintained as new risks are identified or incidents occur, or mitigating controls change. Extracts of the risk register are provided to the Risk Committee at each of its meetings, together with specific commentary or information on significant changes to the risks or the ratings. Specific major risks or incidents are reported, as and when they occur, to the CEO and Other KPMs who are responsible for escalating these to the Risk Committee and Board, where necessary, if the event occurs outside the regular cycle of 34 Committee meetings. The Committee is informed of the effectiveness of actions to mitigate the impact of risk events. In addition, the Committee considers developments or improvements in risk management and controls, including the adequacy of insurance programmes. The Group has identified risks and identified KPIs which the Group believes to be relevant in the industry in which the company operates. Separate records and registers are maintained for other more common or recurring risks; for example, arising from customer complaints and occupational health and safety issues. These are managed and reported to the Committee by relevant in-house specialists, including the Group Integration and Risk Manager and General Manager of Human Resources. In this context, the Committee monitors complaints handling and also has a strong focus on ensuring suitable work practices and employee learning and development programmes are developed and delivered. The Group has established a Greenhouse Emissions Plan for Board review which includes risks and opportunities associated with climate change and identifies emission reduction targets. The Group has taken steps to reduce or minimise carbon emissions; for example, by progressively replacing its older less fuel efficient cremators. Based on measures of carbon emissions in 2008, as a base year, InvoCare is well below the threshold reporting levels under the National Greenhouse and Energy Reporting Act 2007 which was effective from 1 July 2008. The Risk Committee comprises five independent non-executive directors and is currently chaired by Christine Clifton. The other members are Ian Ferrier, Richard Fisher, Benjamin Chow and Aliza Knox. The Risk Committee Charter is available on the Company’s website: www. invocare.com.au Internal control The Group maintains a register of delegated authorities which are designed to ensure that all transactions are approved at the appropriate level of management and by individuals who have no conflicts of interest in relation to the transactions. An internal audit function is established and conducts a series of risk-based and routine reviews in accordance with three-year strategic, and more detailed annual, internal audit plans. These plans are based on the existing risk environment and the level of inherent risk, i.e. the level of risk before the application of controls, in order to effectively identify and prioritise internal audit projects. Within a three-year period all key business systems and processes are regularly reviewed, either using in-house or external resources, to ensure that adequate levels of checks and balances exist to safeguard the assets of the Company and ensure that all transactions are correctly and promptly recorded. Internal audit has developed a self-assessment questionnaire which is distributed to operational management. This questionnaire serves to build higher awareness and understanding of business risks and how to manage and control them. In addition, internal audit reviews all systems improvements and enhancements prior to live implementation to ensure an adequate level of internal control and accountability are maintained. Exception reports have been developed that assist in continuous monitoring of major processes. INVOCARE ANNUAL REPORT 2012 An informal process exists by which employees of InvoCare may, in confidence, raise concerns about possible improprieties in financial reporting or other matters. Internal audit would usually be involved in independent investigations of such matters and follow-up actions. The Group Internal Audit Manager and Integration and Risk Manager meet privately with the chairs of the Audit and Risk Committees without management present on a regular basis. Assurance Prior to finalising the release of half-year and full-year results and reports, the Board receives assurance from the CEO and CFO in accordance with s295A of the Corporations Act 2001 and Recommendation 7.3 of the ASX Corporate Governance Principles and Recommendations. These assurances also provide the Board with information in relation to internal control and other areas of risk management. These officers receive similar assurance from the key financial and operational staff reporting to them in relation to these matters. Principle 8 – Remunerate Fairly and Responsibly Remuneration Committee InvoCare’s remuneration policy ensures that remuneration packages properly reflect the person’s duties and responsibilities, and that remuneration is competitive in attracting, retaining and motivating people of the highest calibre. The Remuneration Committee reviews and makes recommendations to the Board on senior executive remuneration and appointment and on overall staff remuneration and compensation policies. When making recommendations, the Committee aims to design policies that attract and retain the executives needed to run InvoCare successfully and to motivate executives to pursue appropriate growth strategies while marrying performance with remuneration. The Remuneration Committee comprises three independent non- executive directors with Roger Penman as Chair and Ian Ferrier and Benjamin Chow as members. The Remuneration Committee Charter is available on the Company’s website: www. invocare.com.au Remuneration structure Remuneration for senior executives typically comprises a package of fixed and performance-based components. The Committee may, from time to time, seek advice from special remuneration consulting groups so as to ensure that the Board remains informed of market trends and practices. Non-executive directors are remunerated by way of directors’ fees, which may be sacrificed by payment into superannuation plans or by allocation of ordinary shares. They do not participate in schemes designed for the remuneration of executives, and do not receive retirement benefits, bonus payments or incentive shares. Executive remuneration and other terms of employment are reviewed annually by the Committee having regard to personal and corporate performance, contribution to long-term growth, relevant comparative information and independent expert advice. As well as a base salary, remuneration packages include superannuation, performance-related bonuses, access by invitation to the Deferred Employee Share Plan and fringe benefits. The Remuneration Report is set out on pages 35 to 47. Remuneration Report The Remuneration Report summarises the key compensation policies and practices for the year ended 31 December 2012, highlights the link between remuneration and corporate performance and provides detailed information on the compensation for non- executive and executive directors and other key management personnel. The Remuneration Report is set out under the following main headings: A. Directors and key management personnel disclosed in this report B. Remuneration Governance C. Use of remuneration consultants D. Executive remuneration policy and framework E. Relationship between remuneration and InvoCare’s performance F. Non-executive director remuneration policy G. Voting at InvoCare’s 2012 Annual General Meeting H. Details of remuneration I. Service agreements J. Details of share-based compensation The information provided in this Remuneration Report has been audited as required by section 308(3C) of the Corporations Act 2001. A. Directors and key management personnel For the purposes of this report, the key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group or a major operation within the Group and are as follows: Non-executive directors Ian Ferrier (Chairman) Christine Clifton Roger Penman Benjamin Chow Richard Fisher Aliza Knox Richard Davis (appointed 21 February 2012) Other key management personnel Andrew Smith (Executive Director and Chief Executive Officer) Phillip Friery (Chief Financial Officer) Greg Bisset (Chief Operating Officer Australia) Andi Luiskandl (Chief Information Officer – appointed 5 March 2012) Wee Leng Goh (Chief Executive Officer Singapore) Graeme Rhind (Chief Operating Officer New Zealand – with effect from 15 June 2011) With the acquisition of Bledisloe on 15 June 2011 in the previous financial year, the Group entered New Zealand for the first time and Graeme Rhind, the country manager, became a member of key management personnel from that date. In addition, some structural management changes were implemented with official effect from 1 January 2012, although there was unofficial transitioning to this new structure from June 2011. The primary changes were: 35 INVOCARE ANNUAL REPORT 2012 C. Use of remuneration consultants The Remuneration Committee conducted its remuneration review with assistance detailed below from independent remuneration consultant Mr Ian Crichton of CRA Plan Managers Pty Ltd (“CRA”), a specialist consultancy and advisory business dedicated to all aspects of director and executive compensation and equity incentive strategies. CRA was appointed on 30 November 2012, in writing, by the Chairman of the Remuneration Committee, to undertake a remuneration benchmark assessment and analysis in respect of Director and selected key management personnel remuneration. Final reports were provided to the Chairman of the Remuneration Committee on 19 December 2012. The information provided was used, in part, to assist the Board in determining changes to Director and key management personnel remuneration for the 2013 financial year. CRA received a fee of $11,270 (excluding GST and out of pocket expenses) for this work. CRA also received fees totalling $47,450 (excluding GST and expense recovery) during the year ended 31 December 2012 for other services, mainly related to employee share scheme management services. CRA did not make any “remuneration recommendations” as defined in the Corporations Act 2001 in the 2012 financial year. D. Executive remuneration policy and framework 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 should be market competitive and be reviewed annually, with no component guaranteed to increase; and the Chief Executive Officer’s and senior executives’ total remuneration be targeted at the 50th percentile of comparable positions in comparable size companies (taking into account revenue, number of employees, net profit after tax and market capitalisation) which is achieved when individual and overall Group performance targets are met. Directors’ Report continued Remuneration Report continued a) Greg Bisset, previously National General Manager Funerals, was appointed to a newly created role as Chief Operating Officer Australia with responsibility for funeral, cemetery and crematorium operations across Australia, as well as for various corporate support functions such as human resources and marketing which previously reported to Andrew Smith; b) Greg Bisset’s former role was filled by the appointment on 1 September 2011 of Andrew Mullis, previously Bledisloe’s Chief Financial Officer, who reports to Greg Bisset; and c) Armen Mikaelian was assigned broader responsibilities as National General Manager for Cemeteries & Crematoria, Memorials and Pre-need and reporting to Greg Bisset instead of Andrew Smith. To drive and implement the Group’s digital business strategy, Andi Luiskandl joined the Group on 5 March 2012 as Chief Information Officer. B. Remuneration Governance The Board has an established Remuneration Committee which critically reviews the Group’s remuneration policy and, under its charter, has the following primary functions: – – – – – – review and make recommendations to the Board regarding the remuneration and appointment of senior executive officers and the remuneration of non-executive directors; review and make recommendations to the Board regarding policies for remuneration and compensation programmes of the Group focusing on appropriate remuneration policies designed to meet the needs of the Group and enhance corporate and individual performance; review and make recommendations to the Board regarding administration of remuneration and compensation programmes; review and make recommendations for approval by the Board regarding all reports on executive remuneration required by law or regulation proposed to be included in the annual report; review and make recommendations to the Board regarding all equity based remuneration or compensation plans; and report to the Board regularly on each of the above matters. During 2012, the Remuneration Committee considered the emerging market remuneration practices and legislative developments, as well as views expressed by some shareholders and proxy advisers on the Group’s remuneration practices in late 2011 and early 2012. Any new disclosure requirements arising from the Australian Government’s draft bill to amend the Corporations Act 2001 will be reviewed to ensure InvoCare fully complies with any new enacted law. Both the previous and this the latest Remuneration Report provide commentary about any changes to remuneration arrangements and outline the directors’ rationale for the practices adopted. The Board Remuneration Committee makes recommendations to the Board of Directors in relation to the remuneration of the CEO. The CEO recommends the remuneration of all other key management personnel. The Remuneration Committee reviews the recommendations before submission to and approval by the Board of Directors. The key management personnel determine the remuneration of other senior management, within both the Board Remuneration Committee remuneration policy framework and a defined budget approved by the Board of Directors. 36 INVOCARE ANNUAL REPORT 2012 Remuneration structure InvoCare’s compensation structure aims to provide a balance of fixed and variable remuneration components. Variable components are tied to the performance of the Group and the individual and are entirely at risk. The compensation of the Chief Executive Officer and other key management personnel is comprised of payments and/or allocations under the following categories: – – – base salary and benefits, including annual leave, superannuation and other incidental benefits; short-term incentives (“STI”) in the form of annual cash bonuses; and long-term incentives (“LTI”) in the form of share-based bonuses. The target remuneration mix for the CEO and other key management personnel, as depicted in the following graph (and averaged for the other key management personnel), is set to place a considerable portion of executive remuneration at risk so as to align remuneration with both Group performance and the individual’s personal influence and contribution to the Group performance. CEO – 2012 52% 27% 21% CEO – 2011 56% 25% 19% Other key management personnel – 2012 Other key management personnel – 2011 62% 59% 23% 15% 24% 17% 20% ■ Base plus superannuation ■ STI potential ■ LTI potential 60% 40% 0% 80% 100% No director or other key management personnel has, at 31 December 2012, during or since the end of the financial year, had any loans to or from the Group or any options over unissued ordinary shares of InvoCare Limited. Base salary and benefits Executives are offered a market competitive base cash salary, together with annual leave and post-employment superannuation benefits in accordance with relevant jurisdictional statutory requirements and other non-monetary or incidental benefits. An executive may elect to structure the base salary and benefits as a combination of cash and other benefits. The cash 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. No guaranteed base pay increases are included in any executives’ service agreements. Non-monetary benefits may include provision of fully maintained cars and car parking spaces. Other incidental benefits may include payment of total and permanent disablement, death and salary continuance insurance premiums and nominal discounts for funerals of immediate family members. In Australia, entitlements accrue for an employee’s long service and, subject to relevant statutory requirements and qualifying periods, the entitlement may be taken as leave or is payable to the employee upon termination of employment. Termination benefits are provided in the respective individual contracts of employment and are normally limited to statutory entitlements, such as accrued but untaken leave, and payments in lieu of notice periods, which generally range between one month up to a maximum of six months. Details for key management personnel service agreements are set out on page 45 under the heading “I. Service Agreements”. Short-term incentives STI are awarded for achievement of pre-determined financial and non-financial objectives. For key management personnel, the target criteria and possible bonus levels are defined each year by the Remuneration Committee and Board. For other executives, the key management personnel determine the objectives and reward levels, subject to ratification by the Remuneration Committee, within the constraints of a Board approved budget. Each executive has a target STI opportunity depending on the accountabilities of the role and impact on Group performance. The STI opportunity is up to a maximum of 52.5% of base salary plus superannuation for the CEO and up to a maximum 45% for the other key management personnel. The target criteria for key management personnel are heavily weighted to overall financial performance, being up to 50% of the potential STI opportunity, but are also tailored to the relevant circumstances of each executive. In summary, the criteria used to determine short-term bonuses for key management personnel are aligned with InvoCare’s strategic and business objectives and include: – – – Group or specific country EBITDA growth targets, with EBITDA being a key financial measure of the success of operations. absolute case volume and market share growth, which are cornerstones of the past and future growth of the business, including through opening new locations in existing markets, entering new markets or acquiring businesses. innovation in customer service delivery and business operations, including introducing new products and services, modifying operating models and further developing or strengthening brand positioning. developing and implementing digital business strategies, embracing and harnessing new or existing technologies (e.g. social media) to enhance customer service and business efficiencies. continuing to grow the prepaid funeral business and, where possible, influencing independent fund managers to adopt appropriate asset allocations and achieve investment returns in excess of price rises and investment costs. – – Other levels of staff also received short-term objective based compensation based on measurable and pre-determined targets. In addition to complementing the targets applying to more senior executives, these objectives included items such as case average pricing, sales of prepaid contracts, the management of labour costs, client survey results and debtors’ days outstanding. 37 INVOCARE ANNUAL REPORT 2012 Directors’ Report continued Remuneration Report continued Bonuses are payable in cash in the first quarter of each year after the completion of the audit of the results for the previous year ended 31 December. The Board Remuneration Committee considers that STI bonuses are awarded for achievement of key performance criteria for a particular financial year and that no part of the bonus should be deferred for payment in a later year. The Committee is of the view that the share based LTI, described in more detail below, encourage executives to remain employed with the Group and ensure alignment with shareholder interests. Based upon achievements in 2012, the Remuneration Committee determined the CEO and other key management personnel achieved between 67% and 100% (average 91%) of their target STI opportunity. The following factors were among those considered by the Committee in making this assessment: – operating EBITDA was 13.7% higher and operating after tax profit was 16.7% higher than the previous year; – market share was improved or sustained in most key markets; – integration of the Bledisloe business, acquired in June 2011, was finalised during 2012 with performance and synergies realised meeting expectations; negotiations with potential business vendors continued during the year, with the successful acquisition of Tuckers Funeral and Bereavement Service in Geelong in December 2012 and completion of the acquisition of Resthaven Funerals in Auckland in January 2013; appointment of a Chief Information Officer and consequent development of a digital business strategy to guide technological innovation in future years; and ongoing sales penetration of prepaid funeral contracts and correction of investment performance of the main fund over which InvoCare can exert some influence. – – – Long-term incentives Recognising the importance of an appropriate long-term incentive for rewarding and retaining senior management, during 2007 a share-based compensation scheme, the InvoCare Deferred Employee Share Plan (“DESP”), was introduced under which the Board may offer selected senior managers incentive shares (“LTI shares”). In the case of foreign based senior executives who may not be able to participate in Australian share offers, share appreciation rights (“LTI rights”) may be offered which mirror the same outcomes for the employee as LTI shares. In determining the amount of an offer to an individual manager, consideration is given to factors including market benchmarks, skill and experience, expected and actual performance over time and promotion and succession potential. No consideration is payable by the employee for the offer of LTI shares or LTI rights, but they are subject to performance and/or continuous service conditions. The LTI shares are purchased on market and hence the DESP is operated on a completely non-dilutive basis. LTI rights are valued by reference to the market value of InvoCare shares at the time of the offer. The value of LTI shares or LTI rights offered is up to a maximum of 40.8% of base salary plus superannuation for the CEO and up to a maximum 35% for the other key management personnel. 38 Vesting of the LTI shares and LTI rights will be in three equal tranches in February of each of the second, third and fourth subsequent years after the year of offer. Unless otherwise determined by the Board in its sole discretion, unvested LTI shares and LTI rights will be forfeited on death and disability, retirement or resignation or other employment termination. The LTI shares are held in trust until vesting and the employees will be entitled to any dividends paid in respect of unvested, unforfeited shares. Similarly, notional dividend amounts will be paid to holders of unvested, unforfeited LTI rights coinciding with the payment of InvoCare dividends. The Remuneration Committee considers the payment of dividends on unvested shares or rights reinforces the value of the long-term reward. The practice helps align the managers’ interests with those of InvoCare shareholders through appreciation of the importance of dividend benefits and provides further incentive for managers to remain with InvoCare until vesting conditions are met. Upon vesting of LTI shares, the employee has the discretion to leave the LTI shares in trust, withdraw or sell any number of them. In accordance with InvoCare’s Share Trading Policy, senior managers are not permitted to enter into transactions in products associated with their shareholding in the Company which operate to limit the economic risk of their shareholding (e.g. hedging or cap and collar arrangements), which includes limiting the economic risk of holdings of unvested entitlements associated with LTI shares. Upon vesting of LTI rights, the employee will be paid in cash an amount equivalent to the number of vested LTI rights multiplied by the value of those rights derived by reference to the market value of InvoCare shares. Performance conditions apply to senior managers who have an important strategic role impacting InvoCare’s financial performance and relate to compound growth per annum in normalised earnings per share over the vesting period. “Normalised earnings” means reported profit is adjusted: – – to remove the impacts of any gains or losses arising from the sale, disposal or impairment of non-current assets; and to maintain consistency in accounting policies across the respective vesting periods for each grant. Normalised earnings per share compound growth per annum was selected at the time of establishment of the DESP as the most suitable and reliable measure of organisational performance based on independent advice from CRA and analysis by the Board. During 2011 and again in 2012, as part of its normal review of remuneration policy, the Board Remuneration Committee re-affirmed the appropriateness of the earnings per share absolute measure, including by comparison to the commonly used Total Shareholder Return (“TSR”) relative metric. The reasons for this conclusion include: – – – InvoCare is a stable, unique business without a true comparator peer or group to benchmark performance against; relative TSR incentives tend to favour executives in companies with higher levels of inherent share price volatility than InvoCare, which has lower volatility in both share price and earnings than other ASX listed entities or market indices; InvoCare has relatively small market capitalisation and its growth may be appear constrained relative to an index or selected peer group; INVOCARE ANNUAL REPORT 2012 – – the vagaries of equity markets, particularly evident in recent times, are not controllable by InvoCare’s Board or its executives and introducing TSR would detract from the clear and proven organisational performance culture which already exists within InvoCare; and earnings per share growth is aligned with InvoCare’s strategic objectives and more closely reflects management performance and success in incrementally creating value through good decision making and sustained and improving performance over time. For 2012 offers, the 2011 base comparison year earnings per share was set at 34.4 cents per share to exclude the asset sale gains and the large negative impacts arising from net losses on undelivered pre-paid contracts during 2011. The base for 2013 grants has been set at 38.7 cents per share which excludes the asset sale gains in that year. LTI shares or LTI rights granted in 2013 vest as set out below: Normalised reported earnings per share (“EPS”) compound growth per annum from 38.7 cents per share Proportion of each one third tranche of LTI shares that will vest 12% or more 11% or more but less than 12% 10% or more but less than 11% 9% or more but less than 10% 8% or more but less than 9% 7% or more but less than 8% Less than 7% 100% 80% plus 2.0% for each 0.1% EPS over 11% 65% plus 1.5% for each 0.1% EPS over 10% 55% plus 1.0% for each 0.1% EPS over 9% 50% plus 0.5% for each 0.1% EPS over 8% 30% plus 2.0% for each 0.1% EPS over 7% Nil LTI shares or LTI rights granted in 2012 vest as set out below: Normalised reported earnings per share (“EPS”) compound growth per annum from 34.4 cents per share 10% or more 9% or more but less than 10% 8% or more but less than 9% 7% or more but less than 8% Less than 7% Proportion of each one third tranche of LTI shares that will vest 100% 77% plus 2.3% for each 0.1% growth in EPS over 9% 53% plus 2.4% for each 0.1% growth in EPS over 8% 30% plus 2.3% for each 0.1% growth in EPS over 7% Nil LTI shares or LTI rights granted in 2011, 2010 and 2009 vest as set out below: Normalised earnings per share (“EPS”) compound growth per annum from 1 January in the year of offer Proportion of each one third tranche of LTI shares that will vest 10% or more 9% or more but less than 10% 8% or more but less than 9% 7% or more but less than 8% Less than 7% 100% 77% plus 2.3% for each 0.1% growth in EPS over 9% 53% plus 2.4% for each 0.1% growth in EPS over 8% 30% plus 2.3% for each 0.1% growth in EPS over 7% Nil LTI shares granted in 2008 and 2007 vest in accordance with the following table: Normalised earnings per share (“EPS”) compound growth per annum from 1 January in the year of offer Proportion of each one third tranche of LTI shares that will vest 12% or more 11% or more but less than 12% 10% or more but less than 11% 9% or more but less than 10% 8% or more but less than 9% Less than 8% 100% 80% plus 2% for each 0.1% growth in EPS over 11% 65% plus 1.5% for each 0.1% growth in EPS over 10% 55% plus 1% for each 0.1% growth in EPS over 9% 50% plus 0.5% for each 0.1% growth in EPS over 8% Nil 39 INVOCARE ANNUAL REPORT 2012 Directors’ Report continued Remuneration Report continued The performance conditions for LTI shares and LTI rights were selected following independent advice and analysis of: – – – broker analysis and forecasts for InvoCare; historic and forecast EPS growth in the S&P/ASX 200; and InvoCare’s own earnings forecasts derived from its annual five-year plans. If the cumulative EPS growth performance conditions are not met at the vesting date, the LTI shares or LTI rights remain available until February in the fifth year after grant and may vest based on the compound annual growth from the base date for the grant to 31 December of the previous year. Unvested shares and rights at the fifth anniversary of the grant are forfeited. The Board Remuneration Committee continues to support as fair and reasonable the fact that the LTI plan provides for a cumulative EPS test over the vesting period. Each grant is split into three tranches with vesting ranging over two and up to a maximum of five years after each grant. This is to allow for the impact that the number of deaths, which is outside the control of management, has on InvoCare’s annual result, in particular given the fixed cost nature of the business. To receive 100% of the LTI shares or LTI rights, the senior executive or manager must remain employed during the vesting period and InvoCare’s compound EPS growth must equal or exceed the maximum target growth percentage. The employee remains exposed over this timeframe to the consequences of the Group’s results, their own individual performance impacting those results and the market movements in InvoCare’s share price. The following table summarises the performance to date for the grants made since 2007 which impact remuneration in the current or a future financial year. LTI share grant year Target annual compound normalised EPS growth from 1 January of grant year Normalised EPS on 1 January of grant year Performance condition testing date and vesting outcome 2007 8% to 12% 22.2 cents 2008 8% to 12% 27.2 cents 2009 7% to 10% 28.3 cents 2010 7% to 10% 32.3 cents 2011 7% to 10% 33.9 cents 2012 7% to 10% 34.4 cents 2013 7% to 12% 38.7 cents February 2009 – satisfied, first 1/3rd fully vested February 2010 – satisfied, second 1/3rd fully vested February 2011 – 82% of final 1/3rd tranche vested February 2012 – not satisfied, all unvested shares forfeited February 2010 – 70% of the first 1/3rd tranche vested February 2011 – not satisfied, second 1/3rd not vested February 2012 – not satisfied, final 1/3rd not vested February 2013 – not satisfied, all unvested shares forfeited February 2011 – 86% of first 1/3rd tranche vested February 2012 – 39% vesting of second and unvested first tranches February 2013 – 37% vesting of third and previous unvested tranches February 2014 – to be determined February 2012 – not satisfied, first 1/3rd not vested February 2013 – not satisfied, second 1/3rd not vested February 2014 – to be determined February 2015 (if required) February 2013 – not satisfied, first 1/3rd not vested February 2014 – to be determined February 2015 – to be determined February 2016 (if required) February 2014 – to be determined February 2015 – to be determined February 2016 – to be determined February 2017 (if required) February 2015 – to be determined February 2016 – to be determined February 2017 – to be determined February 2018 (if required) Future offers of LTI shares and LTI rights may be made at the discretion of the Board and the service and performance conditions for any future offers may vary from previous LTI shares and LTI rights offers. Further details of LTI shares and LTI rights are set out on page 46 under the heading “J. Share-based Compensation”. 40 INVOCARE ANNUAL REPORT 2012 E. Relationship between remuneration and InvoCare’s performance The overall level of executive reward takes into account the performance of the Group over a number of years, with at risk remuneration linked to that performance. The remuneration approach, elements and mix have delivered shareholder value since listing as depicted by key performance indicators for the Group in the tables below. 2012 2011 2010 2009 2008 2007 2006 2005 2004 Reported profit after tax ($m) – note 1 Basic earnings per share (cents) Normal dividends ($m) – note 2 Normal dividends per share (cents) Total return per share ($) – note 3 Total shareholder return (%) – note 3 Share price – 31 December Shares on issue (m) Market capitalisation ($m) – note 4 Enterprise value ($m) – note 5 47.7¢ 27.6¢ 25.6¢ 26.9¢ 40.6¢ $44.5m $27.0m $27.4m $48.1m $28.0m $27.6m $24.0m $20.1m $19.3m 20.4¢ 28.0¢ $37.4m $32.5m $28.9m $25.7m $23.6m $22.5m $19.2m $16.0m $14.6m 19.5¢ 15.4¢ 23.5¢ $1.56 $1.27 ($1.63) 37% 59% (23%) $5.57 $3.35 $5.15 95m 99m 101m $519m $703m $552m $406m $318m $671m $849m $698m $542m $449m 25.25¢ $1.28 25% $6.18 102m $746m $629m $1,183m $1,055m $894m $778m 29.75¢ $0.71 10% $7.70 110m $966m $847m 28.25¢ $1.37 22% $7.28 102m 34.0¢ $1.39 18% $8.78 110m 22.5¢ $1.66 30% $7.01 100m 16.5¢ $1.11 33% $4.19 97m 21.0¢ 24.7¢ 1. From 2009, the Group changed its accounting policy for prepaid contracts following review by the Australian Securities and Investments Commission which introduced volatility into reported results associated with mark to market valuations of prepaid funds under management recognised on balance sheet for the first time. With a sizeable asset allocation to equities in those prepaid funds, the 2009 and 2010 fair value movements were quite significant as a consequence of the global financial crisis and equity returns in 2011 were subdued. Investment asset allocation tilts away from equities have reduced the return volatility. 2. A special dividend of 10.5 cents per share totalling $10.2m was paid in 2005 in addition to the normal dividends for that year. 3. Total return per share is the share price movement plus in year cash dividends paid. The total shareholder return percentage is the total return per share divided by the share price at the beginning of the year. 4. Market capitalisation at 31 December, being number of shares on issue multiplied by share price at that date. 5. Enterprise value is market capitalisation plus net debt. InvoCare’s TSR compared to the S&P/ASX 200 Index for financial years ended 31 December since listing is set out below. 2012 2011 2010 2009 2008 2007 2006 2005 2004 InvoCare Limited Percentile rank S&P/ASX 200 Index 75th percentile Median 25th percentile 18.4% 10.2% 47.9% 78.4% 23.3% 68.2% 25.2% (23.5%) 80.2% 30.4% 30.6% 65.9% 38.0% 65.4% 33.6% 65.1% 60.1% 75.9% 5.7% 39.0% 21.5% (10.7%) (25.9%) (2.8%) 35.7% (26.2%) 7.7% (48.0%) (65.3%) (6.8%) 146.2% 54.5% 17.3% 40.3% 13.7% (6.0%) 50.3% 27.0% 12.7% 49.8% 22.2% 4.4% 59.5% 34.4% 14.7% Source: Bloomberg as at 4 February 2013 Note: Based on net dividends reinvested and a base currency of Australian dollars. Index members based on membership as at the date of the Bloomberg data, not historical membership. 41 INVOCARE ANNUAL REPORT 2012 Directors’ Report continued Remuneration Report continued InvoCare’s Total Shareholder Return (“TSR”) for the financial years ended 31 December since listing compared to a range of similar international businesses is set out below. 2012 2011 2010 2009 2008 2007 2006 2005 2004 InvoCare Limited Percentile rank 18.4% 10.2% 37.0% 62.3% 23.3% 56.4% 25.2% (23.5)% 50.9% 32.1% 30.6% 67.0% 38.0% 98.9% 33.6% 60.1% 94.9% 100.0% Service Corporation International Dignity plc Stewart Enterprises Inc Carriage Services Inc Funespana SA Tear Corporation San Holdings Inc Stonemor Partners LP 32.6% 31.6% 35.2% 16.1% 36.5% (12.7)% 17.1% 114.7% 2.7% (10.8)% 82.8% (32.6)% (8.2)% (2.3)% (15.4)% 70.3% (64.0)% 2.6% 3.2% (16.2)% 20.2% 75.9% (65.7)% 33.5% 95.9% (77.2)% 23.5% 12.4% 20.2% 62.6% 50.3% 6.8% (10.9)% (16.3)% 68.5% 38.6% 12.3% 44.5% 73.1% 11.3% (43.0)% 6.1% (22.8)% 1.5% 92.3% (33.1)% (13.3)% 26.9% 10.9% 43.3% 38.3% 17.6% (21.7)% 1.2% 1.8% 9.4% (3.1)% n/a n/a 4.2% 10.8% (2.3)% (16.3)% 33.8% Mean Median 35.1% 33.9% 1.7% 4.7% 26.0% 21.8% 49.5% (29.7)% 66.5% (24.7)% 10.9% 5.0% 14.1% 17.6% 8.3% 9.4% Source: Bloomberg as at 4 February 2013 Note: Based on net dividends reinvested and a base currency of Australian dollars. 38.2% n/a 23.1% 33.5% 59.4% n/a (2.9)% n/a 30.2% 33.5% F. Non-executive director remuneration policy Non-executive directors Policy The Board’s primary focus is on the long-term strategic direction and overall performance of the Group. Accordingly, non-executive director remuneration is not linked to short-term results. Fees paid to non-executive directors are determined with the assistance of independent external advisers, CRA. The remuneration policy is designed to: attract and retain competent and suitably qualified non-executive directors; – – motivate non-executive directors to achieve InvoCare’s long-term strategic objectives; and 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 $1,000,000, being the amount approved by shareholders at the Annual General Meeting held on 11 May 2012. This remuneration is divided among the non-executive directors in such proportion as the Board determines. During the 2012 financial year, annual fees for non-executive directors were $190,000 for the Chairman of the Board and $105,000 for each of the other six non-executive directors. No additional fees are paid to non-executive directors who chair the Board’s committees. Using market information from an external review of non-executive director compensation commissioned by the Board Remuneration Committee, the Board has determined 2013 fees will be $220,000 for the Chairman and $120,000 for each of the other six non-executive directors. The aggregate of these fees is $940,000 which is below the current pool limit. The Directors do not propose to ask shareholders to consider increasing the pool limit at the next Annual General Meeting on 24 May 2013. The base fees exclude 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 holding office during the years ended 31 December 2012 and 31 December 2011. Directors are entitled to be reimbursed for all reasonable costs and expenses incurred by them in the performance of their duties as directors. 42 INVOCARE ANNUAL REPORT 2012 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. Non-executive directors may participate in the Company’s Deferred Employee Share Plan on a fee sacrifice basis. No shares have been issued or allocated to non-executive directors under the Deferred Employee Share Plan. During 2009, the Board resolved that with effect from 1 January 2009, non-executive directors of InvoCare Limited be required to acquire a minimum equity interest in the Company equivalent in value to 50% of their annual director’s fee applying at the time of their appointment as a director of the Company and that directors be allowed up to three years to accumulate the required shareholding. At the date of this report, except for Aliza Knox who was appointed on 1 October 2011 and acquired shares to the value of $27,054 during 2012, all non- executive directors have equity interests in the Company higher than required. Directors’ equity holdings are set out under the heading “Information on directors” on pages 28 to 30 of the Directors’ Report and in Note 7: “Key Management Personnel Disclosures” on page 71 of the notes to the financial statements. Retiring allowances No retiring allowances are paid to non-executive directors. Superannuation Where relevant, 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. G. Voting at InvoCare’s 2012 Annual General Meeting The Remuneration Report for the year ended 31 December 2011 received a vote of more than 93% in favour at the Annual General Meeting held on 11 May 2012. The Company did not receive any specific feedback at the AGM regarding its remuneration practices. 43 INVOCARE ANNUAL REPORT 2012 Directors’ Report continued Remuneration Report continued H. Details of Remuneration Details of the remuneration of the directors and the executive key management personnel of the Group are set out in the following table. Short-term employment benefits Post-em- ployment benefits Other long-term benefits Share-based payments benefits Cash Salary or Fee (note 1) $ Short-term cash bonus (note 2) $ Non- monetary benefits (note 3) $ Super- annuation (note 4) $ Long Service Leave (note 5) $ LTI Shares at risk (note 6) $ LTI Shares forfeited (note 7) $ Year Total Statutory Re- muneration (note 8) $ Executives’ Actual Re- muneration (note 9) $ Non-executive directors Ian Ferrier, Chairman Christine Clifton Roger Penman Benjamin Chow Richard Fisher Aliza Knox (Appointed 1 October 2011) Richard Davis (Appointed 21 February 2012) Executive director Andrew Smith 2012 2011 2012 2011 174,312 165,138 96,330 91,743 2012 105,000 2011 100,000 96,330 2012 91,743 2011 96,330 2012 2011 91,743 2012 105,000 25,000 2011 82,869 2012 – 2011 – – – – – – – – – – – – – – – – – – – – – – – – – – – – 15,688 14,862 8,670 8,257 – – 8,670 8,257 8,670 8,257 – – 7,458 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 190,000 180,000 105,000 100,000 105,000 100,000 105,000 100,000 105,000 100,000 105,000 25,000 90,237 – 2012 694,625 353,885 2011 585,404 299,683 42,031 52,354 21,327 22,902 17,854 16,018 240,358 211,895 – 1,370,080 1,289,399 – 1,188,256 1,217,239 Other key management personnel Phillip Friery Greg Bisset Andi Luiskandl (Appointed 5 March 2012) Wee Leng Goh (Note 10) Graeme Rhind (Note 11) (Commenced 15 June 2011) Notes to Remuneration Table: 150,162 2012 331,640 2011 340,008 178,712 2012 339,926 159,422 309,712 156,440 2011 44,000 2012 181,029 – – 2011 27,111 2012 176,696 26,279 2011 171,710 58,158 2012 161,204 20,368 81,636 2011 28,994 26,672 33,353 23,481 24,010 – 6,566 16,336 14,896 5,568 25,647 30,355 27,807 25,650 13,865 – 10,510 9,620 6,277 4,310 8,522 10,255 5,759 5,139 762 – – – – – 102,380 117,362 106,862 89,815 14,921 – 46,214 25,816 13,260 – (79,349) – (57,621) – – – – – – – 567,996 703,364 615,508 610,237 278,587 – 267,097 249,761 253,795 111,882 571,770 670,474 587,823 564,769 262,904 – 225,904 227,104 241,215 111,882 1. The total cost of fees and salary, including annual leave accruals and, at the discretion of the director or employee, any salary or fee sacrificed benefits, for example into superannuation. 2. The amount to be settled in cash relating to performance of the Group and the individual for the financial year from 1 January to 31 December. The proportions of STI bonuses awarded and forfeited are set out in the following table. 3. The cost to the company, including any fringe benefits tax, for the provision of fully maintained cars, car parking spaces and other items. 4. Company contributions to superannuation. 5. Long service leave accruals. 6. The amount amortised as an expense in the financial year in accordance with Australian Accounting Standards which require the value of long-term share-based incentive grants to be amortised as an expense over the relevant future vesting periods. The amounts shown relate to unvested share and rights grants made in the current and past financial years. Subject to meeting the vesting conditions of the grants, the shares or rights will vest, or be forfeited, in future financial years. 7. The reversal in the current financial year, in accordance with Australian Accounting Standards, of the previous years’ amortisation expense for long- term incentive shares granted in earlier 2007 and 2008 years but which were forfeited in the current financial year because vesting conditions were not met. 44 INVOCARE ANNUAL REPORT 2012 8. Total statutory remuneration is calculated and disclosed in accordance with the Corporations Act and Australian Accounting Standards. 9. For information purposes and comparison with the total statutory remuneration, this column shows the executives’ remuneration which actually crystallised during the year, including salary, superannuation, annual leave paid and accrued, short-term incentives payable in respect of the financial year, the market value at vesting date of long-term incentive shares granted in previous years which vested during the year and other benefits. The approximate market value of previous 2007 and 2008 share grants which were forfeited during the year were $110,000 for Phillip Friery and $80,000 for Greg Bisset. 10. Wee Leng Goh, Chief Executive Officer of Singapore Casket Company, received total remuneration of SG$345,617 (2011: SG$324,805), which has been converted to Australian dollars at the average exchange rate for the year of 0.773 (2011: 0.771). 11. Graeme Rhind, Chief Operating Officer of New Zealand, joined the Group on 15 June 2011 upon the Group’s acquisition of Bledisloe and received total remuneration for the full 2012 year of NZ$324,403 (15 June 2011 to 31 December 2011: NZ$143,254), which has been converted to Australian dollars at the average exchange rate for the year of 0.782 (2011: 0.779). The percentage of the available STI cash bonus that was payable for the financial year and the percentage that was forfeited because the person or the consolidated entity did not meet the service and performance criteria is set out below: Name Andrew Smith Phillip Friery Greg Bisset Andi Luiskandl Wee Leng Goh Graeme Rhind Cash STI bonus Payable % Forfeited % 97% 91% 97% 100% 67% 88% 3% 9% 3% 0% 33% 12% I. Service Agreements Chief Executive Officer Remuneration and other terms of employment for the Chief Executive Officer, Andrew Smith, have been formalised in a service agreement, which has been updated from time to time during his employment. The current agreement provides for provision of salary, superannuation, short-term performance related cash bonuses (up to 52.5% of base salary and superannuation), long-term performance related share- based bonuses (up to 40.8% of base salary and superannuation) and other benefits. The latest term of employment is for three years and four months beginning on 1 January 2012 and, subject to agreement to extend the term, ends on 30 April 2015. The total remuneration package is reviewed annually and the latest review effective from 1 January 2013 provides for remuneration as follows: – – – – base salary and superannuation, being $745,000 for 2013 (from 1 January 2012: $695,414); short-term incentive bonus of up to $391,125 (from 1 January 2012: $364,752), being 52.5% of base salary and superannuation; LTI shares of $303,960 (from 1 January 2012: $283,695), being 40.8% of base salary and superannuation; and other benefits such as fully maintained motor vehicle and membership of relevant professional or commercial bodies. The Remuneration Committee and Board have the discretion to provide additional performance incentives. Under the service agreement, where less than 100% of a short-term incentive bonus is achieved in a financial year, the employee may recover any shortfall in a subsequent financial year if the effective compound per annum achievement rate in a subsequent financial year exceeds the original rate not achieved. Termination by the Company, other than in the case of misconduct, may be effected with six months’ notice and by payment of six months’ total remuneration package, including a pro-rata short-term bonus for the year of termination based upon any bonus paid relating to the previous financial year. In addition, unvested LTI shares will immediately vest. In the case of misconduct, the Company may terminate the employee immediately and without notice. Any unvested LTI shares will be forfeited and there will be no payment of pro-rata short-term incentive bonus amounts for the year of termination. If the employee resigns, the employee must give six months’ notice or forfeit six months’ total remuneration for that notice period. Any unvested LTI shares will be forfeited. In any termination, the employee will be entitled to accrued statutory leave entitlements. The employee is not subject to any post-employment restraints. Further details of the share-based remuneration are set out in Section J – Share-based Compensation. 45 INVOCARE ANNUAL REPORT 2012 Directors’ Report continued Remuneration Report continued Other key management personnel Remuneration and other terms of employment for each of the other key management personnel and other senior managers are formalised in service agreements or letters of appointment as varied from time to time, including through annual review of the base salary, short-term and long-term incentives. Each contract is for an indefinite term. The employee’s total remuneration package is reviewed annually by the Remuneration Committee and Board and provides for remuneration to include: – – – – base salary and superannuation; short-term incentive bonus of up to 45% of base salary and superannuation; LTI shares or, in the case of overseas employees, share appreciation rights of up to 35% of base salary and superannuation; and other benefits such as fully maintained motor vehicle and membership of relevant professional or commercial bodies. Up to six months’ notice or payment in lieu of notice is generally required in the event of termination by the Company. The Company may terminate the employee immediately and without notice in the case of misconduct. If the employee resigns, the employee must generally give six months’ notice or forfeit six months’ total remuneration for that notice period. Termination benefits are limited to statutory leave entitlements, unless determined otherwise by the Remuneration Committee and Board. There is no payment of pro-rata short-term incentive bonus amounts for the year of termination. Unless the Board exercises its discretion to determine otherwise, upon employment termination for any reason unvested LTI shares will be forfeited. The Board may decide at its sole discretion that some or all of the shares will not lapse in the event of voluntary retirement on or after normal retirement age, bona fide redundancy, death or permanent disablement and/or any other reason. Other executive key management personnel are generally subject to post-employment restrictions for up to 12 months after employment termination. Non-executive directors On appointment to the Board, all non-executive directors receive a letter of appointment which summarises the Board policies and terms, including compensation, relevant to the office of director. J. Share-based Compensation Details of the LTI share and LTI rights grants, vesting and forfeits for the Chief Executive Officer and other key management personnel are set out below. Final year vesting may occur (note 1) Number of shares or rights granted Year of grant Value at grant date (note 2) Number vested during year Total number vested Maximum value yet to vest (note 3) Vested % Number forfeited during year (note 4) Value of forfeits (note 4) Forfeited % Phillip Friery Andrew Smith 2008 2013 2009 2014 (note 5) 2010 2015 2011 2016 2012 2017 2007 2012 2008 2013 2009 2014 2010 2015 2011 2016 2012 2017 2008 2013 2009 2014 2010 2015 2011 2016 2012 2017 Andi Luiskandl 2012 2017 Wee Leng Goh 2010 2015 2011 2016 2012 2017 Graeme Rhind 2012 2017 Greg Bisset 22,519 52,547 30,404 27,288 31,537 16,172 15,789 20,526 20,374 17,454 8,098 11,842 16,647 13,985 14,749 16,088 5,539 5,451 5,536 5,081 4,536 $135,451 $275,000 $182,875 $201,163 $250,527 $100,000 $100,000 $100,000 $122,540 $128,667 $64,334 $75,000 $81,100 $84,121 $108,728 $127,803 $44,000 $32,760 $40,800 $39,432 $35,199 7,506 10,881 – – – 610 – 3,051 – – – – 2,474 – – – – – – – – 15,012 26,748 – – – 15,765 3,658 8,951 – – – 2,744 7,258 – – – – – – – – 67% $45,158 51% $132,021 – $182,875 – $201,163 – $250,527 – 97% 23% – 44% $56,392 – $122,540 – $128,667 $64,334 – 23% – 44% $45,741 $84,121 – – $108,728 – $127,803 $44,000 – $47,627 – $48,370 – $44,424 – $39,659 – – – – – – 407 – – – – – $3,187 12,131 $106,510 – – – – $79,880 – – – – – – – – – – – – – 9,098 – – – – – – – – – – – – – – 3% 77% – – – – 77% – – – – – – – – – 1. Under the terms of the respective year’s LTI grants, unvested shares or rights may vest in whole or in part in any year from 2013 up to the final year shown for each grant year. 46 INVOCARE ANNUAL REPORT 2012 2. The value at grant date is based upon the share price at the time of grant. In accordance with Australian Accounting Standards, the original grant value of LTI shares is the amount amortised as an expense over the relevant future vesting periods. In the case of LTI rights for overseas based Wee Leng Goh and Graeme Rhind, the amount expensed over the relevant future vesting periods takes account of value changes of the rights using the Black-Scholes/Merton valuation methodology. 3. The maximum value of the original grant yet to vest. LTI shares are valued at original grant value. LTI rights for overseas based Wee Leng Goh and Graeme Rhind are valued using the Black-Scholes/Merton valuation methodology. Performance conditions must be met before vesting and, if not, the minimum that will vest could be nil. 4. Upon final testing in February 2013, from the balance of unvested shares held in trust at the end of the year, shares from grants made in 2008 to Phillip Friery and Greg Bisset were forfeited due to EPS performance conditions not being achieved. For the purposes of display in this table, these forfeits have been shown as occurring in 2012 (with forfeit values based upon InvoCare’s share price at 31 December 2012) and, in accordance with Australian Accounting Standards, the forfeitures were taken into account in determining the share based expense for 2012 by reversing $134,453 of previous grant value amortisation expense. 5. Due to an administrative oversight, Mr Smith’s 2012 grant of LTI shares should have been 4,255 higher. These additional shares will be allocated to him during February 2013, taking his share balance to 209,558, before the granting of 2013 long-term incentive shares. The number of ordinary shares in the Company, or share appreciation rights, held during the year by each director of InvoCare Limited and other key management personnel are summarised in Note 7 on page 71. Indemnifying officers or auditor 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. No indemnity has been provided to the auditor of the Company in its capacity as auditor of the Company. Proceedings on behalf of the company No person has applied for leave of Court to bring proceedings on behalf of the Company or intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or any part of those proceedings. The Company was not a party to any such proceedings during the year. Non-audit services The directors are satisfied that the provision of non-audit services during the year is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The nature and scope of each type of non-audit service provided means that auditor independence was not compromised. The following fees for non-audit services were paid/payable to the external auditor (PricewaterhouseCoopers) during the year ended 31 December 2012: Australian Firm Assurance services Accounting advisory services Taxation services Other services Non-Australian Firms Taxation services Other services Total $ 42,673 36,742 218,643 9,663 27,110 6,411 341,242 Auditor’s Independence Declaration The copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 48. Rounding of amounts The Company is of a kind referred to in Class Order 98/100 issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the Directors’ Report and Financial Report. Amounts in the Directors’ Report and Financial Report have been rounded off to the nearest thousand dollars (where rounding is applicable) in accordance with that Class Order. Signed in accordance with a resolution of the Board of Directors. Ian Ferrier Director Dated this 19th day of February 2013. Andrew Smith Director 47 INVOCARE ANNUAL REPORT 2012 Auditor’s Independence Declaration As lead auditor for the audit of InvoCare Limited for the year ended 31 December 2012, I declare that to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of InvoCare Limited and the entities it controlled during the period. Brett Entwistle Partner PricewaterhouseCoopers Sydney 19 February 2013 48 INVOCARE ANNUAL REPORT 2012 Consolidated Income Statement FOR THE YEAR ENDED 31 DECEMBER 2012 Revenue from continuing operations Finished goods, consumables and funeral disbursements Employee benefits expense Employee related and on-cost expenses Advertising and public relations expenses Occupancy and facilities expenses Motor vehicle expenses Other expenses Depreciation, amortisation and impairment expenses Finance costs Interest income Net gain/(loss) on undelivered prepaid contracts Acquisition related costs Net gain/(loss) on disposal of non-current assets Profit before income tax Income tax expense Profit from continuing activities Profit for the year Profit is attributable to: Equity holders of InvoCare Limited Non-controlling interests Earnings per share for profit attributable to the ordinary equity holders of the Company Basic earnings per share (cents per share) Diluted earnings per share (cents per share) The above consolidated income statement should be read in conjunction with the accompanying notes. Notes 4 5 5 15 6 11 11 2012 $’000 2011 $’000 375,504 (107,304) (91,061) (20,081) (12,697) (25,196) (8,042) (18,097) 93,026 (16,360) (16,262) 780 (18) (731) 2,180 62,615 (18,033) 44,582 44,582 44,479 103 44,582 40.6 40.6 327,496 (95,392) (78,219) (18,267) (10,101) (21,961) (6,866) (14,888) 81,802 (13,746) (15,092) 729 (13,477) (1,309) 203 39,110 (11,995) 27,115 27,115 27,012 103 27,115 25.6 25.6 49 INVOCARE ANNUAL REPORT 2012 Consolidated Statement of Comprehensive Income FOR THE YEAR ENDED 31 DECEMBER 2012 Profit for the year Other comprehensive income Changes in the fair value of cash flow hedges, net of tax Changes in foreign currency translation reserve, net of tax Other comprehensive income for the year, net of tax Total comprehensive income for the year Total comprehensive income for the year is attributable to: Equity holders of InvoCare Limited Non-controlling interests Notes 2012 $’000 2011 $’000 26 26 44,582 27,115 (1,742) 1,218 (524) (5,272) (106) (5,378) 44,058 21,737 43,955 103 44,058 21,634 103 21,737 The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 50 INVOCARE ANNUAL REPORT 2012 Consolidated Balance Sheet AS AT 31 DECEMBER 2012 ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories Prepaid contract funds under management Property held for sale Deferred selling costs Total current assets Non-current assets Trade and other receivables Other financial assets Property, plant and equipment Intangible assets Deferred selling costs Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Borrowings Derivative financial instruments Current tax liabilities Prepaid contract liabilities Deferred revenue Provisions Total current liabilities Non-current liabilities Trade and other payables Borrowings Derivative financial instruments Deferred tax liabilities Deferred revenue Provisions Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Retained profits Parent entity interest Non-controlling interests Total equity The above consolidated balance sheet should be read in conjunction with the accompanying notes. Notes 2012 $’000 2011 $’000 12 13 14 15 13 18 19 21 22 20 15 23 21 22 20 6(d) 23 25 26 26 27 6,081 34,540 21,362 350,905 2,631 610 5,872 32,354 19,858 311,763 625 590 416,129 371,062 14,920 104 284,974 137,484 8,539 13,758 4 282,538 130,791 8,264 446,021 435,355 862,150 806,417 25,059 17 1,353 5,216 355,090 3,161 12,431 28,355 1,872 – 8,278 317,598 3,112 11,688 402,327 370,903 2,163 223,217 8,032 28,502 44,283 1,735 70 214,034 6,873 28,415 41,928 1,577 307,932 292,897 710,259 663,800 151,891 142,617 132,687 (3,120) 21,173 150,740 1,151 151,891 133,336 (2,934) 11,084 141,486 1,131 142,617 51 INVOCARE ANNUAL REPORT 2012 Consolidated Statement of Changes in Equity FOR THE YEAR ENDED 31 DECEMBER 2012 Attributable to Owners of InvoCare Limited Contri- buted equity $’000 Reserves $’000 Retained earnings $’000 Non con- trolling interest $’000 Total Total equity $’000 Notes Balance at 1 January 2012 133,336 (2,934) 11,084 141,486 1,131 142,617 Total comprehensive income for the year Transactions with owners in their capacity as owners: Dividends paid Deferred employee share plan shares vesting during the year Acquisition of shares by the InvoCare Deferred Share Plan Trust Forfeit of deferred employee share plan shares Transfer of shares from the deferred plan to the InvoCare Exempt Share Plan Trust Employee shares – value of services 10 26 25 25 25 – – (524) 44,479 43,955 103 44,058 – (34,390) (34,390) (83) (34,473) 367 (367) (1,225) 430 (221) – – – – 705 – – – – – – (1,225) 430 (221) 705 Balance at 31 December 2012 132,687 (3,120) 21,173 150,740 Balance at 1 January 2011 79,937 2,088 14,259 96,284 Total comprehensive income for the year – (5,378) 27,012 21,634 Transactions with owners in their capacity as owners: Dividends paid Dividend Reinvestment Plan issues Shares issued in a business combination Deferred employee share plan shares vesting during the year Acquisition of shares by the InvoCare Deferred Share Plan Trust Forfeit of shares on termination of employment Employee shares – value of services 10 25 29 26 25 25 – 16,060 37,935 – – – (30,187) – – 617 (617) (1,339) 126 – – – 973 – – – – (30,187) 16,060 37,935 – (1,339) 126 973 Balance at 31 December 2011 133,336 (2,934) 11,084 141,486 1,131 142,617 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 52 – – – – – 1,151 1,139 103 – (1,225) 430 (221) 705 151,891 97,423 21,737 (111) – – (30,298) 16,060 37,935 – (1,339) 126 973 – – – INVOCARE ANNUAL REPORT 2012 Consolidated Statement of Cash Flows FOR THE YEAR ENDED 31 DECEMBER 2012 Notes 2012 $’000 2011 $’000 Cash flows from operating activities Receipts from customers (including goods & services tax) Payments to suppliers and employees (including goods & services tax) Other revenue Interest received Finance costs Income tax paid 409,219 (327,624) 6,947 88,542 182 (15,624) (19,928) Net cash inflow from operating activities 31 53,172 Cash flows from investing activities Proceeds from sale of property, plant and equipment Proceeds from sale of business Purchase of subsidiaries including acquisition costs, net of cash acquired Purchase of property, plant and equipment 3,294 – (9,257) (18,412) 351,221 (282,198) 6,388 75,411 133 (14,443) (17,092) 44,009 678 7,216 (44,488) (16,723) Net cash used in investing activities (24,375) (53,317) Cash flows from financing activities Payment for shares acquired by InvoCare Deferred Employee Share Plan Trust Proceeds from borrowings Repayment of borrowings Payment of dividends – InvoCare Limited shareholders (net of Dividend Reinvestment Plan share issues NIL (2011: $4,827,000) Proceeds from issue of shares Dividends paid to non-controlling interests in subsidiaries Repayment of finance lease Net cash (outflow)/inflow from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of the year 12 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. (1,225) 35,580 (28,500) (34,390) – (83) – (28,618) (1,213) 97,034 (71,619) (25,360) 11,233 (111) (87) 9,877 179 569 5,872 30 6,081 5,123 180 5,872 53 INVOCARE ANNUAL REPORT 2012 Notes to the Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2012 Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statement of comprehensive income and balance sheet, respectively. (ii) Employee share trust The Group has formed a trust to administer the InvoCare Exempt Employee Share Plan and the InvoCare Deferred Employee Share Plan. This trust is consolidated, as the substance of the relationship is that the trust is controlled by the Group. Shares held by the InvoCare Deferred Employee Share Plan Trust are disclosed as treasury shares and deducted from contributed equity. (iii) Associates Associates are entities over which the Group has significant influence but not control or joint control, generally accompanying a shareholding between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting, after initially being recognised at cost. The Group’s share of its associates’ post-acquisition profits or losses and its share of post-acquisition movements in reserves is recognised in the statement of comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. Dividends received from associates are recognised as a reduction in the carrying amount of the investment. If the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured long- term receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. Note 1: Summary of Significant Accounting Policies The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial statements are for the consolidated entity consisting of InvoCare Limited and its subsidiaries. (a) Basis of preparation This general purpose financial report has been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Interpretations and the Corporations Act 2001. (i) Compliance with IFRS Australian Accounting Standards include Australian equivalents to International Financial Reporting Standards (“AIFRS”). Compliance with AIFRS ensures that the consolidated financial statements and notes of InvoCare Limited comply with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. (ii) Historical cost convention These financial statements have been prepared on an accruals basis under the historical cost convention, as modified by the revaluation to fair value of financial assets and liabilities (including derivative instruments). (iii) Critical accounting estimates The preparation of financial statements in conformity with AIFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed at Note 37. (iv) Comparatives Where necessary, comparatives have been reclassified and repositioned for consistency with current year disclosures. (b) Principles of consolidation (i) Subsidiaries The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of InvoCare Limited (“Company’’ or “parent entity’’) as at 31 December 2012 and the results of all subsidiaries for the year then ended. InvoCare Limited and its subsidiaries are together referred to in this financial report as the Group or the consolidated entity. Subsidiaries are all those entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group (refer to Note 1(i)). 54 INVOCARE ANNUAL REPORT 2012 Note 1: Summary of Significant Accounting Policies continued (c) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. This reporting is based on the operational location of the business because different economic and cultural factors impact growth and profitability of the segment. (d) Foreign currency translation (i) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in Australian dollars, which is InvoCare Limited’s functional and presentation currency. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when they are deferred in equity as qualifying cash flow hedges and qualifying net investment hedges or are attributable to part of the net investment in a foreign operation. (iii) Group companies The results and financial positions of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: – – – assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; income and expenses for each income statement are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and all resulting exchange differences are recognised as a separate component of equity. On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other financial instruments designated as hedges of such investments, are taken to shareholders’ equity. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, a proportionate share of such exchange differences will be recognised in the income statement, as part of the gain or loss on sale where applicable. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entities and translated at the closing rate. (e) 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 measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, allowances, duties and taxes paid. Revenue is recognised when the funeral, burial, cremation or other services are performed or the goods supplied. Revenues relating to undelivered memorials and merchandise are deferred until delivered or made ready for use. Minor items such as plaques, ash containers and vases are not individually tracked and are released to revenue over 15 years. The Group enters into prepaid contracts to provide funeral, burial and cremation services in the future and funds received are placed in trust and are not recognised as revenue until the service is performed. Refer Note 1(n). Interest income is recognised using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans is recognised using the original effective interest rate. Dividends are recognised as revenue when the right to receive payments is established. (f) Deferred selling costs Selling costs applicable to prepaid funeral service contracts, net of any administrative fees recovered, are expensed when incurred. Direct selling costs applicable to deferred revenue on undelivered memorials and merchandise are deferred until the revenue is recognised. (g) Income tax The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the national income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and unused tax losses. Companies in the Group may be entitled to claim special tax deductions for investments in qualifying assets (investment allowances). The Group accounts for such allowances as tax credits, which mean that the allowance reduces income tax payable and current tax expense. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. 55 INVOCARE ANNUAL REPORT 2012 Notes to the Financial Statements continued Note 1: Summary of Significant Accounting Policies continued (g) Income tax continued Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised in equity. InvoCare Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation. The head entity, InvoCare Limited, and the controlled entities in the tax consolidated group, account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a stand alone taxpayer in its own right. In addition to its own current and deferred tax amounts, InvoCare Limited also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the Group. Details about the tax funding agreement are disclosed in Notes 34(e) and 35(d). (h) Leases Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. Lease income from operating leases is recognised in income on a straight- line basis over the lease term. (i) Business combinations and acquisitions of assets The purchase method of accounting is used to account for all acquisitions of assets (including business combinations) regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given, shares issued or liabilities incurred or assumed at the date of exchange. Where equity instruments are issued in an acquisition, the value of the instruments is their published market price as at the date of exchange. Transaction costs arising on the issue of equity instruments are recognised directly in equity. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill (refer to Note 1(p)). If the cost of acquisition is less than the fair value of the net identifiable assets of the subsidiary acquired, the difference is recognised directly in the statement of comprehensive income, but only after a reassessment of the identification and measurement of the net assets acquired. Where settlement of any part of a cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of acquisition. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Any variations in the initial estimates of deferred consideration and the final amount payable are remeasured through the statement of comprehensive income. Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value with changes in fair value recognised in profit or loss. The indirect costs of completing business combinations are recorded in the statement of comprehensive income. (j) Impairment of assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment or more frequently if events or changes in circumstances indicate that the carrying amount may not be recoverable. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversals of the impairment at each reporting date. 56 FOR THE YEAR ENDED 31 DECEMBER 2012INVOCARE ANNUAL REPORT 2012 Note 1: Summary of Significant Accounting Policies continued (k) Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Any bank overdrafts are shown within borrowings in current liabilities on the balance sheet. (l) Receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost, less provision for doubtful receivables. Trade receivables are usually due for settlement no more than 30 days from the date of recognition, except where extended payment terms (up to a maximum of 60 months) have been made available on cemetery or crematorium contracts for sale of interment or inurnment rights and associated memorials and other merchandise. Receivables arising from cemetery or crematorium contracts which are initially expected to be collected over a period exceeding 12 months are recognised as non-current receivables and measured as the net present value of estimated future cash receipts, discounted at an imputed effective interest rate. Upon initial recognition of the contract receivables, any undelivered portion of the contracts is included in deferred revenue until delivery. The carrying amount of the asset is reduced through the use of a provision for doubtful receivables account and the amount of the loss is recognised in the statement of comprehensive income within “other expenses”. When a trade receivable is uncollectable, it is written off against the provision account for trade receivables. Subsequent recoveries of amounts previously written off are credited against “sundry revenue” in the statement of comprehensive income. Details of the impaired receivables, provision account movements and other details are included in Notes 2 and 13. (m) 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. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs necessary to make the sale. (n) Prepaid contracts Prepaid contracts are tripartite agreements whereby InvoCare agrees to deliver a specified funeral, cremation or burial service at the time of need and the beneficiary invests the current price of the service to be delivered with a financial institution and conditionally assigns the benefit to InvoCare. InvoCare records the value of the invested funds as an asset and revalues the invested funds to fair value at the end of each reporting period. InvoCare initially recognises a liability at the current selling price of the service to be delivered and increases this liability to reflect the change in selling prices to reflect the best estimate of the expenditure required to settle the obligation at the end of each reporting period. When the service is delivered, the liability is derecognised. The initially recorded liability amount is included in revenue and the price increases recognised since initial recognition are recorded as a reduction in the cost of service delivery. (o) Property, plant and equipment Property, plant and equipment are carried at historical cost less depreciation or amortisation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Repairs, maintenance and minor renewals are charged to the income statement during the financial period in which they are incurred. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 1(j)). Cemetery land is carried at cost less accumulated amortisation and impairment write-downs. 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 or space 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. Other freehold land is not depreciated or amortised. Depreciation of other assets is calculated using the straight-line method to allocate their cost or revalued amounts, net of their residual values, over their estimated useful lives, as follows: – – Buildings 40 years Plant and equipment 3-10 years 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 shorter. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. Gains and losses are included in the income statement. (p) Intangible assets (i) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill acquired in business combinations is not amortised. Instead, goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses (Note 19). (ii) Trademarks and brand names Trademarks and brand names have a finite useful life and are carried at cost less accumulated amortisation and impairment losses. Amortisation is calculated using the straight-line method to allocate the cost of trademarks and brand names over their estimated useful lives of 10 years. 57 INVOCARE ANNUAL REPORT 2012 Notes to the Financial Statements continued Note 1: Summary of Significant Accounting Policies continued (q) Trade and other payables Trade and other payables represent liabilities for goods and services provided to the Group prior to the end of the financial year which had not been settled at balance date. The amounts are unsecured and are usually paid within 60 days of recognition. (r) Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the income statement over the period of the borrowings using the effective interest rate method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Refer to Notes 2 and 22 for further information on borrowings. (s) Derivative financial instruments The Group uses derivative financial instruments such as cross currency and interest rate swaps to hedge its risks associated with exchange and interest rate fluctuations. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either: – – hedges of the risks associated with the cash flows of recognised assets and liabilities and highly probable forecast transactions (cash flow hedges); or hedges of a net investment in a foreign operation. The Group documents at inception the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment of whether the derivatives that are used in hedging transactions have been, and will continue to be, highly effective in offsetting changes in fair values or cash flows or hedged items. The fair value of interest rate swap contracts is calculated as the present value of the estimated future cash flows. The fair value of forward exchange contracts is determined using forward exchange market rates at the balance sheet date. The fair values of derivative financial instruments used for hedging purposes are disclosed in Note 20. Movements in the hedging reserve in shareholders’ equity are shown in Note 26. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months; it is classified as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Hedges that meet the strict criteria for hedge accounting are accounted for as follows: (i) Cash flow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in equity in the hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in the statement of comprehensive income within finance costs. Amounts accumulated in equity are recycled in the statement of comprehensive income within finance costs in the periods when the hedged item affects profit or loss (for instance when the forecast sale that is hedged takes place). When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. (ii) Hedges of a net investment Hedges of a net investment in a foreign operation, including a hedge of a monetary item that is accounted for as part of the net investment, are accounted for in a similar way to cash flow hedges. Gains or losses on the hedging instrument relating to the effective portion of the hedge are recognised directly in equity while any gains or losses relating to the ineffective portion are recognised in the income statement. On disposal of the foreign operation, the cumulative value of any such gains or losses recognised directly in equity is transferred to the income statement. (t) Employee benefits (i) Wages and salaries, annual leave and sick leave Liabilities for wages and salaries, including non-monetary benefits, annual leave and accumulating sick leave expected to be settled within 12 months of the reporting date are recognised in other payables and provision for employee benefits 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, including appropriate on-costs. Liabilities for non-accumulating sick leave are recognised when the leave is taken and measured at the rates paid or payable. (ii) Long service leave The liability for long service leave is recognised in the provision for employee benefits 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 periods of service. Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. 58 FOR THE YEAR ENDED 31 DECEMBER 2012INVOCARE ANNUAL REPORT 2012 Note 1: Summary of Significant Accounting Policies continued (t) Employee benefits continued (iii) Bonus plans The Group recognises a liability in other payables and an expense for bonus plans 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 practices give clear evidence of a constructive obligation. (iv) Retirement benefits Employees of the Group are entitled to benefits on retirement, disability or death from the Group sponsored defined contribution superannuation plans. Fixed statutory contributions are made by the Group to these plans and are recognised as an expense as they become payable. The Group’s liability is limited to these contributions. (v) Share-based payments The Group provides benefits to certain employees, including key management personnel, in the form of share-based payments, whereby employees render services in exchange for shares, share appreciation rights or options over shares. Details of the employee share, share appreciation or option plans are set out in Note 8. The cost of equity-settled transactions with employees is measured by reference to the fair value of the equity instruments at the date granted. The cost is recognised as an employee benefit expense in the income statement, with a corresponding increase in equity, over the period during which the performance and/or service conditions are fulfilled (the vesting period), ending on the date on which the relevant employees become unconditionally entitled to the award (the vesting date). At each balance sheet date, the Group revises its estimate of the number of awards that are expected to vest. The employee benefit expense recognised each period takes into account the most recent estimate. The impact of the revision to original estimates, if any, is recognised in the statement of comprehensive income with a corresponding adjustment to equity. (u) Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Incremental costs directly attributable to the issue of new shares or options for the acquisition of a business are included in the cost of the acquisition as part of the purchase consideration. (v) Dividends Provision is made for the amount of any dividend declared being appropriately authorised and no longer at the discretion of the Company on or before the end of the financial year but not distributed at balance date. (w) Earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year. Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. (x) Goods and Services Tax (“GST”) Revenues, expenses and assets are recognised net of the amount of the GST, except where the amount of the GST incurred is not recoverable from the taxing authority. In these circumstances, the GST is recognised as part of the cost of acquisition of asset or as part of an item of the expense. Receivables and payables in the balance sheet are shown inclusive of GST. Cash flows are included in the statement 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 taxing authority, is classified as operating cash flows. (y) Parent entity financial information The financial information for the parent entity, InvoCare Limited, disclosed in Note 35 has been prepared on the same basis as the consolidated financial statements, except investments in subsidiaries and associates which are accounted for at cost in the financial statements of InvoCare Limited. Dividends received from associates are recognised as a reduction in the carrying value of the investment in associates. (z) Rounding of amounts The Company is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to rounding of amounts in the financial report. Amounts in the financial statements have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. (aa) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2012 reporting periods. The Group’s assessments of the impacts of these new standards and interpretations are set out below. (i) AASB 13 Fair Value Measurement and AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB 13 (effective 1 January 2013) AASB 13 was released in September 2011. It explains how to measure fair value and aims to enhance fair value disclosures. The Group has yet to determine which, if any, of its current measurement techniques will have to change as a result of the new guidance. It is therefore not possible to state the impact, if any, of the new rules on any of the amounts recognised in the financial statements. However, application of the new standard will impact the type of information disclosed in the notes to the financial statements. The Group does not intend to adopt the new standard before its operative date, which means that it would be first applied in the annual reporting period ending 31 December 2013. 59 INVOCARE ANNUAL REPORT 2012 Notes to the Financial Statements continued Note 2: Financial Risk Management The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, cash flow interest rate risk, price risk and fair value interest rate risk), credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses derivative financial instruments such as interest rate swaps to hedge risk exposures. The Group uses different methods to measure different types of risks to which it is exposed. These methods include sensitivity analysis in the case of interest rate, foreign exchange and price risk and ageing analysis for credit risk. Strategic risk management is carried out by the Board of Directors. The Risk Committee and Audit Committee, which operate under policies approved by the Board, are responsible for operational and financial risk management, respectively. These policies provide written principles for overall risk management, as well as policies covering specific areas such as interest rate risk and currency risk. The Group holds the following financial assets and liabilities: Financial assets Cash and cash equivalents Trade and other receivables* Prepaid contract funds under management Other financial assets Financial liabilities Trade and other payables Borrowings Derivative financial instruments * excluding prepayments 2012 $’000 2011 $’000 6,081 44,906 350,905 104 5,872 42,785 311,763 4 401,996 360,424 27,222 223,234 9,385 259,841 28,425 216,858 6,873 252,156 (a) Market risk (i) Cash flow interest rate risk The Group’s main interest rate risk arises from long-term borrowings. All borrowings are initially at variable interest rates determined by a margin over the reference rate based on the Group’s leverage ratio. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. It is the policy of the Group to keep at least 75% of debt on fixed interest rates over the next 12 months by entering into interest rate swap contracts. Following the refinancing of the Group’s debt in 2010, some borrowings were made in Singapore dollars and in 2011 part of the borrowings used to fund the acquisition of Bledisloe were made in New Zealand dollars. All borrowings are at variable rates applicable to the currency in which the borrowing was completed. The Group has entered into interest rate swap contracts under which it receives interest at variable rates and pays interest at fixed rates. The bank loans of the Group currently bear an effective average interest rate of 6.6% (2011: 6.8%) inclusive of swaps and margins but excluding establishment fees. At balance date, interest rate swaps for 91% (2011: 94%) of borrowings were in place. Of these interest rate swaps 10% (2011: 10%) were denominated in Singapore dollar and 10% (2011: 10%) in New Zealand dollar fixed interest instruments, with the balance denominated in Australian dollars. As at 31 December 2012 the weighted average fixed interest rate payable on the interest rate swaps is 4.77% (2011: 4.78%) and the weighted average variable rate receivable as at 31 December 2012 is 2.80% (2011: 3.91%). The following variable rate borrowings and interest rate swap contracts are outstanding: 31 December 2012 31 December 2011 Weighted average interest rate 6.57% 4.77% Weighted average interest rate 6.84% 4.78% Balance $’000 224,181 203,185 20,996 Balance $’000 214,986 201,486 13,500 Bank loans Interest rate swaps (notional principal) Net exposure to cash flow interest rate risk 60 FOR THE YEAR ENDED 31 DECEMBER 2012INVOCARE ANNUAL REPORT 2012 Note 2: Financial Risk Management continued (a) Market risk continued (i) Cash flow interest rate risk continued The notional principal amounts and periods of expiry of the interest rate swap contracts are as follows: Less than one year One to two years Two to three years Three to four years Four to five years 2012 $’000 2011 $’000 86,866 64,500 51,117 60,000 – – 86,439 64,500 50,547 60,000 262,483 261,486 The contracts require settlement of net interest receivable or payable each 90 days. The settlement dates coincide with the dates on which interest is payable on the underlying debt. As a consequence, the Group is exposed to interest rate risks on that portion of total borrowings not swapped to fixed rates and to potential movements in the margin due to changes in the Group’s leverage ratio. An increase of 100 basis points in Australian and New Zealand rates and 50 basis points in Singapore (2011: 100 basis points) in the interest rate would result in additional interest expense after tax of $44,000 (2011: $128,000). A decrease of 100 basis points (2011: 100 basis points) would result in an after tax gain of $197,000 (2011: $128,000). Where possible borrowings are made in the same country as the operation being funded to provide a natural hedge against currency volatility. Where this is not possible other techniques, such as foreign currency bank accounts, are used to mitigate the profit and loss volatility due to currency movements. Due to the use of floating to fixed interest rate swaps, the Group has fixed interest commitments and the changes in the fair value of the future cash flows of these derivatives are recognised in equity to the extent that the derivative remains effective in accordance with AASB 139 Financial Instruments: Recognition and Measurement. The interest rate swap contracts were all effective at 31 December 2012 and the movements in the fair value of these instruments have been quarantined in equity. If interest rates decline by 100 basis points a further $2,742,000 (2011: $4,095,000) net of tax would have been charged to equity and a 100 basis points increase in interest rates would have resulted in a credit to equity of $566,000 (2011: $3,937,000) net of tax. The overall impact on the Group has been summarised on page 66. The Group’s cash and cash equivalents held in Australia are interest bearing. At 31 December 2012 the weighted average interest rate was 2.2% (2011: 3.4%). If interest rates changed by 100 basis points (2011: 100 basis points) the Group’s after tax result would increase or decrease by $49,000 (2011: $23,000). (ii) Foreign exchange risk The Group rarely undertakes commercial transactions in currencies other than in the functional currency of the operating entity. Foreign exchange risks arise from recognised assets and liabilities that are denominated in a currency other than the Group’s functional currency, the Australian dollar. The major foreign exchange risk relates to the investments in controlled entities in New Zealand and Singapore. This exposes the Group to foreign currency risk on the assets and liabilities. Borrowings have been made in New Zealand and Singapore dollars to provide a natural hedge against the risk of changes in exchange rates. Where natural hedges do not exist, currency swap instruments are used to hedge at least 75% of the net recognised assets and liabilities which are denominated in foreign currencies. The Group’s exposure to foreign currency risk at the end of the reporting period, expressed in Australian dollars, was as follows: 2012 $’000 2011 $’000 New Zealand Dollars Singapore Dollars New Zealand Dollars Singapore Dollars Borrowings Derivatives 21,415 549 21,270 132 20,547 551 20,439 209 61 INVOCARE ANNUAL REPORT 2012 Notes to the Financial Statements continued Note 2: Financial Risk Management continued (a) Market risk continued (ii) Foreign exchange risk continued The Group has no significant unhedged foreign exchange exposures at 31 December 2012. The Singapore dollar borrowing is undertaken in Australia and designated as the hedge of a net investment in a subsidiary. The New Zealand borrowings are undertaken in New Zealand. (iii) Price risk The Group is the ultimate beneficiary of funds invested in various prepaid contract trusts, as described in Note 1(n). There are a significant number of trusts in existence with various investment profiles. Accordingly, the Group’s future revenue and margins are sensitive to the price risk relating to the investment returns of these funds under management. These funds are invested in a range of asset classes with different price risk variables including cash, fixed interest, Australian and international equities, hybrids and direct and indirect property. Based on the asset allocation as at 31 December 2012 and 31 December 2011, the following changes in investment returns are reasonably probable. Asset class Equities (plus or minus 10%) Property (plus or minus 3%) Cash and fixed interest (no price risk) 31 December 2012 31 December 2011 Increase Decrease Increase Decrease 2,807 1,790 – 4,597 (2,807) (1,790) – (4,597) 1,702 583 – 2,285 (1,702) (583) – (2,285) The returns of these funds are recognised in the income statement. An estimated 50% of the funds are expected to be realised over the next 10 years and 90% over about 25 years. In any one year approximately 13% of all Australian funeral services performed by InvoCare have been prepaid; a proportion that has been reasonably constant for many years and is not expected to significantly change in the short term. InvoCare monitors the asset allocations and investment performance at least quarterly and makes representations, where possible, to those in control of the trusts to mitigate price risks and enhance the returns which will ultimately impact InvoCare’s future results. As the funds are held in trust for relatively long periods, investment strategies take a long-term view for those trusts not restricted to more conservative, capital guaranteed assets. Historically, equities have provided the best long-term returns although the instability of the equity markets has caused a substantial shift in the investment bias towards more conservative cash and fixed interest investments. The asset allocation at year end of prepaid contract funds under management is as follows: Equities Property Cash and fixed interest 2012 % 8.0 17.0 75.0 2011 % 8.0 9.0 83.0 Approximately 75% of InvoCare’s prepaid funds under management are with Over Fifty Guardian Friendly Society. Other than disclosed above, the Group does not hold any investments in equities, which are not equity accounted, or commodities; and is therefore not subject to price risk. 62 FOR THE YEAR ENDED 31 DECEMBER 2012INVOCARE ANNUAL REPORT 2012 Note 2: Financial Risk Management continued (b) Credit risk Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers including outstanding receivables and committed transactions. For banks and financial institutions, only independently rated parties with a minimum rating of AA – are accepted. Credit risks in relation to customers are highly dispersed and without concentration on any particular region or sector. Funeral homes attempt to collect deposits at the time the service is commissioned both as a sign of good faith and in order to cover out of pocket expenses. Cemetery and crematorium products are generally not delivered prior to the receipt of all or substantially all of the amounts due. Impaired receivables (i) The total amount of the provision for doubtful receivables was $2,631,000 (2011: $2,236,000). As at 31 December 2012, receivables with a nominal value of $3,749,000 (2011: $2,522,000) had been specifically identified internally or referred to the Group’s independent debt collection agent and hence were considered to be impaired. The amount of the provision for doubtful receivables was calculated by applying the historical debt collector’s recovery ratio to all debtors over 90 days overdue. The movement in the provision for impaired receivables is set out in Note 13 – Trade and Other Receivables. (ii) Receivables past due but not impaired As of 31 December 2012, trade receivables of $6,816,000 (2011: $7,229,000) were past due but had not been referred to external debt collection agents and hence were considered not to be impaired. These relate to customers where there is no current evidence of an inability or unwillingness to settle the amount due but where payment has been delayed. The Group’s own collection activity, which varies based on the nature and relative age of the debt, is routinely applied to all past due accounts. When these activities do not result in a successful outcome, the debt is referred to external debt collection agencies. The ageing of receivables past due but not impaired follows: One to three months overdue Over three months overdue 2012 $’000 3,969 2,847 2011 $’000 3,669 3,560 (iii) Other receivables These amounts generally arise from transactions outside the normal operating activities of the Group. Interest is generally not charged on the amounts involved although collateral is generally obtained for larger amounts receivable. (iv) Interest rate risk The Group has no exposure to interest rate risk in respect of receivables as they are non-interest bearing. 63 INVOCARE ANNUAL REPORT 2012 Notes to the Financial Statements continued Note 2: Financial Risk Management continued (c) Liquidity risk Prudent liquidity management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the relatively stable nature of the Group’s business, management aims to maintain a large portion of committed credit lines on a long-term basis. The Group’s borrowings are unsecured but subject to negative pledges and the Group has complied with these covenants throughout and at the end of the year. Details of the Group’s facilities are as follows: Finance facilities available Unrestricted access was available at balance date to the following lines of credit: Total facilities – unsecured loan facility expiring in one to two years – unsecured loan facility expiring in two to five years – working capital facility expiring within one year Used at balance date – unsecured loan facility – working capital facility Unused at balance date – unsecured loan facility – working capital facility 2012 $’000 2011 $’000 64,500 190,500 6,173 127,500 127,500 6,523 261,173 261,523 224,181 1,269 214,986 653 225,450 215,639 30,819 4,904 35,723 40,014 5,870 45,884 The tables below analyse the Group’s financial liabilities into the relevant maturity groupings based on their contractual terms. Trade and other payables and borrowings are non-derivative liabilities. 31 December 2012 Trade and other payables Borrowings Derivatives 31 December 2011 Trade and other payables Borrowings Derivatives Less than one year $’000 Two to three years $’000 More than three years $’000 27,222 – 1,353 – 64,500 4,746 – 159,681 3,286 Less than one year $’000 Two to three years $’000 More than three years $’000 27,222 – – – 64,500 1,910 – 159,685 4,963 Total $’000 27,222 224,181 9,385 Total $’000 27,222 224,185 6,873 The Group’s external debt financing is provided by three of the major Australian banks and their New Zealand operations where relevant through bi-lateral revolver debt facilities totalling $255 million expiring in September 2014, 2015 and 2016. The facilities agreements’ covenant ratios are calculated on a rolling 12 month basis and have been met at 31 December 2012. The ratio of Net Debt to EBITDA (adjusted for acquisitions) must be no greater than 3.5 and the ratio of EBITDA to net interest must be greater than 3.0. 64 FOR THE YEAR ENDED 31 DECEMBER 2012INVOCARE ANNUAL REPORT 2012 Note 2: Financial Risk Management continued (d) Capital risk management The Group’s capital management objectives and strategies seek to maximise total shareholder returns, while maintaining a capital structure with acceptable debt and financial risk. The capital management goals can be broadly described as: – manage the amount of equity and the expectation of returns – including dividend distribution policy, dividend reinvestment and share buy-back policies; – maintain debt and gearing that is prudent, cost effective, supports operational needs and provides flexibility for growth and development; and avoid excessive exposure to interest rate fluctuations and debt refinancing risk. – The goals are actively managed by the use of quantifiable measures. These measures and relevant comments are as follows: – maximising shareholder returns: Earnings per share (EPS) is a key measure and for 2012, basic EPS was 40.6 cents (2011: 25.6 cents). Operating EPS, which excludes gains and losses on the disposal or impairment of non-current assets and on undelivered prepaid contracts and non-controlling interests, was 38.8 cents (2011: 34.5 cents). Importantly, senior management of the Group have long- term incentives linked to EPS growth, thus aligning employee and shareholder interests. Total shareholder return, being the sum of cash dividends and share price growth, has exceeded 22% (2011: 22%) per annum since the Company listed in December 2003, except for 2008 when global equity market values declined, although InvoCare’s share price did not fall as significantly as the rest of the market. A shareholder investing $1.00 in the initial public offering (IPO) would have enjoyed a total return of $4.86 or 486% (2011: $4.11 or 411%) up to 31 December 2012. – maintaining a minimum ordinary dividend payout ratio of at least 75% of operating earnings after tax: For each of the years since listing, the Group has distributed ordinary dividends in excess of this payout ratio. The aggregate of the interim and final 2012 dividends represents a payout ratio of 88% (2011: 89%) of operating earnings after tax. – monitoring participation in the Dividend Reinvestment Plan: Up to 25% of the Company’s shareholders have participated in the DRP – since it was first activated in October 2006. confirming compliance with the debt covenant ratios, as defined in the facility agreements, through bi-annual calculations. The Group has complied with its banking covenants as follows: – – Interest cover (EBITDA/Net Interest Expense) must be greater than 3.00:1. Leverage ratio (Net Debt/Adjusted EBITDA) must not be greater than 3.50:1. – maintaining an optimal leverage ratio: The optimal capital structure, which has the lowest cost of capital, is indicatively at a leverage ratio (i.e. Net Debt/EBITDA) of between 3:1 and 5:1. The Group can sustain and service higher levels of debt than the amount at balance date. Where the capacity exists, debt financing will be used for small acquisitions and capital expenditure. In the absence of opportunities to invest in growing the business, the Group will consider applying excess debt capacity to make returns to shareholders. – maintaining floating to fixed base interest rate swaps for at least 75% of debt principal. At 31 December 2012 the proportion of debt hedged was 91% (2011: 94%). The hedge contracts extend to the second half of 2016. – managing refinancing risk: The Group’s borrowing facilities were renewed during 2010 and in order to reduce refinancing risk were split into three tranches over three, four and five years. The first tranche originally due to expire in 2013 was refinanced in December 2012 and now expires in 2016. 65 INVOCARE ANNUAL REPORT 2012 Notes to the Financial Statements continued Note 2: Financial Risk Management continued (e) Summarised sensitivity analysis The following table summarises the sensitivity of the Group’s financial assets and financial liabilities to interest rate risk and foreign exchange risk net of applicable income tax. Interest rate risk Foreign exchange risk – 100 basis points + 100 basis points – 10% + 10% Carrying amount $’000 Profit $’000 Equity $’000 Profit $’000 Equity $’000 Profit $’000 Equity $’000 Profit $’000 Equity $’000 6,081 44,905 (49) – 350,905 104 (1,235) – – – – – (27,222) (223,234) (9,385) – (121) – – – 2,742 49 – 1,235 – – 121 – – – – – – 489 489 – – – – 7 – – – – (83) – (83) – 2,922 (2,922) 7 – – – – – 68 – 68 (3) – – – – (2,828) 2,828 (3) Interest rate risk Foreign exchange risk – 100 basis points + 100 basis points – 10% + 10% Profit $’000 Equity $’000 Profit $’000 Equity $’000 Profit $’000 Equity $’000 Profit $’000 Equity $’000 Total increase/(decrease) (1,405) 2,742 1,405 31 December 2012 Financial assets Cash and cash equivalents Accounts receivable Prepaid contract funds under management Other financial assets Financial liabilities Trade and other payables Borrowings Derivatives 31 December 2011 Financial assets Cash and cash equivalents Accounts receivable Prepaid contract funds under management Other financial assets Financial liabilities Trade and other payables Borrowings Derivatives Carrying amount $’000 5,872 42,785 311,763 4 (28,425) (214,034) (6,873) (23) – (145) – – (128) – – – – – – – (4,095) 23 – 145 – – 128 – 296 – – – – – – 3,937 3,937 – – – – – – – – – (33) – (33) – 2,044 (2,044) – – – – – – 29 – 29 – – – – – (2,044) 2,044 – Total increase/(decrease) (296) (4,095) The sensitivity analysis has been completed by applying the range values to the actual balances that existed at all points throughout the year. (f) Fair value estimation The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. The fair value of derivatives, which are recorded on the balance sheet, are measured using the cumulative dollar offset method. As of 1 January 2009, the Group adopted the amendment to AASB7 Financial Instruments: Disclosures which requires the disclosure of fair value measurements by level of the following fair value measurement hierarchy: (a) quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1); (b) inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (Level 2); and (c) inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3). The fair value of contingent consideration is calculated as the present value of the expected cash flows using a discount rate that reflects the incremental costs of borrowing used to fund the acquisition. If the discount rate was increased by 10% the contingent consideration would reduce by $19,000. Similarly, a 10% decrease in the discount rate results in an increase in contingent consideration of $21,000. 66 FOR THE YEAR ENDED 31 DECEMBER 2012INVOCARE ANNUAL REPORT 2012 Note 2: Financial Risk Management continued (f) Fair value estimation continued Level 1 Prepaid contract funds under management Level 2 Derivative financial instruments Level 3 Contingent consideration No financial instruments or derivatives are held for trading. 2012 $’000 2011 $’000 350,905 311,763 (9,717) (6,873) 2,163 116 The carrying value less impairment provisions for trade receivables and payables is a reasonable approximation of their fair values due to the short-term nature of trade receivables. Non-current trade receivables are discounted to their fair value in accordance with the accounting policy outlined in Note 1(l). Note 3: Segment Information (a) Description of segments Management has determined that the operating segments should be based on the management reporting regularly reviewed by the Chief Executive Officer. This reporting is based on the operational location of the business because different economic and cultural factors impact the growth and profitability of the segments. (b) Segment information provided to the Chief Executive Officer The segment information provided to the Chief Executive Officer for reportable segments to 31 December 2012 and 31 December 2011 is below. Australian Operations Singapore Operations New Zealand Operations Consolidated 2012 $’000 2011 $’000 2012 $’000 2011 $’000 2012 $’000 2011 $’000 2012 $’000 2011 $’000 Revenue from external customers Other revenue (excluding interest income) Operating expenses 327,866 6,568 (252,875) 295,578 5,831 (228,075) 10,624 188 (5,503) 9,519 174 (4,889) 30,162 96 (24,100) 16,016 378 (12,730) 368,652 6,852 (282,478) 321,113 6,383 (245,694) Operating EBITDA Depreciation and amortisation Finance costs Interest income Business acquisition costs Inter-segment revenue/(expense) Operating earnings before tax Income tax expense Operating earnings after tax After tax loss on prepaid contract movements Profit on sale of assets after tax Non-controlling interest Net profit after tax attributable to equity holders of InvoCare Limited Total assets Total goodwill Total liabilities 81,559 (14,459) (14,331) 744 (698) 1,260 54,075 (16,457) 73,334 (12,505) (13,530) 703 (1,309) 630 47,323 (14,972) 5,309 (498) (580) – – – 4,231 (705) 4,804 (574) (633) – – – 3,597 (603) 6,158 (1,403) (1,351) 36 (33) (1,260) 2,147 (812) 3,664 (667) (929) 26 – (630) 1,464 (402) 93,026 (16,360) (16,262) 780 (731) – 60,453 (17,974) 81,802 (13,746) (15,092) 729 (1,309) – 52,384 (15,977) 37,618 32,351 3,526 2,994 1,335 1,062 42,479 36,407 (13) 2,141 (103) (9,434) 138 (103) – 6 – – – – – (31) – – 4 – (13) 2,116 (103) (9,434) 142 (103) 39,643 22,952 3,532 2,994 1,304 1,066 44,479 27,012 785,279 742,149 29,134 26,822 47,736 37,446 862,149 806,417 84,840 80,138 11,618 11,165 32,971 31,503 129,429 122,806 659,819 615,989 23,504 22,411 26,936 25,400 710,259 663,800 67 INVOCARE ANNUAL REPORT 2012 Notes to the Financial Statements continued Note 3: Segment Information continued (c) Segment information – accounting policies The consolidated entity operates in one industry, being the funeral industry, with operations in Australia, New Zealand and Singapore. Segment revenues, expenses, assets and liabilities are those that are directly attributable to a segment and the relevant portion that can be allocated to the segment on a reasonable basis. Segment assets include all assets used by a segment and consist primarily of operating cash, receivables, inventories, property, plant and equipment and goodwill and other intangible assets, net of related provisions. Segment liabilities consist primarily of trade and other creditors and employee benefits and, in the case of Singapore, include an allocation of the long-term borrowings raised in Australia to fund the investment in Singapore. New Zealand has long-term borrowings which are arranged in New Zealand but with the support of Australia. When the consolidated financial statements were issued the goodwill balances relating to Singapore and New Zealand were transposed; this has been corrected in the table. Note 4: Revenue from Continuing Operations Sales revenue Sale of goods Services revenue Other revenue Rent Administration fees Sundry revenue 2012 $’000 2011 $’000 148,535 220,117 368,652 437 4,706 1,709 6,852 133,165 187,948 321,113 429 4,212 1,742 6,383 Total revenue from continuing operations 375,504 327,496 68 FOR THE YEAR ENDED 31 DECEMBER 2012INVOCARE ANNUAL REPORT 2012 Note 5: Expenses Profit before income tax includes the following specific expenses: Depreciation Buildings Property, plant and equipment Total depreciation Amortisation of non-current assets Cemetery land Leasehold land and buildings Leasehold improvements Brand names Total amortisation Total depreciation and amortisation Impairment of other assets Goodwill Finance costs Interest paid and payable Interest rate swap (gain)/loss Other finance costs Total financing costs Impairment losses – financial assets Trade receivables Rental expense Operating lease rental – minimum lease payments Defined contribution superannuation expense Note 6: Income Tax (a) Income tax expense Current tax Deferred tax Under/(over) provided in prior years Income tax expense attributable to continuing operations (b) Reconciliation of income tax expense to prima facie tax payable Prima facie tax at 30% (2011: 30%) on profit from ordinary activities Tax effect of amounts which are not deductible/(taxable) in calculation of taxable income Impact of previously unrecognised capital losses offsetting capital gains Impact of the eliminations of translation gains/(losses) on intercompany balances in foreign currencies Acquisition costs not deductible Other items (net) Difference in overseas tax rates Under/(over) provided in prior years 2012 $’000 2011 $’000 3,955 10,543 14,498 368 177 300 1,017 1,862 3,476 8,411 11,887 355 175 524 710 1,764 16,360 13,651 – 95 14,562 – 1,700 16,262 13,027 – 2,065 15,092 870 351 10,916 6,469 9,375 5,630 2012 $’000 2011 $’000 17,058 971 4 18,033 17,421 (5,435) 9 11,995 2012 $’000 2011 $’000 18,784 11,733 (418) 165 86 115 – – 433 423 18,732 12,589 (703) 4 (603) 9 69 INVOCARE ANNUAL REPORT 2012 Notes to the Financial Statements continued Income tax expense Note 6: Income Tax continued (c) Tax expense (income) relating to items of other comprehensive income Cash flow hedges (d) Deferred tax (asset)/liability The deferred tax (asset)/liability balances comprised temporary differences attributable to: Amounts recognised in profit and loss: Cemetery land Property, plant and equipment Deferred selling costs Prepayments and other Brand names Prepaid contracts Provisions Receivables Accruals and other Amounts recognised directly in equity: Cash flow hedge reserve The net movement in the deferred tax (asset)/liability is as follows: Balance at the beginning of the year Net charge (credit) to income statement – current period Net charge (credit) to income statement – prior periods Amounts recognised due to business combinations net of businesses subsequently sold Amounts recognised directly in equity Effect of movements in exchange rates Balance at the end of the year Deferred tax liabilities/(assets) to be settled within 12 months Deferred tax liabilities/(assets) to be settled after 12 months 2012 $’000 2011 $’000 18,033 11,995 2012 $’000 2011 $’000 (753) (2,244) 2012 $’000 2011 $’000 25,035 7,422 2,743 720 2,319 (1,108) (4,568) (528) (729) (2,804) 28,502 28,415 971 (332) 586 (753) (385) 28,502 (8,323) 36,825 28,502 25,181 8,078 2,656 675 2,286 (1,419) (5,188) 315 (2,118) (2,051) 28,415 32,679 (5,435) – 3,389 (2,244) 26 28,415 (9,137) 37,552 28,415 (e) Tax losses The Group has unutilised Australian capital losses with a potential benefit of $478,000 (2011: $882,000) at a tax rate of 30% (2011: 30%). 70 FOR THE YEAR ENDED 31 DECEMBER 2012INVOCARE ANNUAL REPORT 2012 Note 7: Key Management Personnel Disclosures (a) Key management personnel compensation Short-term employee benefits Post-employment benefits Other long-term benefits Share-based payments 2012 $ 2011 $ 3,583,879 154,589 32,897 387,025 2,859,730 132,470 31,412 444,888 4,158,390 3,468,500 Detailed remuneration disclosures are provided in the Remuneration Report on pages 35 to 47. (b) Equity instrument disclosures relating to key management personnel (i) Shares and share appreciation rights provided as remuneration Details of shares and share appreciation rights provided as remuneration, together with terms and conditions of the shares and share appreciation rights, can be found in the Remuneration Report on pages 35 to 47. The Company has not provided any options over unissued shares as remuneration during the 2012 or 2011 financial years. (ii) Holdings of shares and share appreciation rights The number of ordinary shares in the Company, or share appreciation rights in the case of overseas based key management personnel, held during the financial year by each director of InvoCare Limited and other key management personnel of the Group, including indirectly by their personally related parties or by the trustee of the InvoCare Deferred Employee Share Plan, are set out below. During the year, Long Term Incentive (“LTI”) shares or LTI rights were granted to other key management personnel under the terms of the InvoCare Deferred Employee Share Plan, the details of which are outlined in Note 8. Non-executive Directors Ian Ferrier Christine Clifton Roger Penman Benjamin Chow Richard Fisher Aliza Knox Richard Davis (note 1) Executive Directors Andrew Smith (note 2) Other key management personnel Phillip Friery (note 3) Greg Bisset (note 3) Andi Luiskandl Wee Leng Goh (note 4) Graeme Rhind (note 4) Balance at start of the year Granted during year as compensation Other changes during year Balance at end of the year 52,401 112,961 8,000 10,413 6,077 – – – – – – – – – – – – 408 238 3,050 636,607 52,401 112,961 8,000 10,821 6,315 3,050 636,607 173,766 31,537 – 205,303 111,781 53,323 – 10,987 – 8,098 16,088 5,539 5,081 4,536 (20,980) – – – – 98,899 69,411 5,539 16,068 4,536 1. The number of shares held by Richard Davis upon his appointment as Director on 21 February 2012 was 656,607 and he subsequently sold 20,000 shares during the year. 2. Due to an administrative oversight, Mr Smith’s 2012 grant of LTI shares should have been 4,255 higher. These additional shares were allocated to him during February 2013, taking his share balance to 209,558, before the granting of 2013 long-term incentive shares. 3. Upon final vesting test in February 2013, from the balance of shares held at the end of the year as shown in the above table, shares from grants made in 2008 were forfeited due to EPS performance conditions not being achieved. Phillip Friery forfeited 12,131 shares and Greg Bisset forfeited 9,098 shares. In accordance with Australian Accounting Standards, these forfeitures were taken into account in determining the share based expense for 2012 by reversing $136,670 of previous expense. 4. These grants are share appreciation rights. 71 INVOCARE ANNUAL REPORT 2012 Notes to the Financial Statements continued Note 7: Key Management Personnel Disclosures continued (c) Loans to key management personnel There were no loans to directors of the Company and other key management personnel. (d) Other transactions with key management personnel The Chairman, Ian Ferrier, is also Chairman and a shareholder of Executive Health Solutions Pty Ltd, a private company which provides specialist medical services to the corporate sector. In the current year, services were provided to the Group on normal terms and conditions amounting to $27,144 (2011: Nil). Aggregate amounts of each of the above types of other transactions with key management personnel of the consolidated entity, including their personally related parties: Amounts recognised as expense Other professional services 2012 $ 2011 $ 27,144 – At balance date there were no amounts payable in either 2012 or 2011 to key management personnel of the Group, including their personally related parties, relating to the above types of transactions. Note 8: Share-based Payments (a) Employee shares (i) Exempt employee share plan During October 2006, the Company established the InvoCare Exempt Employee Share Plan, providing plan members the opportunity to acquire ordinary shares in InvoCare Limited to the tax exempt value of $1,000. During 2012, more than 950 (2011: 850) eligible employees were invited to participate in the plan and pay the share purchase price by regular deductions from pre-tax wages or salary. The criteria for eligibility included being employed for a minimum six months as a full-time or permanent part-time employee at the time of the offer. In July 2012, 27,750 shares that had previously been forfeited were allocated to 222 plan members. The plan rules require members to leave the shares in the plan for a minimum three years after purchase, unless the member leaves the Group’s employment earlier. Future offers of participation may be made at the discretion of, and subject to terms and conditions determined by, the Board of Directors. At 31 December 2012, the balance owing by employee plan members for the purchase price of shares was $110,393 (2011: $123,162). (ii) Deferred employee share plan In 2006, following a review of long-term incentive practices by the Remuneration Committee, the Board of Directors approved the establishment of the InvoCare Deferred Employee Share Plan whereby selected key management personnel and other senior managers are able to participate and benefit from a range of remuneration opportunities, including long-term equity incentives to align executive and shareholder interests. Under the terms of the plan, employees are offered a pre-determined value of shares which the Trustee, IVC Employee Share Plan Managers Pty Ltd, purchases on market. During 2012, offers were made to and accepted by a total of 56 (2011: 54) employees and a total of 154,543 (2011: 170,594) shares purchased on market for $1,227,691 (2011: $1,257,886) at an average price of $7.94 (2011: $7.37) per share. Set out on the following page is a summary of the grants under the plan. Performance hurdles apply to certain grants to senior managers which are outlined in detail in the Remuneration Report. Shading in provisions apply with partial vesting where compound earnings per share growth is less than the target. In non-Australian jurisdictions the direct ownership of InvoCare Limited shares presents complex legal and taxation challenges in an employee share plan environment. In these cases senior non-Australian employees are granted share appreciation rights with the same vesting and performance conditions as the Australia Deferred Employee share plan. 72 FOR THE YEAR ENDED 31 DECEMBER 2012INVOCARE ANNUAL REPORT 2012 Note 8: Share-based Payments continued (b) Expenses arising from share-based payment transactions Total expenses arising from share-based payment transactions recognised during the period as part of employee benefits expense were as follows: Long-term incentive bonus share expense 2012 $’000 2011 $’000 976 1,090 (c) Employee share schemes InvoCare Limited has no options over unissued shares granted to executive management outstanding at balance date. Details of unvested grants and other movements in the deferred employee share plan follow: Grant date Vesting date Purchase price per share $ Balance at the start of the year $’000 Granted during the year $’000 Vested during the year $’000 Forfeited during the year $’000 Balance at the end of the year $’000 1 January 2007 1 January 2008 1 January 2008 1 July 2008 1 January 2009 1 March 2009 1 January 2010 1 March 2010 1 January 2011 1 March 2011 1 July 2011 1 January 2012 1 March 2012 25 February 2011 25 February 2011 25 February 2012 25 February 2012 25 February 2013 25 February 2012 25 February 2011 25 February 2012 25 February 2013 25 February 2012 25 February 2013 25 February 2012 25 February 2013 25 February 2014 25 February 2012 25 February 2013 25 February 2014 25 February 2013 25 February 2014 25 February 2015 25 February 2013 25 February 2014 25 February 2015 25 February 2013 25 February 2014 25 February 2015 25 February 2014 25 February 2015 25 February 2016 25 February 2014 25 February 2015 25 February 2016 6.21 6.33 6.33 6.01 6.01 6.33 4.87 4.87 4.87 4.87 4.87 6.01 6.01 6.01 6.01 6.01 6.01 7.37 7.37 7.37 7.37 7.37 7.37 7.37 7.37 7.37 7.94 7.94 7.94 7.94 7.94 7.94 24 172 172 45 45 58 35 291 291 51 51 275 275 275 54 54 54 328 328 328 67 67 67 7 7 7 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 404 404 404 68 68 68 3,430 1,416 (14) 26 26 (45) – (54) (14) (134) – (51) – – – – (54) – – – – – – – – – – – – – – – – – (314) (10) (23) (23) – – (4) (3) (20) (11) – (3) (21) (21) (21) – (3) (3) (23) (23) (23) (5) (5) (5) – – – – – – (2) (2) (2) – 175 175 – 45 – 19 137 279 – 48 254 254 254 – 51 51 305 305 305 62 62 62 7 7 7 404 404 404 67 67 67 (255) 4,277 Note: The data in this table has been calculated in whole dollars and presented in thousands and as a consequence some totals and movements cannot be computed from the table as presented. 73 INVOCARE ANNUAL REPORT 2012 Notes to the Financial Statements continued Note 8: Share-based Payments continued (c) Employee share schemes continued Details of unvested grants and other movements in share appreciation rights follow: Grant date Vesting date Purchase price per share $ Balance at the start of the year $’000 Granted during the year $’000 Increase during the year $’000 Balance at the end of the year $’000 22 February 2010 24 February 2011 21 February 2012 1 January 2012 1 March 2012 22 February 2012 22 February 2013 22 February 2014 24 February 2013 24 February 2014 24 February 2015 21 February 2014 21 February 2015 21 February 2016 25 February 2014 25 February 2015 25 February 2016 25 February 2014 25 February 2015 25 February 2016 6.01 6.01 6.01 7.37 7.37 7.37 7.76 7.76 7.76 7.76 7.76 7.76 7.76 7.76 7.76 14 14 14 14 14 14 – – – – – – – – – 84 – – – – – – 13 13 13 24 24 24 4 4 4 2 2 2 2 2 2 2 2 2 3 3 3 – – – 16 16 16 16 16 16 15 15 15 27 27 27 4 4 4 124 28 236 Note: The data in this table has been calculated in whole dollars and presented in thousands and as a consequence some totals and movements cannot be computed from the table as presented. The plan rules allow, in instances where full vesting does not occur, an additional year to satisfy the vesting conditions. The tranches with vesting dates in 2011 and 2012 which have closing balances will be retested in 2013 to determine if vesting will occur. Note 9: Remuneration of Auditors During the year, the following fees were paid or payable for services provided by the auditor of the parent entity, its related practices and non-related audit firms: (a) Audit services PricewaterhouseCoopers – Australian firm Audit and review of financial reports PricewaterhouseCoopers – non-Australian firm Audit and review of financial reports Non-PricewaterhouseCoopers – Singaporean firm Audit and review of financial reports Total remuneration for audit services (b) Non-audit services PricewaterhouseCoopers – Australian firm Assurance services Accounting advisory services Taxation services Other services PricewaterhouseCoopers – non-Australian firms Taxation services Other services Non-PricewaterhouseCoopers – Singaporean firm Other services Total remuneration for non-audit services 74 2012 $ 2011 $ 323,647 391,840 7,535 – 24,728 17,355 355,910 409,195 42,673 36,742 218,643 9,663 27,110 6,411 18,229 16,600 13,693 131,882 72,761 – 4,864 8,660 359,471 248,460 FOR THE YEAR ENDED 31 DECEMBER 2012INVOCARE ANNUAL REPORT 2012 Note 9: Remuneration of Auditors continued It is the Company’s policy to employ PricewaterhouseCoopers on assignments additional to their statutory audit duties where PricewaterhouseCoopers’ expertise and experience with the consolidated entity are important and auditor independence is not compromised. These assignments are principally tax advice and advisory services, or where PricewaterhouseCoopers is awarded assignments on a competitive basis. It is the Company’s policy to seek competitive tenders for any major consulting projects. Note 10: Dividends Dividends paid Final ordinary dividend for the year ended 31 December 2011 of 16.25 cents (2010: 15.25 cents) per fully paid share paid on 5 April 2012 (2010: 8 April 2011), fully franked based on tax paid at 30% (2010: 30%) Interim ordinary dividend for the year ended 31 December 2012 of 15 cents (2011: 13.5 cents) per share paid on 5 October 2012 (2011: 7 October 2011), fully franked based on tax paid at 30% (2011: 30%) Dividends paid to members of InvoCare Limited On 19 November 2012 (2011: 25 January 2011 and 18 August 2011) dividend totalling 10.4 cents (2011: 13.7 cents) per fully paid share, fully franked based on tax paid at 30%, was paid to non-controlling interests. Dividends not recognised at year end In addition to the above dividends, since the year end, the directors recommended the payment of a final dividend to InvoCare Limited shareholders of 19.0 cents (2011: 16.25 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 5 April 2013 out of 2012 profits, but not recognised as a liability at year end is: Franking credit balance The amounts of franking credits available for subsequent financial years are: Franking account balance at the end of the financial year Franking credits that will arise from the payment of income tax payable at the end of the financial year Reduction in franking account resulting from payment of proposed final dividend of 19.0 cents (2011: 16.25 cents) Note 11: Earnings per Share Reconciliation of Earnings to Profit and Loss Profit from ordinary activities after income tax Less profit attributable to non-controlling interests Profit used to calculate basic and diluted EPS 2012 $’000 2011 $’000 17,885 15,619 16,505 34,390 14,568 30,187 83 111 34,473 30,298 20,906 17,880 14,490 3,903 (8,960) 9,433 14,626 7,249 (7,663) 14,212 2012 $’000 2011 $’000 44,582 (103) 44,479 27,115 (103) 27,012 2012 Number 2011 Number Weighted average number of shares used as the denominator Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share Weighted average number of ordinary shares used as the denominator in calculating diluted earnings per share 109,498,442 105,405,838 109,498,442 105,405,838 75 INVOCARE ANNUAL REPORT 2012 Notes to the Financial Statements continued Note 11: Earnings per Share continued Earnings per share for profit attributable to the ordinary equity holders of the Company Basic earnings per share (cents per share) Diluted earnings per share (cents per share) Note 12: Cash and Cash Equivalents Cash on hand Cash at bank Cash at bank attracts floating interest rates between 1.25% and 3.05% (2011: 2.9% and 4.0%) Reconciliation to cash at the end of the year: The above figures are reconciled to cash at the end of the financial year as shown in the statement of cash flows as follows: Balances as above Balances per the statement of cash flows Note 13: Trade and Other Receivables Current Trade receivables Provision for doubtful receivables Prepayments Other receivables Non-current Trade receivables Provision for doubtful receivables Security deposits Other receivables (a) Impaired receivables Movements in the provision for impairment of receivables are as follows: Balance at the beginning of the year Provision for impairment recognised during the year Receivables written off as uncollectible Increase due to business combinations Balance at the end of the year 76 2012 cents 40.6 40.6 2012 $’000 72 6,009 6,081 2011 cents 25.6 25.6 2011 $’000 70 5,802 5,872 6,081 6,081 5,872 5,872 2012 $’000 2011 $’000 30,750 (2,541) 4,554 1,777 34,540 14,303 (90) 307 400 14,920 2012 $’000 2,236 870 (475) – 2,631 29,329 (2,197) 3,327 1,895 32,354 13,133 (39) 264 400 13,758 2011 $’000 1,594 351 (399) 690 2,236 FOR THE YEAR ENDED 31 DECEMBER 2012INVOCARE ANNUAL REPORT 2012 Note 14: Inventories Current Work in progress – at cost Finished goods – at cost Note 15: Prepaid Contracts (a) Income statement impact of undelivered prepaid contracts Gain/(loss) on prepaid contract funds under management Change in provision for prepaid contract liabilities Net gain/(loss) on undelivered prepaid contracts (b) Movements in prepaid contract funds under management Balance at the beginning of the year Sale of new prepaid contracts Initial recognition of contracts paid by instalment Redemption of prepaid contract funds following service delivery Increase due to business combinations net of assets subsequently sold Increase in fair value of contract funds under management Balance at the end of the year (c) Movements in prepaid contract liabilities Balance at the beginning of the year Sale of new prepaid contracts Initial recognition of contracts paid by instalment Decrease following delivery of services Increase due to business combinations net of liabilities subsequently sold Increase due to re-evaluation of delivery obligation Balance at the end of the year 2012 $’000 2011 $’000 833 20,529 21,362 887 18,971 19,858 2012 $’000 2011 $’000 17,646 (17,664) 2,067 (15,544) (18) (13,477) 2012 $’000 2011 $’000 311,763 30,414 2,563 (28,288) 16,807 17,646 273,544 26,651 1,681 (26,360) 34,180 2,067 350,905 311,763 2012 $’000 2011 $’000 317,598 30,414 2,563 (30,346) 17,197 17,664 264,646 26,651 1,681 (25,657) 34,733 15,544 355,090 317,598 77 INVOCARE ANNUAL REPORT 2012 Notes to the Financial Statements continued Note 15: Prepaid Contracts continued (d) Nature of contracts under management and liabilities Prepaid contracts are tripartite agreements whereby InvoCare agrees to deliver a specified funeral service, cremation or burial at the time of need and the beneficiary invests the current price of the service to be delivered with a financial institution and conditionally assigns the benefit to InvoCare. InvoCare records the value of the invested funds as an asset and revalues the invested funds to fair value at the end of each reporting period. InvoCare also records a liability at the current selling price of the service to be delivered and adjusts this liability for the change in selling prices during the period. The assignment of the benefit of the invested funds to InvoCare, in most cases, only becomes unconditional when InvoCare demonstrates that it has delivered the service specified. InvoCare receives the investment returns as well as the initial investment when the service has been delivered. As generally required by law, the funds are controlled by trustees who are independent of InvoCare. InvoCare permits, on request, contracts to be paid by instalments over periods not exceeding three years. In some instances these contracts are never fully paid. If, during the three year period the contract becomes at need, the family is given the option of either paying outstanding instalments and receiving the contracted services at the original fixed price or using the amount paid as a part payment of the at need service. If the contract is not fully paid after three years InvoCare only permits the family to use the amounts paid as a partial payment of the at need services. At balance date the total instalments received were $5,727,000 (2011: $4,991,000). These funds and the relevant liability are recognised when the contract has been fully paid. During the year the non-cash fair value movements (i.e. investment earnings) of $17.6 million in prepaid contract funds under management (2011: $2.1 million) matched the non-cash growth due to selling price increases of $17.6 million in the liability for future service delivery obligations (2011: $15.5 million). The improvement in the investment earnings reflected the full year impact of decisions taken in the second half of 2011 to change the asset allocations in the main prepaid fund. 78 FOR THE YEAR ENDED 31 DECEMBER 2012INVOCARE ANNUAL REPORT 2012 Note 16: Subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of InvoCare Limited and the following controlled entities in accordance with the accounting policy in Note 1(b). Name of entity InvoCare Australia Pty Limited New South Wales Cremation Company Pty Limited A.C.N. 002 553 746 Pty Limited (Struck off in 2012) A.C.N. 000 030 491 Pty Limited (Struck off in 2012) A.C.N. 050 110 453 Pty Limited (Struck off in 2012) LifeArt Australasia Pty Limited Macquarie Memorial Park Pty Limited A.C.N. 008 826 453 Pty Limited (Struck off in 2012) 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 A.C.N. 003 778 792 Pty Limited (Struck off in 2012) A.C.N. 068 935 348 Pty Ltd (Struck off in 2012) A.C.N. 060 625 372 Pty Limited (Struck off in 2012) A.C.N 054 583 345 Pty Ltd (Struck off in 2012) Bledisloe Group Holdings Pty Ltd Bledisloe Finance Pty Ltd Bledisloe Holdings Pty. Ltd. Bledone Pty Ltd Bledtwo Pty Ltd Bledisloe Australia Pty Ltd A.C.N. 001 068 373 Pty Ltd A.C.N. 000 146 261 Pty Ltd A.C.N. 000 963 299 Pty Ltd F Tighe & Co Pty Ltd Crematorium Chapel Funerals of Australasia Pty Ltd William Lee & Sons Pty Ltd Australian Pre-Arranged Funeral Plan Pty Ltd Dylhost Pty Ltd Australian Funerals Pty Limited Metropolitan Funeral Services Pty. Ltd. Sydney Cremation Services Pty Ltd Cemetery & Crematorium Management Services Pty Ltd Cemetery & Crematorium Finance Trust Nationwide Care Services Pty Ltd South-East Asia & Australasian Services Pty Ltd Tuckers Funeral & Bereavement Services Pty Ltd Geelong Mortuary Transfer Services Pty Ltd IVC Employee Share Plan Managers Pty Ltd InvoCare (Singapore) Pty Limited Singapore Casket Company (Private) Limited Casket Palace Pte Ltd Simplicity Casket Private Limited Casket Company Embalming and Funeral Services Pte. Ltd Lavender Flora Pte Ltd Simplicity Flora Pte Ltd SCC Funeral Supplies Pte. Ltd. SCC Care Pte. Ltd. SCC Bereavement Services Pte. Ltd. SCC Tentage Pte. Ltd. InvoCare New Zealand Limited Bledisloe New Zealand Holdings Limited Bledisloe New Zealand Limited InvoCare Hong Kong Limited Country of incorporation Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Singapore Singapore Singapore Singapore Singapore Singapore Singapore Singapore Singapore Singapore New Zealand New Zealand New Zealand Hong Kong Equity Holding 2012 % 2011 % 100 100 – – – 100 83 – 100 100 100 100 100 100 100 100 100 – – – – 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 – 100 100 100 100 100 100 100 100 83 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 – – 100 100 100 100 100 100 – – – – – – 100 100 100 100 79 INVOCARE ANNUAL REPORT 2012 Notes to the Financial Statements continued Note 16: Subsidiaries continued Shares in subsidiaries are carried at cost and relate to InvoCare Limited’s ownership interest in InvoCare Australia Pty Limited, InvoCare (Singapore) Pty Limited, InvoCare New Zealand Limited, InvoCare Hong Kong Limited and IVC Employee Share Plan Managers Pty Ltd. All shares held are ordinary shares. InvoCare Australia Pty Limited, InvoCare (Singapore) Pty Limited and Bledisloe Australia Pty Ltd have been granted relief from the necessity to prepare financial reports in accordance with Class Order 98/1418 issued by the Australian Securities and Investments Commission. For further information refer to Note 32. Effective from 31 December 2012, Bledisloe New Zealand Holdings Limited was amalgamated with InvoCare New Zealand Limited and therefore ceased to exist. Note 17: Equity Accounted Investments (a) The carrying amount of the Equity Accounted Investment at the beginning of 2012 is nil and there have been no movements in the carrying amount during 2012. (b) Summarised financial information of associates The Group’s unrecognised share of the result of its associates and their aggregated assets (including goodwill) and liabilities is as follows: Ownership Interest % Group’s share of: Assets $’000 Liabilities $’000 Revenues $’000 Profit $’000 2012 HeavenAddress Pte. Ltd 2011 HeavenAddress Holdings Pty Ltd 27.59 27.59 135 216 73 55 98 111 (118) (69) This associate is an unlisted private company incorporated in Singapore (2011: Australia) and the initial investment was made during 2010. (c) Transactions with non-controlling interests On 13 July 2010, a controlled entity, InvoCare Australia Pty Limited, subscribed for shares representing an equity interest of 27.59% of HeavenAddress Holdings Pty Ltd. At the same time a services agreement was executed between HeavenAddress Holdings and InvoCare Australia for the provision of services enabling client families to post online obituaries on the web. In July 2012 a payment of $300,000 (2011: $300,000) was made for the period to June 2013. In October 2012 the shares held in HeavenAddress Holdings Pty Ltd were exchanged for an equivalent number of shares in HeavenAddress Pte Limited. Contemporaneously, a new service agreement between the Group and HeavenAddress was entered into and HeavenAddress Holdings Pty Ltd became a 100% owned subsidiary of HeavenAddress Pte Ltd. Subsequent to the end of the financial period a further $5 million was invested to assist the growth of the business. 80 FOR THE YEAR ENDED 31 DECEMBER 2012INVOCARE ANNUAL REPORT 2012 Note 18: Property, Plant and Equipment Cemetery land $’000 Freehold land $’000 Buildings $’000 Leasehold land and buildings $’000 Leasehold improve- ments $’000 Plant and equipment $’000 Total $’000 At 1 January 2012 Cost Accumulated depreciation/amortisation Impairment write-downs 106,437 (5,939) (15,976) 73,352 – – 120,718 (38,301) – 5,087 (2,344) – 3,877 (1,892) – 92,298 (54,779) – 401,769 (103,255) (15,976) Net book amount 84,522 73,352 82,417 2,743 1,985 37,519 282,538 Year ended 31 December 2012 Additions Business combinations Disposals Depreciation/ amortisation charge Effect of movement in exchange rates Transfers/reclassifications 352 (600) – (368) – – – 2,925 – – 613 (2,000) 2,151 1,017 (5) (3,955) 328 (632) – – – (177) – (187) 524 101 (2) (300) 2 – 12,748 585 (306) (10,543) 165 – 15,775 4,028 (313) (15,343) 1,108 (2,819) Closing net book amount 83,906 74,890 81,321 2,379 2,310 40,168 284,974 At 31 December 2012 Cost Accumulated depreciation/amortisation Impairment write-downs 106,189 (6,307) (15,976) 74,890 – – 123,627 (42,306) – 4,900 (2,521) – 4,518 (2,208) – 99,960 (59,792) – 414,084 (113,134) (15,976) Net book amount 83,906 74,890 81,321 2,379 2,310 40,168 284,974 At 1 January 2011 Cost Accumulated depreciation/amortisation Impairment write-downs 105,079 (5,554) (15,976) 49,504 – – 97,550 (32,471) – Net book amount 83,549 49,504 65,079 Year ended 31 December 2011 Additions Business combinations Disposals Depreciation/amortisation charge Effect of movement in exchange rates Transfers/reclassifications 85 1,243 – (355) – – – 24,435 (1) – (261) (325) 5,254 16,234 (238) (3,476) (136) (300) 4,351 (2,169) – 2,182 – 736 – (175) – – 2,781 (1,369) – 70,517 (40,105) – 329,782 (81,668) (15,976) 1,412 30,412 232,138 510 597 (9) (524) (1) – 10,285 5,850 (531) (8,409) (88) – 16,134 49,095 (779) (12,939) (486) (625) Closing net book amount 84,522 73,352 82,417 2,743 1,985 37,519 282,538 At 31 December 2011 Cost Accumulated depreciation/amortisation Impairment write-downs 106,437 (5,939) (15,976) 73,352 – – 120,718 (38,301) – 5,087 (2,344) – 3,877 (1,892) – 92,298 (54,779) – 401,769 (103,255) (15,976) Net book amount 84,522 73,352 82,417 2,743 1,985 37,519 282,538 During the year a property in Brunswick, Melbourne, Victoria was deemed to be surplus to the needs of the Group and was sold with the settlement deferred until the middle of 2013. This land and building has been reclassified as an asset held for sale and is recorded as a transfer in the table above. 81 INVOCARE ANNUAL REPORT 2012 Notes to the Financial Statements continued Note 18: Property, Plant and Equipment continued (a) Assets in the course of construction The carrying amounts of assets disclosed above include the following expenditure recognised in relation to property, plant and equipment which is in the course of construction: Freehold buildings Leasehold improvements Plant and equipment Total assets in the course of construction 2012 $’000 1,067 9 577 1,653 2011 $’000 4,251 166 256 4,673 (b) Impairment All impaired cemetery and crematorium sites were reassessed at 31 December 2012 using the same methodology as previously applied and no change to the impairment provision was considered necessary in 2012. The impairment losses may be reversed in future years. The Group has no impairment at other cemetery and crematorium sites, or of other property, plant and equipment assets. The total recoverable amount of the Group’s assets is well in excess of carrying value. The recoverable amount of cash generating units is based on value-in-use calculations. These calculations use cash flow projections based on financial estimates approved by management based on past performance and future expectations. The cash flows cover an initial five- year period and are then extrapolated beyond five years using estimated growth rates of 4% in revenues and 3% in expenses which are not inconsistent with historical trends and forecasts included in reports prepared by market analysts. A sensitivity analysis has been conducted on the impaired sites by moving the underlying assumptions both up and down 10%. This analysis demonstrates that changing the assumptions is unlikely to result in a material change in the currently recognised impairment losses. Management considers that a +/– 10% shift is within the reasonably possible range of long-term outcomes. The pre-tax discount rate used was 10.9% (2011: 10.7%), reflecting the risk estimates for the business as a whole. 82 FOR THE YEAR ENDED 31 DECEMBER 2012INVOCARE ANNUAL REPORT 2012 Note 19: Intangible Assets At 1 January 2012 Cost Accumulated amortisation Net book amount Year ended 31 December 2012 Acquisition of subsidiary/businesses net of divestments Effect of movement in exchange rates Amortisation charge Net book amount At 31 December 2012 Cost Accumulated amortisation Net book amount At 1 January 2011 Cost Accumulated amortisation Net book amount Year ended 31 December 2011 Acquisition of subsidiary/businesses net of divestments Effect of movement in exchange rates Impairment Amortisation charge Net book amount At 31 December 2011 Cost Accumulated amortisation Net book amount Goodwill $’000 Brand name $’000 Total $’000 122,806 – 122,806 4,849 1,774 – 10,068 (2,083) 132,874 (2,083) 7,985 130,791 961 126 (1,017) 5,810 1,900 (1,017) 129,429 8,055 137,484 129,429 – 129,429 59,608 – 59,608 63,701 (408) (95) – 122,806 122,806 – 122,806 11,179 (3,124) 140,608 (3,124) 8,055 137,484 3,948 (1,359) 2,589 6,156 (50) – (710) 7,985 63,556 (1,359) 62,197 69,857 (458) (95) (710) 130,791 10,068 (2,083) 132,874 (2,083) 7,985 130,791 (a) Impairment test for goodwill For the Group’s Australian-based operations, goodwill cannot be allocated on a non-arbitrary basis to individual Cash Generating Units (“CGUs”) due to the significant history of numerous acquisitions, especially during the years 1993 to 1999, and resulting post-acquisition business integration activities and operational changes over many years. The New Zealand and Singapore operations are separate CGUs and the associated goodwill arising from that acquisition has been allocated to the single New Zealand or Singaporean CGU. As a result, the lowest level within the Group at which goodwill is monitored for management purposes comprises the grouping of all CGUs within a country of operation. The recoverable amounts of the total of Australian, New Zealand and Singaporean CGUs are based on value-in-use calculations. These calculations use cash flow projections based on financial estimates approved by management covering a five-year period. Cash flows beyond the five-year period have been extrapolated using estimated growth rates. Management has assessed that a reasonable possible long-term shift in key assumptions will not cause further impairment. (b) Key assumptions used for value-in-use calculations Management determined budgeted cash flows based on past performance and its expectations for the future. The growth rates of 4% in revenue and 3% in expense projections are not inconsistent with historical trends and forecasts included in reports prepared by market analysts. The pre-tax discount rate used for assessing the carrying value of goodwill in each CGU was 10.9% (2011: 10.7%), reflecting the risk estimates for the business as a whole. Sensitivity analysis indicates significant headroom exists in the value-in-use calculations for Australia, New Zealand and Singapore compared to the carrying value of goodwill. 83 INVOCARE ANNUAL REPORT 2012 Notes to the Financial Statements continued Note 20: Derivative Financial Instruments Current liabilities Interest rate swap contracts – cash flow hedges Non-current liabilities Interest rate swap contracts – cash flow hedges 2012 $’000 2011 $’000 1,353 1,353 8,032 8,032 – – 6,873 6,873 Full details of the derivatives being used by the Group and the risks and ageing of the existing derivatives are set out in Note 2 – Financial Risk Management. In September 2010, a controlled entity entered into a bank loan amounting to SG$27 million. This loan, which was taken out to support the investment in Singapore, has been designated as a hedge of the net investment in this subsidiary. The fair value and carrying amount of the borrowing at 31 December 2012 was $21.3 million (31 December 2011: $20.4 million). There was no ineffectiveness to be recorded from net investments in foreign entity hedges. Note 21: Trade and Other Payables Current Trade payables Sundry payables and accrued expenses Deferred cash settlement for business interests acquired Non-current Deferred cash settlement for business interests acquired 2012 $’000 2011 $’000 16,950 8,109 – 25,059 2,163 2,163 20,798 7,511 46 28,355 70 70 Full details of the risks and currency exposure of trade and other payables are set out in Note 2 – Financial Risk Management. Note 22: Borrowings Short-term borrowings Lease liabilities Long-term borrowings Borrowings are represented by: Principal amount of bank loans – unsecured Lease liabilities Loan establishment costs Full details of the risks, ageing and available facilities are set out in Note 2 – Financial Risk Management. 84 2012 $’000 2011 $’000 17 17 1,872 1,872 224,181 10 (974) 214,986 – (952) 223,217 214,034 FOR THE YEAR ENDED 31 DECEMBER 2012INVOCARE ANNUAL REPORT 2012 Note 23: Provisions for Employee Benefits Current Employee benefits Non-current Liability for long service leave (a) Employee numbers Number of full-time equivalent employees 2012 $’000 2011 $’000 12,431 11,688 1,735 1,577 2012 Number 2011 Number 1,470 1,430 (b) Superannuation plan The Company contributes to accumulation-type employee superannuation plans in accordance with statutory requirements. Note 24: Current Liabilities expected to be Settled within 12 Months The amounts included in current liabilities which are expected to be settled within 12 months are set out below. Trade and other payables Short-term borrowings Current tax liabilities Prepaid contract liabilities Deferred revenue Employee benefits Total Current Liability Expected to Settle within Twelve Months 2012 $’000 2011 $’000 2012 $’000 2011 $’000 25,059 17 5,216 355,090 3,161 12,431 28,355 1,872 8,278 317,598 3,112 11,688 400,974 370,903 25,059 17 5,216 30,006 3,161 6,095 69,554 28,355 1,872 8,278 28,901 3,112 7,259 77,777 The amounts expected to be settled within 12 months have been calculated based on the historical settlement patterns. Note 25: Contributed Equity Fully paid ordinary shares Ordinary shares Balance at the beginning of the financial year Dividend reinvestment plan issues Shares issued in a business combination Total contributed equity Treasury shares (Note 25 (b)) 2012 $’000 2011 $’000 132,687 133,336 2012 Number 2012 $’000 2011 Number 2011 $’000 110,030,298 – – 136,858 – – 102,421,288 2,331,783 5,277,227 82,863 16,060 37,935 110,030,298 136,858 110,030,298 136,858 (634,252) (4,171) (572,791) (3,522) Total consolidated contributed equity 109,396,046 132,687 109,457,507 133,336 85 INVOCARE ANNUAL REPORT 2012 Notes to the Financial Statements continued Note 25: Contributed Equity continued (a) Ordinary shares 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. (b) Treasury shares Treasury shares are shares in InvoCare Limited that are held by the InvoCare Deferred Employee Share Plan Trust for the purpose of issuing shares under the InvoCare Deferred Employee Share Plan, as set out in Note 8. Date Details 1 January 2011 Balance Number of shares $’000 518,763 2,926 22 to 25 February 2011 24 February to 3 March 2011 1 July 2011 5 July 2011 15 July 2011 10 October 2011 14 October 2011 Shares vested Acquisition of shares by the Trust and reallocation of previously forfeited shares Transfer of shares to members of the Exempt Employee Share Plan Forfeit of shares on termination of employment Forfeit of shares on termination of employment Forfeit of shares on termination of employment Forfeit of shares on termination of employment Unallocated shares held by the Trustee (113,895) 170,594 (1,998) (4,668) (2,114) (12,106) (1,356) 19,571 (627) 1,258 (15) (27) (13) (75) (10) 105 31 December 2011 Balance 572,791 3,522 Shares vested 25 February 2012 20 March 2012 to 10 April 2012 Acquisition of shares by the Trust and reallocation of previously forfeited shares Forfeit of shares on termination of employment 02 January 2012 Shares forfeited due to failing vesting conditions 25 February 2012 Forfeit of shares on termination of employment 14 March 2012 Forfeit of shares on termination of employment 20 March 2012 Forfeit of shares on termination of employment 30 June 2012 Transfer of shares to members of the Exempt Employee Share Plan 01 July 2012 Forfeit of shares on termination of employment 21 November 2012 Forfeit of shares on termination of employment 04 December 2012 Shares granted but not yet allocated by the plan Trustee 14 December 2012 Shares provisionally forfeited but not yet de-allocated by the plan Trustee 31 December 2012 Unallocated shares held by the Trustee 31 December 2012 Balance (66,946) 160,419 (678) (1,556) (2,194) (23,416) (11,458) (27,750) (678) (629) 17,815 (27,444) 45,976 634,252 (367) 1,274 (5) (10) (13) (146) (72) (221) (5) (5) 141 (174) 252 4,171 (c) Dividend reinvestment plan During 2006, the Company activated its Dividend Reinvestment Plan under which holders of ordinary shares may elect to have all or part of their dividend entitlements satisfied in ordinary shares rather than by being paid in cash. 86 FOR THE YEAR ENDED 31 DECEMBER 2012INVOCARE ANNUAL REPORT 2012 Note 26: Reserves and Retained Profits (a) Reserves Share-based payments reserve Hedging reserve – cash flow hedge reserve Foreign currency translation reserve Movements: Share-based payments reserve Balance at the beginning of the year Deferred employee share plan expense Vesting of deferred employee share plan shares Balance at the end of the year Hedging reserve Balance at the beginning of the year Revaluation to fair value – gross Deferred tax Balance at the end of the year Foreign currency translation reserve Balance at the beginning of the year Currency translation differences Balance at the end of the year (b) Retained profits/(accumulated losses) Movements in retained profits/(accumulated losses) were as follows: Balance at the beginning of the year Net profit for the year Dividends paid during the year Balance at the end of the year 2012 $’000 2011 $’000 2,504 (6,564) 940 (3,120) 2,166 705 (367) 2,504 (4,822) (2,495) 753 (6,564) (278) 1,218 940 2,166 (4,822) (278) (2,934) 1,810 973 (617) 2,166 450 (7,516) 2,244 (4,822) (172) (106) (278) 11,084 44,479 (34,390) 21,173 14,259 27,012 (30,187) 11,084 (c) Nature and purpose of reserves (i) Share-based payments reserve The share-based payments reserve is used to recognise the expensed portion of shares granted to employees under the terms of the Deferred Employee Share Plan. (ii) Hedging reserve – cash flow hedge reserve The hedging reserve is used to record gains or losses on hedging instruments that are cash flow hedges which are recognised directly in equity. Amounts are recognised in profit and loss when the associated hedged transaction affects the profit and loss. (iii) Foreign currency translation reserve Exchange differences arising on translation of the foreign controlled entities and from the hedging of the net investment in foreign operations are taken to the foreign currency translation reserve as set out in Notes 1(d) and 1(s). The reserve is recognised in the profit and loss when the net investment is sold. 87 INVOCARE ANNUAL REPORT 2012 Notes to the Financial Statements continued Note 27: Non-controlling Interests Reconciliation of non-controlling interests in controlled entities: Share capital Retained earnings Balance at the beginning of the year Add share of operating earnings Less dividends paid Closing balance of retained earnings Reserves Balance at the end of the year Note 28: Capital and Leasing Commitments (a) Operating lease commitments Non-cancellable operating leases contracted for at the reporting date but not capitalised in the financial statements: Payable – minimum lease payments – not later than 12 months – between 12 months and five years – greater than five years 2012 $’000 2011 $’000 800 232 103 (83) 252 99 800 240 103 (111) 232 99 1,151 1,131 2012 $’000 2011 $’000 9,553 20,555 14,676 44,784 8,350 18,170 14,906 41,426 Non-cancellable operating leases contracted for at the reporting date but not capitalised in the financial statements include the following: Not later than 12 months Between 12 months and five years Greater than five years Property $’000 Equipment $’000 Total $’000 8,690 19,521 14,650 42,861 863 1,034 26 1,923 9,553 20,555 14,676 44,784 88 FOR THE YEAR ENDED 31 DECEMBER 2012INVOCARE ANNUAL REPORT 2012 Note 28: Capital and Leasing Commitments continued The Group leases premises, motor vehicles and sundry office equipment under non-cancellable operating leases with terms generally from one to five years. The Rookwood Crematorium lease expires in 2025. The Great Southern Garden of Remembrance lease expires in 2047 with an option to renew for a further 50 years. (b) Finance lease commitments Non-cancellable finance leases in respect of motor vehicles contracted for at the reporting date and capitalised in the financial statements: Payable – minimum lease payments – not later than 12 months – between 12 months and five years (c) Capital expenditure commitments Capital expenditure commitments contracted for at the reporting date but not recognised as liabilities payable: Building extensions and refurbishments – within one year Plant and equipment purchases – within one year (d) Other expenditure commitments Documentary letters of credit outstanding at balance date payable: – within one year 2012 $’000 2011 $’000 17 10 27 – – – 218 930 1,592 766 84 129 Note 29: Business Combinations Tuckers Funeral & Bereavement Services (a) Summary of acquisition: On 10 December 2012, a subsidiary InvoCare Australia Pty Limited completed the acquisition of Tuckers Funeral & Bereavement Services Pty Ltd and Geelong Mortuary Transfer Services Pty Ltd together with the property assets owned by a party related to the vendors (“Tuckers”). Tuckers has been operating since 1883, and is recognised to be one of the largest regional funeral directors in Australia. The company operates in the state of Victoria and its main facilities are located in Geelong West, with additional chapels and offices located in Grovedale, Lara and Barrabool Hills. Provisional accounting for this acquisition has been completed as at 31 December 2012. Details of the purchase consideration, the net assets acquired and goodwill are as follows: (b) Purchase consideration: Purchase consideration Cash paid Contingent consideration Total purchase consideration Fair value of net identifiable assets acquired (refer (c) below): Goodwill The goodwill recognised is attributable to the workforce and high profitability of the acquired business. It will not be deductible for tax purposes. $’000 8,650 2,117 10,767 4,961 5,806 89 INVOCARE ANNUAL REPORT 2012 Notes to the Financial Statements continued Note 29: Business Combinations continued (c) Assets acquired The assets and liabilities recognised as a result of the acquisition are as follows: Cash Receivables Inventories Prepaid contract funds under management Property, plant and equipment Deferred Tax Liabilities Brand name Trade and other payables Income tax payable Prepaid contract liabilities Provisions Onerous contracts Net identifiable assets acquired Fair Value $’000 84 427 87 16,807 4,835 (364) 961 (340) (95) (16,807) (244) (390) 4,961 Contingent consideration includes a total of $2.1 million in future payments if predetermined revenue targets are achieved in each of the next three calendar years along with a working capital adjustment determined after the delivery of final completion accounts. The fair value of acquired trade receivables is $427,000. The acquired business contributed revenues of $413,000 and after tax profit of $27,000 to the Group for the period from 10 December 2012 to 31 December 2012. If the acquisition had occurred on 1 January 2012, consolidated revenue and profit for the year ended 31 December 2012 would have been increased by approximately $6.8 million and profit after tax by approximately $650,000. Acquisition-related costs of $284,000 are included in other expenses in profit or loss and in investing cash flows in the statement of cash flows. Bledisloe Group The acquisition of the Bledisloe Group, completed on 15 June 2011, was accounted for provisionally as at 31 December 2011. Subsequently, further information has come to light about certain events prior to the acquisition date which has caused a re-assessment of the fair values recognised as at 31 December 2011. The following table outlines the movements. Receivables Inventories Prepaid contract funds under management Property, plant and equipment Other financial assets Intangible assets: Brand name Trade and other payables Bank overdraft Income tax payable Prepaid contract liabilities Prepaid contract onerous liabilities Provisions Long-term borrowings Deferred purchase consideration Deferred tax liabilities Net identifiable assets acquired Fair1 Value on Acquisition $’000 Assets2 Disposed $’000 Adjustment to Fair Values $’000 5,629 1,395 37,393 51,123 4 6,504 (9,109) (187) (531) (37,393) (588) (2,372) (37,758) (372) (3,577) 10,161 (70) (148) (3,213) (2,028) – (359) – – – 3,213 – 219 – – 188 (2,198) (163) – – (807) – – – – – – – 977 – – 950 957 Revised Fair Value $’000 5,396 1,247 34,180 48,288 4 6,145 (9,109) (187) (531) (34,180) (588) (1,176) (37,758) (372) (2,439) 8,920 1. The Fair Value on Acquisition is the initial value ascribed to all Bledisloe assets and liabilities acquired on 15 June 2011 and as reported in the financial report dated 31 December 2011. 2. Assets disposed represent the fair value of assets and liabilities of Gregory & Carr and Great Northern Garden of Remembrance that were disposed of in accordance with the ACCC undertaking as disclosed in the financial report dated 31 December 2011. 90 FOR THE YEAR ENDED 31 DECEMBER 2012INVOCARE ANNUAL REPORT 2012 Note 29: Business Combinations continued Goodwill arising from this acquisition has been reduced by $957,000 to $62,744,000. Bledisloe acquisition On the acquisition of Bledisloe a number of existing businesses, included in the fair values acquired, were still subjected to deferred consideration arrangements. Subsequent to acquisition of Bledisloe the following transaction has occurred in relation to these pre- acquisition business combinations. Guardian North City Funeral Home, New Zealand This business was acquired by the Bledisloe Group in July 2010 and operates in Porirua, New Zealand which is to the north of Wellington. During the year, on the achievement of pre-agreed earnings targets an additional payment of NZ$60,000 was made. Further payments may occur in 2013 if the earnings targets are achieved. Note 30: Contingent Liabilities and Contingent Assets 2012 $’000 2011 $’000 The Group had contingent liabilities at 31 December 2012 in respect of bank guarantees given for leased premises of controlled entities to a maximum of: 1,269 1,242 For information about the deed of cross guarantees given by InvoCare Limited, InvoCare Australia Pty Limited, InvoCare (Singapore) Pty Limited, Bledone Pty Ltd and Bledisloe Australia Pty Ltd, refer to Note 32. No liability was recognised by the consolidated entity in relation to the guarantees as the fair value of the guarantees is immaterial. Note 31: Cash Flow Information Reconciliation of cash flow from operations with profit from ordinary activities after income tax Profit from ordinary activities after income tax Non-cash items in profit from ordinary activities Depreciation, amortisation and impairment Share-based payments expense Loan establishment costs Imputed interest from deferred purchase consideration Net (gain)/loss on disposal of property, plant and equipment Unrealised (gain)/loss on prepaid contracts Other prepaid contract movements Once off acquisition costs classified in investing activities Effect of movement in exchange rates Changes in assets and liabilities, net of the effects of purchase and disposal of subsidiaries (Increase)/decrease in trade and other receivables (Increase)/decrease in inventories (Increase)/decrease in deferred selling expenses Increase/(decrease) in trade and other payables Increase/(decrease) in deferred revenue Increase/(decrease) in income taxes payable Increase/(decrease) in deferred taxes Increase/(decrease) in provisions 2012 $’000 2011 $’000 44,479 27,012 16,360 766 398 – (2,180) 18 (1,788) 731 (150) (3,609) (1,478) (275) 158 2,398 (3,507) 10 841 13,746 1,090 343 16 (203) 13,477 926 1,560 285 (4,729) (1,275) 48 (4,106) 867 1,595 (6,804) 161 53,172 44,009 91 INVOCARE ANNUAL REPORT 2012 Notes to the Financial Statements continued FOR THE YEAR ENDED 31 DECEMBER 2012 Note 32: Deed of Cross Guarantee InvoCare Limited, InvoCare Australia Pty Limited and InvoCare (Singapore) Pty Limited entered into a Deed of Cross Guarantee on 11 December 2006 under which each company guarantees the debts of the others. Effective from 15 June 2011, Bledone Pty Ltd and Bledisloe Australia Pty Ltd became parties to this Deed of Cross Guarantee. By entering into the deed, the wholly-owned entities have been relieved from the requirement to prepare a financial report and directors’ report under Class Order 98/1418 (as amended) issued by the Australian Securities and Investments Commission. The above companies represent a “Closed Group” for the purposes of the Class Order, and as there are no other parties to the Deed of Cross Guarantee that are controlled by InvoCare Limited, they also represent the “Extended Closed Group”. Set out below is a consolidated income statement, statement of comprehensive income, summary of movements in consolidated retained earnings and balance sheet for the year ended 31 December 2012 of the Closed Group. (a) Consolidated income statement, statement of comprehensive income, and a summary of movements in consolidated retained profits of the Closed Group 2012 $’000 2011 $’000 322,405 (89,599) (76,149) (17,743) (10,891) (20,105) (6,914) (15,327) 85,677 (13,218) (14,859) 704 (18) (698) 2,206 59,794 (14,584) 45,210 (2,090) (824) (2,914) 42,296 16,885 45,210 (34,390) 27,705 287,758 (83,083) (68,018) (16,493) (8,863) (17,770) (6,091) (12,534) 74,906 (11,498) (14,121) 656 (13,477) (1,309) 181 35,338 (9,291) 26,047 (4,877) 240 (4,637) 21,410 21,028 26,047 (30,190) 16,885 Consolidated income statement of the Closed Group Revenue from continuing operations Finished goods and consumables used Employee benefits expense Employee related and on-cost expenses Advertising and public relations expenses Occupancy and facilities expenses Motor vehicle expenses Other expenses Depreciation, impairment and amortisation expenses Finance costs Interest income Net gain/(loss) on prepaid contracts Acquisition costs Net gain/(loss) on disposal of non-current assets Profit before income tax Income tax expense Profit for the year Changes in the fair value of cash flow hedges, net of tax Changes in foreign currency translation reserve, net of tax Other comprehensive income for the year, net of tax Total comprehensive income for the year Summary of movements in consolidated retained profits of the Closed Group Retained profits at the beginning of the financial year Profit for the year Dividends paid Retained profits at the end of the financial year 92 INVOCARE ANNUAL REPORT 2012 Note 32: Deed of Cross Guarantee continued (b) Balance sheet of the Closed Group Current assets Cash and cash equivalents Trade and other receivables Inventories Prepaid contract funds under management Deferred selling costs Total current assets Non-current assets Trade and other receivables Shares in subsidiaries Property, plant and equipment Intangible assets Deferred selling costs Total non-current assets Total assets Current liabilities Trade and other payables Short-term borrowings Derivative financial instruments Current tax liabilities Prepaid contract liabilities Deferred revenue Provisions for employee benefits Total current liabilities Non-current liabilities Trade and other payables Long-term borrowings Derivative financial instruments Deferred tax liabilities Deferred revenue Provisions for employee benefits Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained profits Total equity 2012 $’000 2011 $’000 1,139 29,629 19,565 350,905 574 2,062 27,752 18,316 311,763 553 401,812 360,446 14,835 164,761 234,395 47,682 8,035 13,676 168,764 232,767 47,672 7,742 469,708 470,621 871,520 831,067 20,957 – 1,685 3,404 354,700 2,983 11,595 25,415 1,872 – 7,137 317,598 2,893 11,047 395,324 365,962 43,404 201,796 5,798 24,259 41,779 1,703 51,933 193,487 6,323 22,835 39,389 1,577 318,739 315,544 714,063 681,506 157,457 149,561 132,687 (2,935) 27,705 133,336 (660) 16,885 157,457 149,561 93 INVOCARE ANNUAL REPORT 2012 Notes to the Financial Statements continued Note 33: Events after the Balance Sheet Date There have been no significant events that have occurred subsequent to 31 December 2012. After the end of the financial period a further investment has been made in HeavenAddress; and Resthaven, a small funeral business in New Zealand, has been acquired. Note 34: Related Party Transactions (a) Parent entity The ultimate parent entity within and for the Group is InvoCare Limited. (b) Subsidiaries Interests in subsidiaries are set out in Note 16. (c) Directors and key management personnel Disclosures relating to directors and key management personnel are set out in Note 7. (d) Transactions with related parties Transactions with other related parties Contributions to superannuation funds on behalf of employees 2012 $ 2011 $ 6,468,550 5,630,220 (e) Guarantees and other matters Under the terms of loan facility agreements executed on 22 September 2010, as amended on 21 December 2012, InvoCare Limited and most of its wholly-owned entities (the “Guarantors”) have individually guaranteed to the financiers the due and punctual payment in full of any liabilities or obligations under the facilities. The Guarantors have also indemnified the financiers against any loss or damage suffered by the financiers arising from any failure by a borrower or any Guarantor to satisfy the obligations. Under income tax consolidation legislation, InvoCare Limited assumes responsibility for the income tax payable by the consolidated Australian tax group comprising InvoCare Limited and its wholly-owned entities. A Tax Sharing and Funding Agreement (“TSA”) between InvoCare Limited and its wholly-owned Australian entities covers the funding, accounting and calculation of the tax liability for each individual entity, and also caters for entities joining and exiting the Group. In accordance with the terms of the TSA, InvoCare Australia Pty Limited makes tax payments on behalf of InvoCare Limited and receives reimbursement through the intercompany loan account for amounts paid except for the tax allocated to that entity. 94 FOR THE YEAR ENDED 31 DECEMBER 2012INVOCARE ANNUAL REPORT 2012 Note 35: Parent Entity Financial Information (a) Summary financial information The individual financial statements for the parent entity show the following aggregate amounts: Balance sheet Current assets Total assets Current liabilities Total liabilities Shareholders’ equity Contributed equity Reserves Share-based payments Hedging reserve – cash flow hedge reserve Retained earnings Total shareholders’ equity Profit for the year after tax Total comprehensive income for the year (b) Contingent liabilities of the parent entity 2012 $’000 2011 $’000 71 379,771 5,144 190,996 94 369,523 7,366 184,997 132,687 133,336 2,504 (6,424) 60,008 2,166 (4,280) 53,305 188,775 184,527 41,087 39,281 32,036 27,671 2012 $’000 2011 $’000 The parent entity had contingent liabilities at 31 December 2012 in respect of bank guarantees given for leased premises of controlled entities to a maximum of: 1,269 1,242 No liability was recognised by the parent entity or the consolidated entity in relation to the guarantees as the fair value of the guarantees is immaterial. (c) Contractual commitments for the acquisition of property, plant or equipment The parent entity has no contractual commitments for the acquisition of property, plant or equipment at 31 December 2012 (31 December 2011: Nil). (d) Tax consolidation legislation InvoCare Limited and its wholly-owned Australian controlled entities implemented the tax consolidation legislation from 1 January 2004. The accounting policy in relation to this legislation is set out in Note 1(g). On adoption of the tax consolidation legislation, the entities in the tax consolidated group entered into a tax sharing and funding agreement which, in the opinion of the directors, limits the joint and several liability of the wholly-owned entities in the case of a default by the head entity InvoCare Limited. This agreement was updated on 5 June 2007 and provides that the wholly-owned entities will continue to fully compensate InvoCare Limited for any current tax payable assumed and be compensated by InvoCare Limited for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to InvoCare Limited under the tax consolidation legislation. The amounts receivable or payable under the tax funding agreement are due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each financial year. InvoCare Australia Pty Limited, as permitted by the tax funding agreement, acts on behalf of InvoCare Limited for the purpose of meeting its obligations to make tax payments, or receive refunds, and reimburses, or is compensated by, that entity through the intercompany loan account for amounts of tax paid, or received, except for the tax allocated to that entity. 95 INVOCARE ANNUAL REPORT 2012 Notes to the Financial Statements continued Note 36: Economic Dependence The parent entity depends on dividend and interest income from, and management fees charged to, its controlled entities to source the payment of future dividends and fund its operating costs and debt service obligations as borrower under the bank loan facility agreements. The parent entity’s financial position is sound, notwithstanding a net current liability situation being shown in the balance sheet. Adequate cash resources are available to enable it to meet its obligations as and when they fall due, through either drawing on unused loan facilities, which at the reporting date amounted to $35,719,000 as outlined in Note 2(c), or by on-demand repayment of intercompany advances. Note 37: Critical Accounting Estimates and Judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. (i) Estimated impairment of goodwill The Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in Note 1(p). The recoverable amounts of cash generating units have been determined based on value-in-use calculations. These calculations require the use of assumptions. Refer to Note 19 for details of these assumptions and the potential impact of changes to the assumptions. (ii) Estimated impairment of other non-financial assets and cash generating units The Group annually considers if events or changes in circumstances indicate that the carrying amount of other non-financial assets or cash generating units may not be recoverable. Similarly, at each reporting date, assets or cash generating units that suffered a previous impairment are reviewed for possible reversals of the impairment. The recoverable amounts are determined based on value-in-use calculations which require the use of assumptions. Refer to Note 18 for details of these assumptions. (iii) Timing of recognition of deferred plaque and miscellaneous merchandise revenue Prepaid cemetery/crematorium plaque and miscellaneous merchandise sales are currently brought to account over an assumed 15-year period. Unredeemed merchandise sales (included within deferred revenue on the balance sheet) total $37.1 million at 31 December 2012 (2011: $35.8 million). The 15-year period is based on the actuarially assessed average period between a customer entering into a prepaid funeral plan and the contract becoming at-need. The actual history of a prepaid cemetery/crematorium contract may differ from the profile of a prepaid funeral plan; however, in the absence of more specific data being available, the funeral data has been applied. The average 15-year period is an assumption only and therefore subject to uncertainty. It is possible that there will remain unperformed contracts at the end of the 15-year amortisation period, yet all revenue will have been recognised. Offsetting this is the likelihood that contracts performed during the 15-year period will have unrecognised revenue. Management has been collating actual redemptions information for a sample of sites in order to determine a more accurate historical pattern of cemetery/crematorium prepaid sale redemptions. The information collated to date suggests there is no material misstatement of revenue using the assumed 15-year period. The impact of recognising revenue over five years less (or five years more) than 15 years would be to increase annual revenue by approximately $2.5 million (decrease by $1.2 million). 96 FOR THE YEAR ENDED 31 DECEMBER 2012INVOCARE ANNUAL REPORT 2012 Note 38: Company Details InvoCare Limited is a company limited by shares, incorporated and domiciled in Australia. The registered office and principal place of business of the company is: Level 4, 153 Walker Street North Sydney NSW 2060 Note 39: Authorisation of the Financial Report This financial report was authorised for issue by the directors on 19 February 2013. The Company has the power to amend and reissue this report. 97 INVOCARE ANNUAL REPORT 2012 Directors’ Declaration In the directors’ opinion: (a) the financial statements and notes set out on pages 49 to 97 are in accordance with the Corporations Act 2001, including: (i) (ii) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and giving a true and fair view of the Company’s and consolidated entity’s financial position as at 31 December 2012 and of their performance 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; and (c) at the date of this declaration, there are reasonable grounds to believe that the members of the Extended Closed Group identified in Note 32 will be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the deed of cross guarantee described in Note 32. Note 1(a) confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The directors have been given the declarations by the Chief Executive Officer and Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the directors. Ian Ferrier Director Andrew Smith Director Sydney 19 February 2013 98 INVOCARE ANNUAL REPORT 2012 Independent Auditor’s Report INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF INVOCARE LIMITED Report on the financial report We have audited the accompanying financial report of InvoCare Limited (the Company), which comprises the balance sheet as at 31 December 2012, and the income statement, the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration for the InvoCare Group (the consolidated entity). The consolidated entity comprises the company and the entities it controlled at the year’s end or from time to time during the financial year. Directors’ responsibility for the financial report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. Our procedures include reading the other information in the Annual Report to determine whether it contains any material inconsistencies with the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. Auditor’s opinion In our opinion: (a) the financial report of InvoCare Limited is in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of the consolidated entity’s financial position as at 31 December 2012 and of its performance for the year ended on that date; and complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and (b) the financial report and notes also comply with International Financial Reporting Standards as disclosed in Note 1. 99 INVOCARE ANNUAL REPORT 2012 Independent Auditor’s Report continued INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF INVOCARE LIMITED Report on the Remuneration Report We have audited the remuneration report included in pages 35 to 47 of the directors’ report for the year ended 31 December 2012. The directors of the company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. Auditor’s opinion In our opinion, the remuneration report of InvoCare Limited for the year ended 31 December 2012 complies with section 300A of the Corporations Act 2001. Matters relating to the electronic presentation of the audited financial report This auditor’s report relates to the financial report and remuneration report of InvoCare Limited (the Company) for the year ended 31 December 2012 included on InvoCare Limited’s web site. The Company’s directors are responsible for the integrity of the InvoCare Limited web site. We have not been engaged to report on the integrity of this web site. The auditor’s report refers only to the financial report and remuneration report named above. It does not provide an opinion on any other information which may have been hyperlinked to/ from the financial report or the remuneration report. If users of this report are concerned with the inherent risks arising from electronic data communications they are advised to refer to the hard copy of the audited financial report and remuneration report to confirm the information included in the audited financial report and remuneration report presented on this web site. PricewaterhouseCoopers Brett Entwistle Partner Sydney 19 February 2013 100 INVOCARE ANNUAL REPORT 2012 Shareholder Information Shares and options as at 28 March 2013 Shares on issue Options on issue Distribution of shareholders as at 28 March 2013 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Number 110,030,298 Nil Number of shareholders Number of shares Percentage % 3,980 5,899 1,323 710 45 2,196,713 14,933,533 9,849,491 14,820,012 68,230,549 2.00% 13.57% 8.95% 13.47% 62.01% 11,957 110,030,298 100.00% There were 144 holders of less than a marketable parcel of ordinary shares (being 45 based on a price of $10.98 on 28 March 2013) who hold a total of 1,407 ordinary shares. Equity security holders Largest 20 holders of ordinary shares at 28 March 2013 1. HSBC Custody Nominees (Australia) Limited 2. National Nominees Limited 3. J P Morgan Nominees Australia Limited 4. Citicorp Nominees Pty Limited 5. BNP Paribas Nominees Pty Ltd 6. J P Morgan Nominees Australia Limited (Cash Income A/C) 7. HSBC Custody Nominees (Australia) Limited (NT-Comnwlth Super Corp A/C) 8. Milton Corporation Limited 9. Argo Investments Limited 10. BNP Paribas Nominees Pty Ltd ACF Pengana (DRP A/C) 11. Australia Foundation Investment Company Limited 12. Mirrabooka Investments Limited 13. BKI Investment Company Limited 14. IVC Employee Share Plan Managers Pty Ltd 15. UBS Wealth Management Australia Nominees Pty Ltd 16. UCA Growth Fund Limited 17. Mr Richard Hugh Davis 18. Australian United Investment Company Limited 19. Gwynvill Trading Pty Ltd 20. Perpetual Trustee Company Limited Total for top 20 Substantial holders Substantial holders in the Company as at 28 March 2013 are set out below: JCP Investment Partners Ltd National Australia Bank Limited Group Voting rights The voting rights attaching to each class of security are set out below: Number of shares Percentage % 14,257,097 13,537,162 12,219,338 4,628,125 2,440,425 2,341,851 2,185,864 1,695,526 1,507,191 1,388,959 1,279,043 974,658 974,000 969,031 965,869 850,000 636,607 500,000 465,643 417,170 12.96% 12.30% 11.11% 4.21% 2.22% 2.13% 1.99% 1.54% 1.37% 1.26% 1.16% 0.89% 0.89% 0.88% 0.88% 0.77% 0.58% 0.45% 0.42% 0.38% 64,233,559 58.38% Number of shares held Percentage % 14,502,739 10,143,868 13.18% 9.22% 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. 101 INVOCARE ANNUAL REPORT 2012 InvoCare Locations Contemporary – Australia and New Zealand New South Wales Queensland Victoria South Australia New Zealand Guardian Funeral Providers Guardian Funerals (est 1890) Bankstown Blacktown Bondi Junction Burwood Campbelltown Chatswood Cremorne Hurstville Leppington Lidcombe Merrylands Minchinbury North Ryde Parramatta Rockdale Warrawee Hansen & Cole Funerals (est 1936) Bulli Kembla Grange Wollongong J W Chandler Funerals (est 1885) Richmond Windsor Boland Funerals (est 1962) Maroubra Tobin Brothers Funerals (est 1946) Queanbeyan Australian Capital Territory Tobin Brothers Funerals (est 1946) Belconnen Kingston Tuggeranong Other Providers Allan Drew Funerals (est 1985) Castle Hill Rouse Hill Ann Wilson Funerals (est 1995) Dee Why Mona Vale David Lloyd Funerals (est 1885) Adamstown Belmont Beresfield Toronto Byron District Funerals (est 1978) Byron Bay Casino Funerals (est 1930) Casino Economy Value Funerals All areas Kevin Geaghan Funerals (est 1896) Ballina Liberty Funerals (est 1994) Chatswood Granville Twin Towns Funerals (est 1913) Tweed Heads Universal Chung Wah (est 1955) Fairfield William Riley & Sons (est 1882) Lismore W N Bull (est 1892) Newtown Parramatta North Sydney Le Pine including Le Pine Heritage (est 1891) Altona Box Hill Camberwell Croydon Dandenong Eltham Ferntree Gully Footscray West Glen Waverley Greensborough Healesville Ivanhoe Kew East Lilydale Mordialloc Oakleigh Pakenham Thornbury Le Pine Asian Funerals Glen Waverley West Footscray W D Rose (est 1884) Brighton Burwood Cheltenham Joseph Allison (est 1853) Brunswick Essendon Werribee Other Providers Mulqueen Funerals (est 1932) Coburg Southern Cross (est 1998) Noble Park Tuckers Funeral & Bereavement Service (est 1883) Geelong West Grovedale Highton Lara Value Funerals All areas Blackwell Funerals (est 1940) Glenside Paradise Payneham Prospect South Brighton Torrensville Other Providers Value Funerals All areas Tasmania Turnbull Family Funerals (est 1936) North Hobart Western Australia Purslowe Funerals (est 1907) Midland North Perth South Fremantle Victoria Park Wangara Other Providers Oakwood Funerals (est 1999) Booragoon Rockingham Chipper Funerals (est 1889) Mandurah Myaree Rockingham Subiaco Christian Funerals (est 1978) Maylands Value Funerals All areas North Island Forrest Funeral Services (est 1978) Browns Bay (Auckland) Orewa (Auckland) Fountain’s Funeral Services (est 1956) Papakura (Auckland) Manurewa (Auckland) Sibuns Funeral Directors (est 1913) Remuera (Auckland) Lychgate Funeral Home (est 1876) Wellington Gee & Hickton (est 1946) Lower Hutt Upper Hutt Guardian North City (est 1966) Porirua (Wellington) James R Hill (est 1965) Hamilton Pellows Funeral Directors (est 1963) Hamilton Elliotts Funeral Services (est 1967) Tauranga Mt Maunganui Kati Kati Beth Shan Funeral Directors (est 1977) Napier Cleggs Funeral Services (est 1919) Hawera Vospers (est 1933) New Plymouth Wairarapa Funeral Services (est 1938) Masterton South Island John Rhind Funeral Directors (est 1881) Christchurch Academy Funeral Services (est 1982) Christchurch Geoffrey T Sowman (est 1869) Blenheim Sowman Memorials Blenheim George Hartnett Funerals (est 1947) Albany Creek Cleveland Holland Park Redcliffe Sandgate Wynnum Metropolitan Funerals (est 1941) Aspley Cleveland Mt Gravatt Petrie Redcliffe Southport Springwood Toowong Wynnum Other Providers Cannon & Cripps (est 1886) Kelvin Grove Drysdale Funerals (est 1983) Maroochydore Nambour Tewantin Reed & Bottcher (Reed est 1869 and Bottcher est 1887) Ipswich Somerville Funerals (est 1932) Nerang Robina Southport Value Funerals All areas City Funeral Services (est 1959) Mackay Gatton Funerals (est 1983) Gatton Hiram Philp Funerals (est 1903) Toowoomba Mackay Funerals (est 1884) Mackay Burkin Svendsens (est 1884) Cairns Laidley Funeral Services (est 1995) Laidley Serenity Funerals (est 2001) Beaudesert Beaudesert Funeral Services (est 1980) Beaudesert 102 INVOCARE ANNUAL REPORT 2012 Simplicity Funerals (est 1979) New South Wales Queensland Victoria South Australia Western Australia Penrith Randwick Ryde Smithfield Toukley East Tweed Heads Woy Woy Wyong Buranda Ipswich Kedron Logan Miami Parkwood Strathpine Sunshine Coast Bayswater Carnegie Flemington Frankston Pascoe Vale Reservoir Sunshine Werribee Albert Park Black Forest Brahma Lodge Enfield Gawler Morphett Vale Victor Harbor Joondalup Kelmscott Osborne Park Spearwood Mandurah New Zealand Royal Oak Balgowlah Bankstown Bateau Bay Chatswood Erina Hornsby Liverpool Mascot Miranda Newtown New South Wales Queensland Victoria South Australia Western Australia White Lady Funerals (est 1987) Ashmore Chelmer Kelvin Grove Morningside Tanah Merah Warana Caulfield South Doncaster Epping Heathmont Heidelberg Mornington North Essendon Rosebud South Melbourne Hillcrest Plympton Operating as Mareena Purslowe & Associates Funerals Subiaco Willetton Bankstown Belmont Bondi Junction Camden Charlestown Charmhaven Eastwood Five Dock Manly Mayfield Mosman Queanbeyan Rockdale Roseville Sutherland Tweed Heads Wyoming Narrabeen Nelson Bay Northern Rivers Pennant Hills Penrith Australian Capital Territory Belconnen Kingston Tuggeranong Singapore Casket Company (est 1920) Simplicity Casket Company (est 2009) Lavender Street Mount Vernon Sin Ming Drive Singapore Cemeteries and Crematoria New South Wales Queensland Albany Creek Memorial Park (est 1964) Allambe Gardens Memorial Park (est 1968) Great Southern Memorial Gardens (est 1997) Mt Thompson Memorial Gardens (est 1934) Toowoomba Garden of Remembrance (est 1966) Bridgeman Downs Nerang Carbrook Holland Park Toowoomba Castlebrook Memorial Park (est 1973) Forest Lawn Memorial Park (est 1962) Lake Macquarie Memorial Park (est 1994) Lakeside Memorial Park (est 1964) Lung Po Shan Information Centre (est 2000) Newcastle Memorial Park (est 1936) Northern Suburbs Memorial Gardens and Crematorium (est 1933) Pinegrove Memorial Park (est 1962) Po Fook Shan Information Centre (est 2002) Rookwood Memorial Gardens and Crematorium (est 1925) Tweed Heads Memorial Gardens (est 1971) Rouse Hill Leppington Ryhope Dapto Haymarket Beresfield North Ryde Minchinbury Cabramatta Rookwood Necropolis Tweed Heads 103 INVOCARE ANNUAL REPORT 2012 Glossary AASB ABS ACCC AGAAP AIFRS ASX Australian Accounting Standards Board Australian Bureau of Statistics Australian Competition & Consumer Commission Australian Generally Accepted Accounting Principles The Australian equivalents to International Reporting Standards for annual reporting periods beginning on or after 1 January 2005 Australian Securities Exchange which is the operating brand of ASX Limited ASX Corporate Governance Guidelines The eight essential corporate governance principles and best practice recommendations of the ASX Corporate Governance Council including 2010 amendments Cemetery CGU Condolence Lounge Constitution Crematorium Crypts DRP EBITDA EEO EPS A place for burials and memorialisation A cash generating unit which is the smallest identifiable group of assets that independently generates cash inflows A facility for family and friends to gather at after the funeral service – usually offering a catering service The Constitution of the Company A place for cremations and memorialisation Above ground burial facilities Dividend reinvestment plan Earnings before interest, tax, depreciation and amortisation Equal Employment Opportunity Earnings per share Funeral Arrangement The process in which the funeral service is planned and necessary documentation prepared Funeral Home The InvoCare location where a funeral can be arranged and where some services can be conducted Memorial or Memorialisation The physical marker or tribute to the life of the deceased Memorial Park OH&S Operating Earnings Prepaid Cemetery and Crematorium Services An InvoCare location offering cremation, burial and memorialisation services Occupational Health and Safety Earnings before the net gain/(loss) on undelivered prepaid contracts, asset sales gains/ (losses), minority interests and any other unusual items as disclosed in the relevant reconciliations. Cemetery and crematorium services that have been arranged and paid for in advance Prepaid Funeral Fund The fund where prepaid funeral monies are held in trust until the funeral service is provided Volume A term that refers to the number of funeral services, burials and cremations performed 104 INVOCARE ANNUAL REPORT 2012 Personal details guide For the benefit of our stakeholders, this guide enables you to record important personal information. This will assist your family and funeral director to make arrangements ensuring everything is conducted in accordance with your wishes. Should you require assistance in completing it or further copies of the guide for other family members, please call Guardian Plan on Freecall 1 800 PRE PLAN (1 800 772 7526) Personal Information Family name Address Date of birth Place of birth (Town/City/State/Country) If born overseas, year arrived in Australia Occupation during working life Given names Postcode Female Male Name and Address of Person Who I Would Like to Make Any Arrangements (For instance, registering the death and contacting the funeral director, e.g. executor, solicitor, family member) Name Address Funeral Director (Funeral director you would like to conduct your service) Name Address Next of Kin This information is needed when the death is registered. Name Address Executor of My Will Executor will need certain financial information when applying for grant of probate. Name Address Telephone Telephone Telephone Telephone Postcode Postcode Postcode Postcode Copy of My Will Date of Will Deposited with (Name and Address) Solicitor Name Address Family Doctor Name Address Personal Documents Birth Certificate Location Marriage Certificate Location Telephone Telephone Postcode Postcode Medicare Card Card number (to be returned to Medicare office) Centrelink Pension Number Type of pension Veterans’ Affairs Number Passport Name shown on passport (Passport should be returned to passport office in your area, details at local Post Office) Passport number Expiry date Driver Licence Number State of issue Club or association memberships (Should be returned to appropriate organisation. It may be that a claim can be made for unexpired memberships or mortality fund benefit.) Family Details Father’s surname Usual occupation Mother’s maiden surname Usual occupation Spouse surname First names First names First names Marriage Details (Please tick appropriate box(es)) Married Divorced Separated Widowed Never married De facto Details of Marriage(s) First marriage (Place/City/Town/Country) Age at date of marriage Name of spouse (at date of marriage) Second marriage (if applicable) (Place/City/Town/Country) Age at date of marriage Name of spouse (at date of marriage) Children’s Details (List all children in order of date of birth, including legally adopted, deceased (D), still born (SB), or if no children write “none”.) First name First name First name First name Date of birth Date of birth Date of birth Date of birth Female Female Female Female Male Male Male Male Financial Information (Information below may be required by the executor of your Will.) Bank account details Bank name Account numbers Bank branch Location of documents, books, statements Building society/Financial institution Building society/Financial institution name Account numbers Address Income tax records Tax File Number Location of records Deeds of property Property address(es) Location of records Mortgage details Location of records Lender Reference number Address of lender Life insurance policies Location of records Superannuation Details Stocks and shares Location of records Safe deposit box Box location/number Location of keys Accountant Name Telephone Address Postcode Car details Registration number and state Registration document location Location of purchase receipt/H.P. details Military Information (If applicable) Branch of service Date entered service Date of discharge Grade, rank or rating Wars/Conflicts served Service serial number Place Place Additional Information Historical information Every individual is deserving of a meaningful obituary written in their memory. It is here that you may list those achievements and accomplishments that have been of pride to you and your family that are not mentioned elsewhere in your “Personal details guide”. Education Name of primary school Date attended from Name of secondary school Date attended from Name of tertiary institution Date attended from Qualifications attained to to to Societies/Clubs Memberships and positions held (include dates) Other (including civic or public office held) Special achievements (details of any special achievements or recognitions) Medical History This information is very important for your spouse, children and grandchildren. It is also suggested that you keep an updated copy of your medical records for your family, as doctors often ask for it. Special Instructions and Information We suggest that you use these lines to keep our information current. We also recommend that you always date these entries to avoid possible confusion later. Person to be notified Name Relationship Person to be notified Name Relationship Person to be notified Name Relationship Telephone Telephone Telephone Corporate Information InvoCare Limited ABN 42 096 437 393 Directors Ian Ferrier (Chairman) Andrew Smith (Managing Director and Chief Executive Officer) Benjamin Chow (Non-executive Director) Christine Clifton (Non-executive Director) Richard Davis (Non-executive Director) Richard Fisher (Non-executive Director) Aliza Knox (Non-executive Director) Roger Penman (Non-executive Director) Company Secretary Phillip Friery Annual General Meeting The Annual General Meeting of InvoCare Limited will be held at the offices of PricewaterhouseCoopers, 201 Sussex Street, Sydney on 24 May 2013 Registered Office Level 4, 153 Walker Street North Sydney NSW 2060 Telephone: 02 9978 5200 Facsimile: 02 9978 5299 Website: ww w.invocare.com.au Share Registry Link Market Services Limited Level 12, 680 George Street Sydney NSW 2000 Toll free: 1300 854 911 Facsimile: 02 9287 0303 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 Securities Exchange only. ASX code is IVC Auditors PricewaterhouseCoopers Darling Park Tower 2 201 Sussex Street Sydney NSW 1171 Solicitors Addisons Lawyers Level 12 60 Carrington Street Sydney NSW 2000 Anthony Harper Lawyers Level 15, Chorus House 66 Wyndham Street Auckland New Zealand Bankers Australia and New Zealand Banking Group Limited 20 Martin Place Sydney NSW 2000 ANZ Bank New Zealand Limited Level 27, ANZ Centre 23–29 Albert Street Auckland New Zealand Bank of New Zealand Limited Level 6 80 Queen Street Auckland New Zealand Commonwealth Bank of Australia 201 Sussex Street Sydney NSW 2000 National Australia Bank Limited 255 George Street Sydney NSW 2000 Printing Specifications Pages 1–28 are printed on Impress Silk. Impress ensures that all virgin pulp is derived from well-managed forests and controlled sources. It is manufactured by an ISO 14001 certified mill and is Elemental Chlorine Free. Pages 29–108 are printed on ENVI Uncoated. ENVI Recycled 50/50 Uncoated contains 50% recycled fibre. It is made from elemental and process chlorine free pulp derived from sustainably managed forests and non-controversial sources. ENVI Recycled 50/50 Uncoated is certified neutral and Australian Paper is an ISO 14001 accredited mill. Designed and produced by Precinct I N V O C A R E L I M I T E D A N N U A L R E P O R T 2 0 1 2 www.invocare.com.au