Kathmandu Holdings Ltd
Annual Report 2011

Plain-text annual report

K A T H M A N D U H O L D I N G S L I M I T E D A N N U A L R E P O R T 2 0 1 1 KATHMANDU HOLDINGS LIMITED ANNUAL REPORT 2011 423644 Kathmandu AR Cover FINAL.indd 1 5/10/11 12:38 PM store locations AUSTRALIA Hampton East Melbourne (Bourke St) Highpoint (Maribyrnong) Camberwell Melbourne (Spencer St) VIC Smith St Fitzroy Blackburn Knox Richmond Chadstone Doncaster Frankston Chapel St Bendigo Geelong Ballarat South Wharf DFO Southland (Cheltenham) NSW Albury Sydney (Kent St) Chatswood Cronulla Birkenhead Point NORTH ISLAND Albany Auckland (Queen St) Auckland (Victoria St) Botany Gisborne Hamilton Hastings Lyall Bay Manukau Napier New Plymouth Newmarket Onehunga Otaki Palmerston North Petone Rotorua Sylvia Park Takapuna Taupo Redyard (Auburn) Bondi Junction Hornsby Warringah Newcastle Castle Towers Macquarie Rouse Hill Parramatta Macarthur Erina Fair Orange Wollongong Wagga Wagga Adelaide (Rundle St) SA Marion Tea Tree Adelaide Harbourtown ACT Canberra Civic Woden Canberra Centre Belconnen Tauranga Tauranga CBD Te Rapa Waitakere Wanganui Wellington Whakatane Whangarei Dunedin Invercargill Nelson Queenstown Riccarton Timaru Papanui Ashburton SOUTH ISLAND Blenheim Christchurch (Cashel St) Christchurch (Tower Junction) QLD Brisbane (Albert St) Fortitude Valley Chermside Pacific Fair (Broadbeach) Logan Kawana Townsville Cairns Toowoomba Southport TAS Hobart Devonport Launceston WA Perth (Hay St) Cottesloe Innaloo Carousel (Cannington) Fremantle Whitford Perth Harbourtown Brighton Bristol London (Berners St) London (Covent Garden) London (Spitalfields) London (White City) This book is printed on environmentally responsible paper manufactured using FSC-certified, mixed-source pulp harvested from sustainable well-managed forests and using an elemental chlorine-free process. Vegetable based inks and water-based aqueous coating were used. Designed and printed by GEON print and communication solutions www.geongroup.com NEW ZEALAND UNITED KINGDOM 423644 Kathmandu AR Cover FINAL.indd 2 5/10/11 12:38 PM contents kathmandu annual report 2011 1 Chairman’s Report Highlights For The Year Chief Executive’s Report Board Management Team Directors’ Report Corporate Governance Auditor’s Independence Declaration Financial Statements Statutory Information Share Registry 2 4 6 12 13 15 25 27 29 74 80 notice of annual General meetinG 11.00am Friday 18 November 2011 Stamford Plaza, Albert Street, Auckland New Zealand 2 kathmandu annual report 2011 chairman’s report James Strong Chairman I am pleased to report on a very successful year for Kathmandu Holdings Limited. After our listing on the ASX and NZX in November 2009, in our first full year’s trading as a listed company we have delivered a substantial increase in both sales and profit. this result was particularly satisfying in view of the general economic environment, and the challenging circumstances now facing the retail sector, as consumers focus on their personal debt management and become increasingly value conscious. capital inveStment proGramme the Company has committed to an increase in capital expenditure over the next three years. the investment programme, including the ongoing new store rollout, is necessary to support the growth targets in the Kathmandu business plan, and includes the following key initiatives: Kathmandu will now move forward as the market leader in the outdoor travel and adventure category, and make further investment to enhance future growth opportunities. financial reSultS the key financial highlights for the year ended 31 July 2011 were: Growth in sales by 24.5% to $306.1 million Gross profit margin of 65.5% Increase in earnings before interest and tax of 32% from nZ$48.5 million to nZ$64.0 million this result reflected strong double digit same store sales growth in both australia and new Zealand, a further 14% increase in total store numbers and effective management of operating costs. overall eBIt margin lifted from 19.7% to 20.9%. Growth StrateGy at the time of listing in late 2009, Kathmandu highlighted its sales growth would be driven through: Continuing store rollout in australia and new Zealand; optimisation of existing store footprint; Introduction of new product; and Development of online capabilities. the success of these strategies to date, combined with the delivery of the new Kathmandu brand strategy over the next two years, will support the expansion of both the Kathmandu retail footprint and the range of product that we offer in the outdoor travel and adventure market. Delivery of the new brand identity across the business; In association with the brand refresh, an accelerated programme of store refurbishments and where appropriate re-locations to new sites that will generally be larger; Improved physical infrastructure including the new Zealand distribution centre and Melbourne support office; and enhanced information systems technology including an online platform that will enable global sales capability. dividend the Directors are recommending a final dividend of 7 cents per share, with the 3 cents interim dividend making a total payout for the year of 10 cents per share. the final dividend will be fully imputed for new Zealand shareholders, and fully franked for australian shareholders. this dividend represents a payout ratio of 51% and the Board expects the payout ratio will remain in the 50 to 60% range, particularly through the next two to three years in association with the planned capital investment programme. people the Board congratulates Kathmandu’s Chief executive officer, peter Halkett and his team for the result achieved by Kathmandu over the past year. they have delivered one of the best results in australasian retail in an exceptionally challenging retail environment, and dealt with the impacts of an extraordinary series of natural disaster events. the devastating earthquakes in Christchurch placed enormous strain on our people, who have performed in an outstanding manner. their commitment in these circumstances has been exemplary. We record our sympathy for the effects of this tragedy, and acknowledge the sustained efforts of our staff. outlook the economic environment is likely to continue to adversely affect overall consumer spending. However we are confident the new Kathmandu brand strategy, with an increased and enhanced product range, and the on-going growth in its retail network will maintain our strategic competitive advantage. kathmandu annual report 2011 3 It is likely that the next year will be just as challenging for retail, but our strategy remains to invest to grow the business and continue to build the Kathmandu brand in the australasian market. this will provide the opportunity for the Board and senior management to then evaluate and pursue future new growth opportunities as they arise in the medium and long term. James Strong Chairman Southland (melbourne) 4 kathmandu annual report 2011 highlights for the year Record sales and earnings result 100th store opened Brand refresh project completed Summit Club members now exceed 500,000 Core systems upgrade completed  Record sales and earnings result 100th store opened Brand refresh project completed Summit Club members now exceed 500,000 Core systems upgrade completed kathmandu annual report 2011 5 SALES (NZ$m) $306.1 $192.8 $215.6 $245.8 $151.4 fy2007 fy2008 fy2009 fy2010 fy2011 EBIT (NZ$m)* $33.1 $32.9 $64.0 $48.5 $44.1 fy2007 fy2008 fy2009 fy2010 fy2011 NPAT (NZ$m)* $39.1 $25.2 $14.9 $11.5 $8.0 fy2007 fy2008 fy2009 fy2010 fy2011 * FY2007 - FY2009 as presented in the Prospectus dated 23 October 2009, and FY2010 excluding the impact of IPO listings costs, and $0.6m of net exchange losses on foreign currency borrowings. 6 kathmandu annual report 2011 chief executive’s report peter halkett Managing Director and Chief executive officer key hiGhliGhtS Record sales ($306.1m,+24.5%) and earnings (EBIT $64.0m,+32%) result Strong growth in gross margin and improved EBIT margin On-going product range growth and increased overall investment in inventory underpinned same store sales growth of 15.7% Opening of our 100th store, total store numbers now 111 Summit Club membership numbers exceed 500,000 Brand refresh project completed and fi rst new stores opened with new brand identity Core systems upgrade completed, new distribution and inventory management systems now operative reSult overview Kathmandu’s fi rst full year as a listed company on the aSX and nZX was one of the most signifi cant years in the Company’s 24 year history. the excellent result, highlighted by an increase in sales of over $60 million (24%) and eBIt of $15.5 million (32%), was achieved during a generally diffi cult period for retailers. the Company also had to deal with the on-going impacts of the Christchurch earthquakes, where the majority of its support offi ce team and new Zealand distribution centre are located. In these circumstances the result refl ects the strong position that Kathmandu has established in the outdoor market, and it has to be considered an excellent performance. Sales levels throughout most of the year from December 2010 onwards were at the upper end of our expectations in both australia and new Zealand. the growth in both our store network, and the Kathmandu product range were signifi cant contributors to the sales result. Store network growth was a combination of both new store rollout and the enlargement of the retail footprint for a number of existing stores. additionally we made a substantial incremental investment in base inventory levels. this was primarily to ensure the stock-outs experienced during the second half of FY2010, which followed our transition from private to public company ownership did not re-occur. again this initiative contributed to this year’s sales uplift, and it resulted in the year on year increase in total inventories of $16.6m. the strong a$ and nZ$ exchange rates relative to the uS$ assisted in partially offsetting supplier cost increases experienced across most categories. effective management of supplier cost increases, and the overall product mix, combined to deliver an above target gross profi t margin (65.5%) for the year. Despite a slight increase in operating expenses, overall eBIt margin improved in FY2011 from 19.7% to 20.9%. BuSineSS overview the kathmandu Brand Kathmandu has continued it’s leadership in the outdoor travel and adventure market. our market positioning and brand awareness has been further enhanced since our listing in november 2009, especially in australia, assisted by our store rollout programme and expansion of the product range. an increase of 29 stores (35%) in the fi rst two years as a listed company has been achieved. We now have over 100 stores in australia and new Zealand which, supported by increased advertising spend year on year, has caused our measured brand recognition to improve signifi cantly in both markets. the continued development and strength of the Kathmandu brand has been a key focus of the business throughout the past year. We completed a comprehensive review of the Kathmandu brand in FY2011, and this has culminated in a complete refresh of the Kathmandu brand identity, formally released to the market from September 2011. the brand refresh project is much more than a simple logo change. It carries through to our store design, our advertising collateral, product and packaging and general communication with our customers. the new brand identity refl ects our brand strategy and its core purpose of inspiring and enabling people to live their dreams of travel and adventure. up to 75 stores will be rebranded during FY2012, and our objective is complete all stores by the end of FY2013. additionally a large portion of our new summer product range and packaging has been rebranded, and the balance is planned to be completed within 12 months. the new design, including advertising and marketing material, and our website, launched on September 1st. We are very confi dent that our brand refresh will underpin Kathmandu growth well into the future. kathmandu annual report 2011 7 product range the development and delivery of new and innovative products for the outdoor and travel categories is critical to growing our market share. Design is a central part of who we are as a Company, and we design product that is original and engineered to perform. Store network there were 14 permanent new stores opened during the year, but as the central Christchurch store has remained closed since the February 22 earthquake net store numbers increased by 13 stores year on year. permanent store numbers as at 31 July 2011 were new Zealand 38, australia 66 and uK 6. Stores currently open were 110. In addition to the focus on design our structured approach to product development addresses: the new stores opened during the year were: expansion of our overall product offer through growth of existing ranges and new complimentary categories; Continuous enhancement of technical attributes, both in tandem with fabric and component suppliers, and through our own proprietary technologies; on-going growth in the australian market, particularly for warmer and tropical climate requirements; evaluation and management of our supplier base, with a focus on consistent and contracted performance standards. the on-going and increasing investment made by Kathmandu in design resources will ensure we maintain our technical credibility and further enhance the success of our brand. australia: Cairns, logan, toowoomba, Southport, orange, Wollongong, Wagga Wagga, Belconnen (Canberra), Southland (Melbourne), Whitford City (perth), perth Harbour town. new Zealand: Whakatane, papanui (Christchurch), ashburton. the overall results of all the new stores that we opened this year were in line with expectations, and in australia the stores opened in regional cities performed particularly well. the results from new stores continue to reinforce and support our target of a store network of approximately 150 stores in australia and new Zealand. In new Zealand the new plymouth and palmerston north stores were 8 kathmandu annual report 2011 re-located and our Sylvia park store in auckland was extended. the Innaloo store in perth was also extended. Sales from our online store, launched in october 2009, recorded significant growth in FY2011. Sales achieved through the online channel are now the equivalent of a mid- sized store in each country. Kathmandu is well positioned, as a brand owner, to capitalise on the rapid growth of online sales. Major enhancements to our website are scheduled to be delivered during FY2012, providing more functionality, capacity and global sales capability. infrastructure and Systems enhancement of our information systems is an essential requirement to support future growth, and a number of key projects are either planned to commence shortly or are already underway. our new erp platform has been operating live since 1 august, and this was implemented in tandem with a new warehouse management system. this has been an 18 month project that will deliver improved operating efficiency, and positively impact on the per unit cost of stock handling across our internal supply chain. our erp upgrade also provides the starting point for further systems enhancements in key areas such as online trading, business intelligence and reporting, improved CrM initiatives and specialist software for product and image database management. two projects are planned in FY2012 to further improve our overall supporting infrastructure. the lease expires for our current new Zealand distribution centre in october 2012, and after a detailed and extended evaluation, we have committed to a new purpose built facility, to be constructed approximately 500 metres from our existing site in Christchurch. the new facility provides adequate capacity to support projected long term growth in the new Zealand market, supported by third party logistics and warehousing in auckland through peak periods of stock holding and sales demand. We expect the new facility to be operating by July 2012. We are also re-locating our Melbourne domiciled management and support team to new premises in South Melbourne before the end of 2011. market overview overall retail sales statistics highlight the challenge faced by discretionary retail through the past year. there was only a small increase (c. 2%) in new Zealand total sales across the combined recreational goods, clothing and footwear categories. Spending on recreational goods only in new Zealand, and on sales of clothing, footwear and personal accessories in australia declined year on year. Given this flat to negative macro sales outcome, Kathmandu’s double digit same store sales result in both countries indicates the specific market for travel and adventure products was relatively stronger than clothing and recreational goods sales generally. although there has been an extended period of consumer de-leveraging, exacerbated by the economic uncertainty in europe and the uSa, Kathmandu has been selling to a customer base that appears willing to keep spending money on quality product for travel and adventure. the strong a$ and nZ$ exchange rates encouraged spend on experiential activity and holidaying in overseas locations, and published statistics highlighted growth of c.10% in the number of australians travelling overseas in the first half of 2011, and c. 5% in new Zealand travellers over the year to 30 June 2011. price deflation has also been commented on and observed in a number of retail categories, but it wasn’t generally apparent across the technical product ranges that Kathmandu sells. our overall gross profit margin result highlights that we have successfully negotiated most of the challenges of price deflation and competitor discounting through the year. Weather influences Kathmandu sales and gross margin performance, particularly during our key easter and Winter promotional periods, given our product offer is weighted overall towards winter, cold and wet weather product. the third quarter trading period including easter was colder throughout australia and new Zealand compared to last year, when March/april temperatures were at record highs. this did assist sales volumes in this period, primarily in australia. By comparison, overall weather patterns in the final quarter didn’t vary significantly from the previous year. as we have grown store numbers across all the main cities in australasia, the geographic spread also provides some mitigation of the impact of regional variation in weather and other regional economic factors. financial performance Group sales increased by 24.5% over the previous year, to $306.1m. Most pleasing was the increase in same store sales, by 15.7% overall and 12.9% at a constant exchange rate. Country by country change in same store sales was as follows: australia 14.4% new Zealand 12.3% uK (7.1%) the increase in total gross profit for FY2011 was $45.3m, an increase of 29%. the sales increase was matched by an improvement in gross margin by 230bps, to 65.5% overall. Gross margins achieved in new Zealand increased slightly (by c. 30bps), whilst in australia there was an improvement of over 300bps. the key reasons for the improved outcome were:  Favourable product mix outcome, as the increase in sales in FY2011 was derived primarily from higher gross margin apparel categories; excellent sales results from the initial period of our easter and Winter sales promotions, resulting in a reduced reliance upon both further reductions during those promotions and subsequent clearance sales activity. In FY2011 our now improved capital structure enabled us to invest effectively in stock and as a result we had substantially higher inventory levels available to sell throughout the second half of the year. this meant a reduction in the level of lost sales due to out of stocks when compared to FY2010 and the investment supported both the sales and gross margin result achieved. the year on year increase in total stock levels was $16.6m, and whilst stock both in absolute terms and per store increased substantially compared to the previous year, the more relevant comparison is between FY2009 and FY2011, when working capital constraints weren’t a relevant factor. there has been an increase of less than 1% in value of stock held per store between FY2009 and FY2011, which we consider a satisfactory outcome having regard to the increase in store numbers over the same period. expenses, excluding depreciation, amortisation and financing costs (and in FY2010 also excluding Ipo costs), increased by $28.3m (28.0%). this was an increase as a % of sales from 41% to 42.2%. approximately one-third of this rate of % increase arose specifically because of the cost of incentive based remuneration payable in FY2011 to Senior Management as a result of achieving all profit targets applying this year. In FY2010 because profit targets were not met there were very limited amounts of incentive remuneration paid. the other primary reasons for the increase in expenses as a % of sales were the on-going shift in weighting of operating costs incurred in australia, where cost of doing business is higher, and the incurring of approximately $1.1m of expenses in FY2011 for the brand refresh project. In FY2012 there will again be a similar level of expenditure as the new brand identity is rolled out. the benefit of a full year with an appropriate capital structure resulted in a substantial reduction in finance costs. net profit after tax, after eliminating from the FY2010 result the costs of the Ipo net of tax, increased by $13.9 million (55%) to $39.1 million. kathmandu annual report 2011 9 online activity will occur to fully leverage the new website capability we intend to launch during FY2012. SuStainaBility Kathmandu has been working for some time on our approach to sustainability and it is important to communicate our plan and progress to date. We have developed a common understanding of sustainability across the business, described in the following statement: “At Kathmandu we take social and environmental responsibility to heart. We passionately believe in the importance of sustainable product development and running an ethical business. We strive to minimise our environmental impact and look for ways to contribute to the broader community, aligning our values with those of our customers, team members and society. With a holistic outlook, we live, work and dream to inspire adventure and enable an outdoor lifestyle for generations to come.” We have also established our Sustain the Dream plan, which focuses on four priority areas. these areas and some examples of actions taken over the last year are: 1. minimise our environmental footprint - reducing the amount of waste produced, energy used, greenhouse gases emitted and water used, and increasing our efficiency. Steps taken included: Moving to either use of recycled product packaging, and/or minimising packaging altogether, dependent on product requirements. Commencing the replacement of plastic shopping bags by asking customers to either take no bag, bring their own, or purchase a reusable bag or an 80% recycled paper bag. Completing an energy audit of the australian distribution centre. We will apply some of the major energy saving initiatives to the new new Zealand distribution centre and australian support office. 2. respect human rights - adhering to and promoting safe and equitable workplace practices both locally and internationally. uk BuSineSS For the first five months of FY2011, we achieved positive sales results, but sales declined sharply after the Vat rate increased to 20% from 1 January, and they did not recover. the period of economic uncertainty in the uK may be prolonged, and this reinforces our decision not to make further investment in the uK retail network at this time. although no new stores are currently planned, a step up in all core suppliers have been issued with the new Kathmandu terms of trade, which stipulate minimum requirements with regards to our suppliers’ social and environmental labour practices. We have conducted factory site audits as a part of a wider on-going programme to ensure that our suppliers are adhering to our terms of trade. 10 kathmandu annual report 2011 3. Strengthen communities - providing financial and product support to appropriate community organisations as a way to give back and to maintain our relevance and relationship with our community. We continue with our well established major sponsorships of the Kathmandu adventure Series and outward Bound new Zealand. the Kathmandu adventure Series encourages people to appreciate the outdoors in an active and enjoyable way. outward Bound provides opportunities for people to learn and grow through experiences in the outdoors. a new partnership with red Cross has been established. red Cross will be supported in both australia and new Zealand through the sale of our paper shopping bags, and we have supported red Cross with either cash or product donations for the Christchurch earthquakes and Queensland cyclone and flood events. We have commenced a new partnership with the australian Himalayan Foundation, supporting teacher training programs in the impoverished Solu Khumbu region of nepal. this is an appropriate organisation to support and enable an on-going contribution by Kathmandu to the region where our brand name originates. 4. develop our team - they are integral to our business, and we endeavour to provide opportunities for our staff to develop skills and retain healthy lifestyles. We have: established a cross functional sustainability representative team who we call our Dream team, to ensure two way communication on sustainability across the business, and to drive the initiatives of the Sustain the Dream plan. Increased our investment in training and development, including integrating our core values throughout the organisation. Finally we have defined and adopted five core values that serve as the guiding principles and beliefs that capture the spirit, culture and attitude of Kathmandu. these are fundamental in guiding how team members interact with one another and represent Kathmandu. the values are: Integrity openness & Directness passion & Determination resourcefulness love of travel & adventure Further details relating to our sustainability activities can be seen on our website. the kathmandu team Staff numbers as at 31 July 2011 increased by 11% to 1733 compared to 1562 at the same last year. approximately 50% of this number are full or part time permanent staff members. our first annual employee engagement survey delivered pleasing results for our employees support of our brand and their positive view of Kathmandu as an employer. Staff retention within our retail management teams in particular improved this year, and the depth and expertise of our wider leadership team continues to effectively support our growth strategy. this latter group of over 30 people, as well as the executive Management team, are now incentivised to achieve annual earnings targets by way of equity participation. the executive Management team remained unchanged during the year. the Christchurch earthquakes had a severe and on- going impact on tens of thousands of people in the city, and we consider ourselves very fortunate to have had tremendous on-going support and commitment from our sales, distribution and office staff located in our home city. understandably the decision was made by some to leave Christchurch, but it is pleasing that the number was relatively few, and that we have continued to be able to recruit new staff members into our Christchurch operations. We don’t underestimate the on-going challenge we will have in recruiting and retaining the people we need across the business to support our growth strategy, and our future strategy will involve on-going flexibility where practical in locating people in either Christchurch or Melbourne. outlook the FY2011 performance gives us confidence in the on-going potential of the Kathmandu brand in the outdoor and travel markets. In the short term, the primary growth opportunity remains to uplift (relative to new Zealand) the sales peneration in australia, to a level that equates at the very least to that achieved by other retailers selling discretionary spend product through a fully developed network in each country. at present sales per capita in australia is less than 40% of that in new Zealand, and our target ratio when we have a full retail network in each country is no less than 60%. the ongoing development of our product range with a greater focus on the requirements of the australian market is also critical to achieving this target, as is a further increase in Summit Club membership. a further 15 stores are targeted for opening in FY2012, and perhaps more significantly we will substantially increase our investment in re-located and renovated stores, in tandem with rolling out the new brand identity. We have already committed to re-development or re-location in existing key sites including Chatswood, Camberwell, Queen Street, newmarket and Wellington in the first half of FY2012, and our overall budget for FY2012 anticipates up to 12 major projects of this type. our cost of product for FY2012 will again generally be subject to supplier price increases, but we anticipate that overall the extent of these increases will be no worse than for FY2011, and we have the benefit of a substantially improved rate of uS$ hedging applying through the forthcoming year compared to FY2011. as with FY2011, we again consider it unlikely that our cost of doing business will reduce as a % of sales. this is because of our investment in business infrastructure and the on-going weighting of operating costs being derived from australia domiciled stores, where net margins are lower than new Zealand. the investment in our product, our new and refurbished stores, and our new brand further enhance the strategies that have already doubled Kathmandu sales revenue between FY2007 and FY2011. We continue to have a clear opportunity to build the australian business to realise the potential the Kathmandu brand has in that country. In new Zealand, we are confident that the new brand identity and the on-going investment in new product will continue to deliver revenue growth. Whilst we recognise and are cautious in relation to the generally uncertain economic outlook, our performance through the past year gives us confidence that our focused growth strategies should continue. kathmandu annual report 2011 11 In the medium to long term, the online channel provides options for the expansion of the Kathmandu brand that realistically were not available prior to our listing in 2009. We recognise this is much more than simply initiating a website, but with our new brand identity and a successful australasian business we have confidence there is the potential to take the Kathmandu brand to other markets in a profitable manner. through FY2012 we will undertake comprehensive planning and build the technology platform required to take this opportunity forward. Finally my thanks to all of the Kathmandu staff for their commitment and contribution to achieving this result. FY2011 provides us with a clear benchmark for the results that Kathmandu can achieve in the years ahead, and the Kathmandu team are committed to delivering further growth in FY2012 and beyond. Peter Halkett Managing Director and Chief executive officer 12 kathmandu annual report 2011 board left to right: John Harvey, Peter Halkett, James Strong, Mark Todd, Sandra McPhee and John Holland. James Strong ao Chairman Mr Strong is currently Chairman of Woolworths limited, the australia Council for the arts and the organising Committee for the ICC Cricket World Cup 2015. He is a Director of Qantas airways, a member of the australian Grand prix Corporation and a member of the nomura australia advisory Board. previously, Mr Strong was the Chairman of Insurance australia Group, rip Curl Group and Corrs Chambers Westgarth. Mr Strong was also the Chief executive officer of australian airlines from 1986 to 1989 and the Managing Director and Chief executive officer of Qantas airways from 1993 to 2001. peter halkett Managing Director and Chief executive officer Mr Halkett joined Kathmandu in 2006 and has directed the growth strategy for the business throughout the period of current ownership. Mr Halkett has had a management career with extensive retail experience including Chief executive officer roles in new Zealand and the united Kingdom. the companies he has led include two that were publicly listed, in particular pacific retail Group. mark todd Finance Director and Chief Financial officer Mr todd joined Kathmandu in 1998, following previous financial management experience in both the apparel and retail sectors. Mr todd has been Kathmandu’s senior financial executive throughout his 13 years with the Group, a Director of various Group companies and manager of the new Zealand business from 2004 to 2006. Mr todd is the Company Secretary. John harvey non-executive Director Mr Harvey is a professional Director with a background in accounting and professional services. Mr Harvey has over 35 years professional experience, including 23 years as a partner of pricewaterhouseCoopers where he also held a number of leadership and governance roles. Mr Harvey has extensive experience in financial reporting, governance, information systems and processes, business evaluation, acquisition, merger and takeover reviews. Mr Harvey is currently a non-executive Director of DnZ property Fund, Heartland Building Society, port otago and nZ opera. John holland non-executive Director Mr Holland is a partner in the national new Zealand law firm Chapman tripp and specialises in general corporate and commercial law. Mr Holland was a Board member of Chapman tripp for six years until 31 March 2009. Mr Holland’s securities law experience includes acting on initial public offerings, advising on employee share schemes and in the private equity area. Mr Holland was a member of the Securities Commission of new Zealand from January 2007 to 30 april 2011 and is an accredited director of the new Zealand Institute of Directors. Sandra mcphee non-executive Director Ms Mcphee is a professional Director with an executive career background in sales and marketing including 10 years with Qantas airways. Ms Mcphee also served as Chief executive officer of the ansett/traveland Group. Ms Mcphee is currently a non- executive Director of Fairfax Media, aGl energy, Westfield retail trust and Vice president of the art Gallery of new South Wales. She is also a member of the advisory Council of Jp Morgan and advisory Board of MMC and St Vincent’s and Mater Health Community advisory Board. previous non-executive roles include Coles Group, australia post, perpetual, primelife and South australia Water. kathmandu annual report 2011 13 left to right: Grant Taylor, Peter Halkett, Caleb Nicholson, Mark Todd, Tamalin Morton, Matt Spencer, Michelle Adams and Paul Stern. management paul Stern General Manager, Business Development and Sustainability Joined Kathmandu in January 2010 with over 18 years experience in senior retail and Marketing roles, including at Kmart, a.S. Watson (Hong Kong), and Cadbury Schweppes. peter halkett Managing Director and Chief executive officer refer to page 12 mark todd Finance Director and Chief Financial officer refer to page 12 matt Spencer General Manager, retail Joined Kathmandu in 2007 after over 10 years in senior operational and planning roles with domestic and international retailers, including Shell and the Coles Group. michelle adams General Manager, product Joined Kathmandu in 2009 following extensive product and brand management experience with pacific Brands and Canterbury. tamalin morton General Manager, Marketing Joined Kathmandu in 2007, with extensive experience in marketing management and brand strategy gained through senior marketing roles with Coles Group and Bass plc (uK). Grant taylor Chief Information officer Joined Kathmandu in august 2010 with 15 years experience in senior It roles, including CIo at otago and Southland District Health Boards and Group It Manager for pGG Wrightson. caleb nicolson General Manager, Supply Chain Joined Kathmandu in 2007, after eight years with the Warehouse, where he had responsibility for delivering change across the supply chain and the merchandise function. kathmandu annual report 2011 15 directors’ report your directors present their report and the financial Statements for the year ended 31 July 2011. directorS the following persons were Directors of Kathmandu Holdings limited during the financial year. James Strong Was re-appointed Chairman, non-executive Director, Member of the audit and risk Committee, Member of the remuneration and nominee Committee on 24 november 2010 and continues in these offices at the date of this report. Peter Halkett Was appointed as Managing Director and Chief executive officer on 9 october 2009 and continues in these offices at the date of this report. Mark Todd Was appointed as Finance Director, Chief Financial officer and Company Secretary on 9 october 2009 and continues in these offices at the date of this report. John Harvey Was appointed as a non-executive Director, Chair of the audit and risk Committee, Member of the remuneration and nominee Committee on 16 october 2009 and continues in these offices at the date of this report. John Holland Was re-appointed as a non-executive Director, Member of the audit and risk Committee, Member of the remuneration and nominee Committee on 24 november 2010 and continues in these offices at the date of this report. Sandra McPhee Was appointed as a non-executive Director, Member of the audit and risk Committee, Chair of the remuneration and nominee Committee on 16 october 2009 and continues in these offices at the date of this report. Details of the experience and expertise of the Directors and the Company Secretary are outlined on pages 12 and 13 of this annual report. retirement of directorS In accordance with the Company’s constitution, Mark todd and Sandra Mcphee will retire as Directors at the annual general meeting and being eligible, offer themselves for re-election. Director Meetings Audit and Risk Committee Meetings Remuneration and Nominee Committee Meetings Director James Strong Peter Halkett Mark Todd John Harvey John Holland Sandra McPhee A 8 8 8 8 7 8 B 8 8 8 8 7 8 A 8 XX XX 8 7 8 B 8 XX XX 8 7 8 A 8 XX XX 8 7 8 B 8 XX XX 8 7 8 A - Number of meetings attended B - Number of meetings held during the time the Director held office during the year XX - Not a member of relevant Committee review of operationS the profit of the consolidated entity for the financial year after providing for income tax amounted to $39,066,000 (2010: $9,387,000). a detailed review of operations is provided on pages 2 to 11 of this annual report. SiGnificant chanGeS of affairS there has been no material change in the state of affairs of the Company or the Group. principal activitieS the Group’s principal activity in the course of the financial year was the design, marketing and retailing of clothing and equipment for travel and adventure. It operates in new Zealand, australia and the united Kingdom. matterS SuBSeQuent to the end of the financial year no matters or circumstances have arisen since the end of the financial year which significantly affect or may significantly affect the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity in future financial years. likely developmentS and eXpected reSultS of operationS meetinG of directorS the number of meetings of the Board of Directors and likely developments in the operations of the consolidated entity and the expected results of those operations in future Committees held during the year ended 31 July 2011 and financial years are contained on pages 2 to 11 of this annual the numbers of meetings attended by each Director were: report. 16 kathmandu annual report 2011 environmental reGulation the consolidated entity’s operations are not regulated by any significant environmental regulation under a law of the Commonwealth or of a State or territory of australia, or of new Zealand. dividendS Since the end of the financial year the Directors have declared the payment of a final ordinary dividend of nZ 7.0 cents per share. Dividends will carry full new Zealand imputation credits and full australian franking credits. the dividend will be paid on 24 november 2011. the Company does not currently have a dividend re- investment plan. inSurance of officerS the Company has entered into deeds of indemnity, insurance and access with each Director which confirms each person’s right of access to certain books and records of the Company for a period of seven years after the Director ceases to hold office. this seven year period can be extended where certain proceedings or investigations commence before the seven years expires. the deed also requires the Company to provide an indemnity for liability incurred as an officer of the Company, to the maximum extent permitted by law. Indemnification: pursuant to the Constitution, the Company is required to indemnify all Directors and employees, past and present against all liabilities allowed under law. the Company has entered into an agreement with each Director to indemnify those parties against all liabilities to another person that may arise from their position as Director or other officer of the Company or its controlled entities to the extent permitted by law. the deed stipulates that the Company will meet the full amount of any such liabilities, including reasonable legal costs and expenses. Insurance: pursuant to the Constitution, the Company may arrange and maintain Directors’ and officers’ insurance during each Director’s period of office and for a period of seven years after a Director ceases to hold office. this seven year period can be extended where certain proceedings or investigations commence before the seven years expires. remuneration report the remuneration report is set out in the following sections: the information provided in this remuneration report has not been audited as Kathmandu Holdings limited is a foreign company in terms of the Corporations act 2001 (australia). However the report is provided in the same form as is generally applied by australian companies listed on the aSX, and the audited remuneration disclosures contained in note 10 of the financial statements generally comply with those required under the Corporations act 2001 (australia). a principleS uSed to determine the nature and amount of remuneration the objective of the Company’s remuneration and nominee Committee (“the Committee”) is to create a framework whereby Directors and executives are remunerated fairly and within generally accepted market and comparable entity norms, on a basis that appropriately rewards for the creation of shareholder value. the composition, role and responsibility of the Committee is outlined in the Corporate Governance Statement on page 27 of this annual report. the general principles adopted by the Committee in the setting of remuneration are: remuneration whether measured at base or total level, should be market competitive, and generally account for key relevant internal and external factors such as employee level of responsibility and place of domicile, Company commercial circumstances, and market practice; those employees with the clear ability to influence the achievement of the Company’s strategic objectives and business plans (“key management and senior management personnel”) should be rewarded by way of performance based rewards structured to reflect success or otherwise against those objectives and plans; the alignment and mix of remuneration should not be based primarily upon cash incentives earned from Company short term profit performance (which was the case under the framework for executives which applied under the Company’s previous private equity ownership structure). the remuneration framework recognises the varying executive roles, remunerates these accordingly and has an incentive structure that has a lesser and appropriate proportion of total remuneration that is cash based; a principleS uSed to determine the nature and amount of remuneration B detailS of remuneration c Service aGreementS d detailS of Share-BaSed compenSation e additional information the opportunity to participate in equity based rewards should be a component of the reward structure for key management personnel, both to align their reward with the creation of shareholder value, and to encourage their ongoing participation in and retention by the Company;  Key management personnel who are executives (those personnel who report directly to the Chief executive officer and who are not Board members) should have a substantial portion (as a target no less than one-third) of their total remuneration aligned with reward for creating shareholder value. this should generally be achieved through the application of appropriate and measurable performance hurdles to be met as criteria for receiving incentive based remuneration by way of cash or equity; the executive Directors (Chief executive officer and Chief Financial officer) should, relative to other executives have; a greater proportion of total remuneration that is “at risk”, i.e. contingent upon the achievement of performance hurdles, and a greater proportion of “at risk” remuneration weighted towards equity based rewards rather than cash, because of their role in establishing and delivering achievement of medium and long term Company strategic objectives and business plans, and increasing shareholder value over that period. the opportunity to participate in equity based rewards should be a component of remuneration for all senior management personnel. the audited consolidated financial results for the Group are the basis for measuring achievement against a financial performance target. non-executive Directors’ remuneration should enable the Company to attract and retain high quality Directors with the relevant experience. In order to maintain independence and impartiality, non- executive Directors should not receive performance based remuneration. executive rewards the executive remuneration framework (currently applying to 8 executives including the 2 executive Directors) has four components: 1 Base salary and benefits; 2 Short term cash incentives; 3 Short term equity incentives with performance conditions relating to continuing employment with the company, and 4 long term incentives via participation in the company’s options and long term incentive plans kathmandu annual report 2011 17 the combination of these comprises the executives’ total remuneration. other senior management personnel have a remuneration framework incorporating components 1 to 3 above. the remuneration framework provides a market competitive reward for executives that aligns appropriately with achievement of personal and strategic objectives, the results delivered, and the creation of value for shareholders. the framework also creates emphasis on cross-functional collaboration by requiring the payment of all short term incentive based rewards to be contingent firstly upon the achievement of the applicable overall Group financial performance targets. there has been a re-alignment of the make-up of executive total remuneration, which from 1 august 2011 results in: a greater proportion of total cash remuneration earned by executives by way of base salary and a lesser proportion by way of short term cash incentive; the now reduced proportion of remuneration available through short term incentives earned as a mix of cash and equity incentives (was previously all cash); long term incentive plan performance rights granted, subject to shareholder approval, only to executive Directors. the Company’s previous framework, established under private equity ownership, had a weighting of rewards applying to the entire executive which was based primarily upon cash incentives earned from Group short term profit performance. the new framework recognises the varying executive roles, remunerates these accordingly and has an incentive structure that contains a much greater weighting to equity based rewards. Group earnings before interest, tax, depreciation and amortisation (eBItDa) has been determined as the appropriate financial performance target to trigger payment of short term cash incentives. In the previous (FY2010) year the performance target adopted was Group eBIt (earnings before interest and tax). Both criteria were determined based on comparative research against the market and advice from external independent remuneration consultants. the change in criterion reflects the substantial increase in the capital investment programme expected to be approved and overseen by the Board over the medium term. the large increase in programme $ spend and number of projects, means considerable variability in the depreciation and amortisation expense arising year by year is possible and this could be both within and beyond executive control given the nature and mix of the Group’s capital assets and leases. 18 kathmandu annual report 2011 the Company’s objective is to provide a remuneration framework whereby every incentive payment over and above an executive’s fixed pay, whether in the form of cash or equity, is appropriate for the results delivered by the Company and the employee and based on reward for performance. the Board, through the Committee undertakes its governance role in establishing executive remuneration including, where required, use of external independent remuneration consultants and/or available market information, with reference to both total remuneration and its various components. 1 Base Salary and Benefits executive base salaries are structured as part of a total employment remuneration package which is delivered as a mix of cash and non-monetary benefits determined by negotiation with the executive. executives are offered a competitive base salary that comprises the fixed component of pay and rewards. external independent remuneration consultants provide analysis and advice to assess whether base salary as well as total remuneration reflects the market positioning for a comparable role. Base salary for senior executives is reviewed annually to provide competitiveness with the market but there are no guaranteed base salary increases in any executive’s contracts, except as specifically stated in this report. an executive’s remuneration is also reviewed on promotion. executive benefits made available are superannuation contributions made in accordance with the legislation specific to each country in which the employee is resident, medical insurance and for some executives leasing and/or reimbursement of vehicle running costs. Key management and senior management personnel who relocate their place of working between countries may be assisted in the cost of such relocation. 2 Short term cash incentives executives are eligible to participate in an annual short term cash incentive which delivers rewards by way of cash bonuses, subject to the achievement of Group financial performance targets and individual KpI’s. were paid to the extent of 50% of base salary for all eligible executives (60% for the Chief executive officer). this comprised of payment for achievement of Group financial performance targets to a level that triggered maximum permissible cash bonuses (40% of base salary, 50% for Chief executive officer), and consequent entitlement to individual KpI based cash bonuses (10% of base salary). For the year ended 31 July 2010 no short term cash incentives were paid under the terms above, as Group financial performance targets were not met. Details of these short term cash incentives along with other remuneration of the key management personnel of the Company, for the current and prior financial years are set out in note 10 of the financial statements. Further incentives may also be paid at the discretion of the Board to individual executives as recognition of exceptional achievement in any given year. 3 Short term equity incentives with performance conditions the shareholder approved long term incentive plan enables the Board to offer equity incentives as part of short and long term remuneration. In FY2011 short term equity incentives were offered to senior management personnel and from 1 august 2011 both senior management personnel and executives will participate in short term equity incentives. For FY2012 executives including the executive Directors will have no less than 30% of the total value of their annual short term incentive equity based, with rewards delivered by way of nil cost performance rights. the entitlement to the short term equity incentive will be subject to the achievement of the same Group financial performance and individual KpI’s as for the short term cash incentive. If the Group financial performance targets and individual KpI’s are achieved, vesting of the performance rights granted under this incentive will generally require the executive staff member to remain employed by the Group for a period of two years after the end of the financial year in which Group financial performance that determines entitlement to the rights is measured. the amount of any short term cash incentive paid in a year is dependent upon: the level of over performance achieved against the Group’s financial performance target (eBItDa or eBIt) for the year; and if financial performance targets have been met or exceeded, the achievement or otherwise of individual KpI’s. For the year ended 31 July 2011 short term cash incentives For senior management personnel short term equity incentives, delivered by way of nil cost performance rights, were granted in november 2010. the vesting of the rights was dependent firstly upon achievement of Company epS targets for FY2011. these targets were achieved and the rights granted will vest on 31 July 2012 providing the personnel concerned remain employed by the Group. For FY2012 the equity incentives applying for senior management personnel will again be measured based on the level of financial over performance of the Group against the Group’s financial target for the year (eBItDa), and if these targets are achieved the rights granted will vest on 31 July 2013 providing the personnel concerned remain employed by the Group. the value of the short term equity incentive for senior management personnel is generally up to 10% of base salary. 4 long term incentive plans w options plan 2009 the Company implemented the employee option plan on 16 october 2009, and it was developed in the lead in to the Company’s Ipo in order to provide an incentive scheme for selected senior employees in conjunction with the public listing of the Company. an initial grant of options was made in conjunction with the Ipo to seven executives of the Company. Vesting of the options is subject to the Company achieving a compound annual growth in total Shareholder return (tSr) of 15% for the period applying to each tested period of performance measurement. tSr was determined as the criterion for performance measurement based on research against the market, and advice from external independent remuneration consultants with reference to the approach considered appropriate for a Company undertaking an Ipo of shares. Subject to achievement of this condition and executives remaining in employment with the Company at the vesting date, the options granted to each executive as detailed below vest progressively in 3 equal tranches on the test dates of 1 october 2010, 2011 and 2012. If the tSr performance condition has not been achieved on the applicable test date there will be re-testing of this condition on 1 october 2011, 2012 and 2013. all options have an expiry date five years from their date of grant. the Board do not intend to grant any further options under the existing plan. the Board are of the view that the existing plan no longer represents an appropriate on-going long term incentive structure for the Company post the Ipo. long -term incentive plan november 2010 Shareholders approved a new long term incentive plan at the Company’s 2010 annual General Meeting based on the granting of nil cost performance rights. rights were offered in 2010 to all executives. For executives vesting of the rights will be dependent upon the Company achieving earnings per Share (epS) and /or relative tSr targets over a 2, 3 and 4 year performance period, with 50% of the value of rights allocated under each target . epS is measured on a compound annual growth basis and tSr is measured on a relative basis against similar sized australian and new Zealand listed retail organisations. performance measurement under either criterion is at the end of each applicable performance period with no ability to re-test. Fifty percent of the relevant portion of the award kathmandu annual report 2011 19 vests for achievement of targets and a further fifty percent vests for the achievement of aspirational targets. a sliding scale operates between target and aspirational performance levels. this long-term incentive is intended to focus performance on achievement of key long-term performance metrics. the selected performance measures provide an appropriate balance between relative and absolute Company performance. the Committee considers this plan will best support and facilitate the growth in shareholder value over the long term. With effect from 1 august 2011, the Committee intends to grant only executive Directors with nil cost performance rights that will require achievement of epS and relative tSr targets over the 2, 3 and 4 year periods. these grants are subject to shareholder approval. other executives and senior management personnel have been granted nil cost performance rights under this plan that are measured and will vest under the short term equity incentive framework. non-executive directors’ fees the current aggregate limit for non-executive Directors’ fees is $a600,000 per annum with a base fee payable (including superannuation if applicable) to the Chairman of $a206,000 and to a non-executive Director currently of $a103,000 per annum. additionally a$10,000 per annum is paid for sub-committee attendances. all non-executive Directors’ fees are inclusive of Committee fees. the Managing Director and Finance Director do not receive Directors’ fees. the amounts approved for Directors’ fees are expressed in $a given the specific requirements for remuneration reporting applying to aSX listed companies, however all amounts reported in the tables within this report are specified in $nZ, being the reporting currency of the Company. non-executive Directors’ fees are those as set at the time of the Initial public offering (Ipo) of shares in the Company. the Board will be recommending to shareholders an increase in the aggregate limit for non-executive Directors’ fees to a$800,000 per annum at this year’s Company annual General Meeting. this increase is being recommended to enable the Board to appoint a further non-executive Director. It remains the Board’s intention that Directors’ fees will be reviewed annually, with external independent remuneration consultants providing advice to ensure fees reflect market rates. there are no guaranteed annual increases in any Director’s fees. non-executive Directors do not participate in the Company short or long term incentive schemes. 20 kathmandu annual report 2011 the following fees apply per annum, including sub- committee attendance fees: Total fees Chairman Other Non-Executive Directors Actual fees paid in year ended 31 July 2011 (converted to reporting currency) Chairman Other Non-Executive Directors AUD $ 216,000 113,000 NZD $ 283,235 148,174 all of the named persons were employed by the Group and were key management personnel for the entire year ended 31 July 2011 and the year ended 31 July 2010, unless otherwise stated. peter Halkett, Mark todd, Michelle adams, Caleb nicolson and Grant taylor are employees of Kathmandu limited (new Zealand domiciled), and Matt Spencer, tamalin Morton and paul Stern are employees of Kathmandu pty limited (australian domiciled). Details of the remuneration of the Directors and other key management personnel of the Group, for the current and prior financial years are set out in note 10 of the financial statements. B detailS of remuneration c Service aGreementS the following executives along with the Directors were the key management personnel with the authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, during the financial year. the key management personnel also include the five highest paid officers: peter halkett - Chief executive officer mark todd - Chief Financial officer matt Spencer - General Manager, retail tamalin morton - General Manager, Marketing (returned from maternity leave on 23 August 2010) michelle adams - General Manager, product caleb nicolson - General Manager, Supply Chain paul Stern - General Manager, Business Development and Sustainability (from 1 August 2010) Grant taylor - Chief Information officer (from 30 August 2010) all executives are on employment terms consistent with the remuneration framework outlined in this report. each of the agreements has an open term, and the period of notice to be given by the employee is three months. the agreements provide for three months base salary inclusive of any applicable superannuation to be paid in the event of a redundancy. d detailS of Share-BaSed compenSation options plan 2009 the Company employee option plan entitles the holder to acquire one share for each option granted by paying the prescribed exercise price to the Company once the option has vested in the holder and the relevant exercise conditions have been met. the number of options granted by the Company and thus provided as remuneration to executive Directors and other key management personnel during the current financial year is set out below. 2011 Options grant date Executive Directors Peter Halkett Mark Todd - - Other Key Management Personnel Matt Spencer Michelle Adams Tamalin Morton Paul Stern Caleb Nicolson Grant Taylor Total - - - - - Options granted during the year First vesting date Last vesting date Total fair value of options at grant date $ Options vested during the year - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - kathmandu annual report 2011 21 Options grant date Options granted during the year 2010 Executive Directors First vesting date Last vesting date Total fair value of options at grant date $ Options vested during the year 18 Nov 2009 186,218 1 Oct 2010 1 Oct 2013 18 Nov 2009 186,218 1 Oct 2011 1 Oct 2013 18 Nov 2009 186,218 1 Oct 2012 1 Oct 2013 Peter Halkett Peter Halkett Peter Halkett Mark Todd Mark Todd Mark Todd 18 Nov 2009 18 Nov 2009 18 Nov 2009 Other Key Management Personnel Matt Spencer 18 Nov 2009 Matt Spencer 18 Nov 2009 Matt Spencer 18 Nov 2009 Michelle Adams 18 Nov 2009 Michelle Adams 18 Nov 2009 Michelle Adams 18 Nov 2009 Tamalin Morton 18 Nov 2009 Tamalin Morton 18 Nov 2009 Tamalin Morton 18 Nov 2009 Caleb Nicolson 18 Nov 2009 Caleb Nicolson 18 Nov 2009 Caleb Nicolson 18 Nov 2009 Bryan Moore* 18 Nov 2009 Bryan Moore 18 Nov 2009 Bryan Moore 18 Nov 2009 53,377 53,377 53,377 39,541 39,541 39,542 26,755 26,755 26,756 36,932 36,932 36,933 15,518 15,518 15,518 14,983 14,983 14,983 1 Oct 2010 1 Oct 2013 1 Oct 2011 1 Oct 2013 1 Oct 2012 1 Oct 2013 1 Oct 2010 1 Oct 2013 1 Oct 2011 1 Oct 2013 1 Oct 2012 1 Oct 2013 1 Oct 2010 1 Oct 2013 1 Oct 2011 1 Oct 2013 1 Oct 2012 1 Oct 2013 1 Oct 2010 1 Oct 2013 1 Oct 2011 1 Oct 2013 1 Oct 2012 1 Oct 2013 1 Oct 2010 1 Oct 2013 1 Oct 2011 1 Oct 2013 1 Oct 2012 1 Oct 2013 1 Oct 2010 1 Oct 2013 1 Oct 2011 1 Oct 2013 1 Oct 2012 1 Oct 2013 78,925 88,912 90,841 22,623 25,485 26,038 16,759 18,879 19,289 11,340 12,774 13,052 15,653 17,634 18,017 6,577 7,409 7,570 6,350 7,154 7,309 - - - - - - - - - - - - - - - - - - - - - - Total 1,119,976 518,590 * Bryan Moore was General Manager, Information Services until his resignation on 10 September 2010. the fair value of the options granted on 18 november 2009 is $0.46 per option. all options granted during the current year will vest on the exercise dates above provided the required performance hurdles are achieved and the employee remains employed with the Company at the vesting date. In the event an employee leaves the Company prior to the vesting date the options will lapse. any options that vest under this plan must be exercised no later than 18 november 2014. the total payable per employee on the exercise of one or more options on a particular day is the price per share in the Company paid for by the purchasers of shares in the Ipo, being $a1.70 and $nZ2.1333, regardless of the number exercised on that day. no options in the Company were granted or vested in the previous year. no grants have been made subsequent to year end. 22 kathmandu annual report 2011 long-term incentive plan november 2010 the Company long term incentive plan entitles the Board to grant performance rights for no cash consideration, at intervals determined by the Board. rights were offered in 2010 to all executives and senior management personnel domiciled in australia and new Zealand. For executives vesting of the rights will be dependent upon the Company achieving earnings per Share (epS) and /or relative tSr targets over a 2, 3 and 4 year performance period, with 50% of the value of rights allocated under each target. For senior management vesting of the rights was dependent firstly upon achievement of Company epS targets for FY2011, and given those targets were achieved, the rights granted will vest on 31 July 2012 providing the personnel concerned remain employed by the Company. For each executive the number of rights granted and the applicable performance period over which epS and relative tSr is measured is set out below, along with the fair value of the rights at the grant date of 29 november 2010. 2011 Grant date Executive Directors Peter Halkett Peter Halkett Peter Halkett Mark Todd Mark Todd Mark Todd 29 Nov 2010 29 Nov 2010 29 Nov 2010 29 Nov 2010 29 Nov 2010 29 Nov 2010 Other Key Management Personnel Matt Spencer Matt Spencer Matt Spencer Michelle Adams Michelle Adams Michelle Adams Tamalin Morton Tamalin Morton Tamalin Morton Paul Stern Paul Stern Paul Stern Caleb Nicolson Caleb Nicolson Caleb Nicolson Grant Taylor Grant Taylor Grant Taylor Total 29 Nov 2010 29 Nov 2010 29 Nov 2010 29 Nov 2010 29 Nov 2010 29 Nov 2010 29 Nov 2010 29 Nov 2010 29 Nov 2010 29 Nov 2010 29 Nov 2010 29 Nov 2010 29 Nov 2010 29 Nov 2010 29 Nov 2010 29 Nov 2010 29 Nov 2010 29 Nov 2010 Rights granted during the year Date exercisable Expiry date Total fair value of performance rights at grant date $ Performance rights granted in prior periods vested during the year 59,048 59,048 59,048 20,833 20,833 20,833 9,925 9,925 9,925 6,131 6,131 6,131 8,759 8,759 8,759 8,759 8,759 8,759 5,952 5,952 5,952 5,357 5.357 5,357 1 Dec 2012 1 Dec 2013 1 Dec 2014 1 Dec 2012 1 Dec 2013 1 Dec 2014 1 Dec 2012 1 Dec 2013 1 Dec 2014 1 Dec 2012 1 Dec 2013 1 Dec 2014 1 Dec 2012 1 Dec 2013 1 Dec 2014 1 Dec 2012 1 Dec 2013 1 Dec 2014 1 Dec 2012 1 Dec 2013 1 Dec 2014 1 Dec 2012 1 Dec 2013 1 Dec 2014 1 Oct 2013 1 Oct 2013 1 Oct 2013 1 Oct 2013 1 Oct 2013 1 Oct 2013 1 Oct 2013 1 Oct 2013 1 Oct 2013 1 Oct 2013 1 Oct 2013 1 Oct 2013 1 Oct 2013 1 Oct 2013 1 Oct 2013 1 Oct 2013 1 Oct 2013 1 Oct 2013 1 Oct 2013 1 Oct 2013 1 Oct 2013 1 Oct 2013 1 Oct 2013 1 Oct 2013 139,353 132,858 126,363 49,166 46,874 44,583 23,423 22,331 21,240 14,469 13,795 13,120 20,671 19,708 18,744 20,671 19,708 18,744 14,047 13,392 12,737 12,643 12,053 11,464 374,292 842,157 - - - - - - - - - - - - - - - - - - - - - - - - - performance rights granted to each executive will, subject to satisfaction of performance conditions, vest on the basis of one ordinary share for each performance right which vests, at the end of each performance period. kathmandu annual report 2011 23 e additional information retesting against the 15% compound tSr growth target on cash Bonuses and performance as noted above, for the current year all cash bonuses that were available to be paid to key management personnel 1 october each year through to 2013 for this tranche and the subsequent tranches that will be performance tested for the first time in 2011 and 2012. based on achievement of financial performance targets and company performance individual KpI’s were paid as a result of the Company and all key management personnel’s short term cash incentive individuals meeting those performance targets. no part of the cash bonuses are payable in future years. options and performance the first test date for the vesting of options granted under the Company employee option plan was 1 october 2010 (for one-third of the options granted). In the event that the initial tranche of options do not vest on that date because is dependent upon the Company’s overall financial performance for each financial year and their long term incentive is dependent upon both earnings per share growth and relative total shareholder returns over a range of performance periods. With reference to the measurement of long term incentive performance the table below outlines the Company’s the tSr performance target for the tested period has earnings and share performance since its listing on 13 not been met, the options do not lapse. there is annual november 2009: Year NPAT Growth EPS cents per share EPS growth Share price at start of year Share price at end of year Share price growth Ordinary dividends paid or declared per share FY2010 $9.4m NA FY2011 $39.1m 316% 0.3 19.5 NA 65x $2.13 $2.05 $2.05 $2.20 (3.8%) 7.3% $0.07 $0.10 Share price quoted is the nZX listing price. the Company is listed on both the aSX and nZX and options will vest on both exchanges, dependent on where the employee is based. Historical performance prior to the Company’s listing is not considered meaningful with respect to the Company’s performance and its impact on shareholder wealth. Shares under options or performance rights there are no unissued ordinary shares of the Company under any vested options or performance rights at the date of this report. remuneration of auditorS Details of remuneration of auditors is set out in note 24 of the Financial Statements. non-audit Services pricewaterhouseCoopers were appointed auditors of Kathmandu Holdings limited in 2009 and whilst their main role is to provide audit services to the Company, the Company does employ their specialist advice where appropriate. In each instance, the Board has considered the nature of the advice sought in the context of the audit relationship and in accordance with the advice received from the audit and risk Committee, does not consider these services compromised the auditor independence for the following reasons: all non-audit services have been reviewed by audit and risk Committee to ensure they do not impact the impartiality and objectivity of the auditor. none of the services undermined the general principles relating to auditor independence, including not reviewing or auditing the auditor’s own work, not acting in a management or a decision making capacity for the Company, not acting as advocate for the Company or not jointly sharing economic risk or rewards. a copy of the auditor’s independence declaration is contained on page 27 of this annual report. this report is made in accordance with a resolution of the Directors. James Strong Chairman Peter Halkett Managing Director kathmandu annual report 2011 25 corporate governance the Board and management of the Company are committed to ensuring that the Company adheres to best practice governance principles and maintains the highest ethical standards. the Board is responsible for the overall corporate governance of the Company, including adopting the appropriate policies and procedures and seeking to ensure Directors, management and employees fulfil their functions effectively and responsibly. the Company is listed on both the new Zealand and australian stock exchanges. Corporate governance principles and guidelines have been introduced in both countries. these include the australian Securities exchange (aSX) Corporate Governance Council Corporate Governance principles and recommendations, the new Zealand Stock exchange listing rules relating to corporate governance, the nZX Corporate Governance Best practice Code, and the new Zealand Financial Markets authority’s Corporate Governance principles and Guidelines (collectively, the principles). the Board considers that the Company’s corporate governance practices and procedures substantially reflect the principles. the full content of the Company’s Corporate Governance policies, practices and procedures can be found on the Company’s website (www.kathmanduholdings.com). the main policies and practices adopted by the Company are summarised below. Board charterS of directorS and itS committeeS the Board has adopted a written charter to provide a framework for the effective operation of the Board. the charter addresses the following matters and responsibilities of the Board: enhancing Shareholder value; oversight of the Company, including its control and accountability systems; appointing and removing the Managing Director (or equivalent) and the Finance Director; ratifying the appointment, and where appropriate, the removal of the senior executives; input into and approval of corporate strategy and performance objectives; reviewing and ratifying systems of risk management and internal compliance and control, codes of conduct and legal compliance; monitoring senior management’s performance and implementation strategy, and seeking to ensure appropriate resources are available; approving and monitoring the progress of major capital expenditure, capital management and acquisitions and divestitures; approving budgets; and approving and monitoring financial and other reporting. Board compoSition at present, there are six Directors on the Board. Four out of the six Directors are non-executive Directors. peter Halkett, (Managing Director and Chief executive officer), and Mark todd (Finance Director and Chief Financial officer) are the only executive Directors on the Board. the Chairman of the Board is James Strong. the biography of each Board member, including each Director’s skills, experience, expertise and the term of office held by each Director at the date of this annual report is set out in the “Board of Directors” section of this annual report. independence of directorS the factors that the Company will take into account when assessing the independence of its Directors are set out in its Charter, a copy of which is available on the Company’s website (www.kathmanduholdings.com). the Managing Director (peter Halkett) and Finance Director (Mark todd) are employed by the Company or another Group member in an executive capacity and are not considered to be independent Directors based on the criteria set out in the Board Charter. all remaining Directors satisfy the criteria and are considered independent Directors, namely James Strong, John Harvey, John Holland and Sandra Mcphee. Board committeeS the Board may from time to time establish appropriate committees to assist in the discharge of its responsibilities. the Board has established the audit and risk Committee and the remuneration and nomination Committee. other committees may be established by the Board as and when required. Membership of Board committees will be based on the needs of the Company, relevant legislative and other requirements and the skills and experience of individual Directors. audit and riSk committee under its charter, this committee must have at least three members, a majority of whom must be independent Directors and all of whom must be non-executive Directors. Currently, all the non-executive Directors are members of this committee. John Harvey is Chair of the committee. the primary role of this committee includes: overseeing the process of financial reporting, internal control, continuous disclosure, financial and non- financial risk management and compliance and external 26 kathmandu annual report 2011 audit; monitoring Kathmandu’s compliance with laws and continuouS diScloSure policy the Company is committed to observing its disclosure regulations and Kathmandu’s own codes of conduct obligations under the listing rules. the Company has a and ethics; policy which establishes procedures which are aimed at encouraging effective relationships with, and ensuring that Directors and Management are aware of and communication between, the Board, Management and fulfil their obligations in relation to the timely disclosure of Kathmandu’s external auditor; and material price-sensitive information. evaluating the adequacy of processes and controls established to identify and manage areas of potential risk and to seek to safeguard the Company’s assets. under the charter it is the policy of the Company that its external auditing firm must be independent of the Company. the committee will review and assess the independence of the external auditor on an annual basis. remuneration and nomination committee under its charter, this committee must have at least three members, a majority of whom must be independent Directors and all of whom must be non-executive Directors. Currently, all the non-executive Directors are members of this committee. Sandra Mcphee is Chair of the committee. the main functions of the committee, are to assist the Board with a view to establishing a Board of effective composition, size, expertise and commitment to adequately discharge its responsibilities and duties, and assist the Board with a view to discharging its responsibilities to Shareholders and other stakeholders to seek to ensure that the Company: has coherent remuneration policies and practices which enable the Company to attract and retain executives and Directors who will create value for Shareholders; fairly and responsibly remunerates Directors and executives, having regard to the performance of the Company, the performance of the executives and the general remuneration environment; and has effective policies and procedures to attract, motivate and retain appropriately skilled persons to meet the Company’s needs. riSk manaGement policy the identification and proper management of the Company’s risk are an important priority of the Board. the Company has a risk management policy appropriate for its business. this policy highlights the risks relevant to the SecuritieS tradinG policy the Company has guidelines for dealing in securities which are intended to explain the prohibited type of conduct in relation to dealings in securities under the Corporations act 2001 (australia) and the Securities Markets act 1988 (nZ) and to establish a best practice procedure in relation to Directors’, management’s and employees’ dealings in Shares in the Company. Subject to the overriding restriction that persons may not deal in Shares while they are in possession of material price sensitive information, Directors and management will only be permitted to deal in Shares during certain ‘window periods’, following the release of the Company’s full and half year financial results or the release of a disclosure document offering shares in the Company. outside of these periods, Directors and management must receive clearance for any proposed dealing in Shares. code of conduct the Board recognises the need to observe the highest standards of corporate practice and business conduct. accordingly, the Board has a formal code of conduct, to be followed by all employees and officers. the key aspects of this code are to: act with honesty, integrity and fairness and in the best interest of the Company; act in accordance with all applicable laws, regulations, policies and procedures; and use Company resources and property properly. communicationS with ShareholderS the Company is committed to keeping Shareholders informed of all major developments affecting the Company’s state of affairs relevant to Shareholders in accordance with all applicable laws. Information is communicated to Shareholders through the lodgement of all relevant financial and other information with aSX and nZX and publishing information on the Company’s website (www.kathmanduholdings.com). In particular, Company’s operations, and the Company’s commitment the Company’s website will contain information about the to designing and implementing systems and methods Company, including media releases, key policies and the appropriate to minimise and control its risk. the audit terms of reference of the Company’s Board Committees. and risk Committee is responsible for monitoring risk all relevant announcements made to the market and any management and establishing procedures which seek to other relevant information will be posted on the Company’s provide assurance that major business risks are identified, website as soon as they have been released to aSX consistently assessed and appropriately addressed. and nZX. kathmandu annual report 2011 27 PricewaterhouseCoopers, 5 Sir Gil Simpson Drive, Burnside, PO Box 13 244, Christchurch 8053, New Zealand T: +64 (3) 374 3000, F: +64 (3) 374 3001, www.pwc.com/nz kAThMANdu annual report 2011 29 financial statements For the year ended 31 July 2011 Directory Directors’ Approval of Financial Statements Income Statements Statements of Comprehensive Income Statements of Changes in Equity Balance Sheets Statements of Cash Flows Notes to the Financial Statements Auditors’ Report Summary of significant accounting policies Standards, interpretations and amendments to published standards Income and expenses Costs associated with the Initial Public Offering (IPO) Income tax expense Reconciliation of net profit after taxation with cash inflow from operating activities47 Cash and cash equivalents Trade and other receivables Inventories Intangible assets Investment in subsidiaries CONTENTS OF NOTES TO FINANCIAL STATEMENTS 1 General information 2 3 4 5 6 7 8 9 10 Related party disclosures 11 Derivative financial instruments 12 13 Property, plant and equipment 14 15 16 Deferred taxation 17 Trade and other payables Interest bearing liabilities 18 19 Contributed equity - ordinary shares 20 Employee share based remuneration 21 Reverse acquisition 22 Reserves and retained earnings 23 Dividends 24 Remuneration of auditors 25 Contingent liabilities 26 Contingent assets 27 Commitments 28 Financial risk management 29 Segmental information 30 Earnings per share 31 Earthquake disclosures 32 Events occurring after the balance date 29 30 31 32 33 34 35 36 73 36 36 43 44 45 46 47 48 48 49 52 52 53 54 55 56 57 58 59 59 62 62 63 63 64 64 64 65 70 72 72 72 30 kAThMANdu annual report 2011 directors’ approval of fi nancial statements For the year ended 31 July 2011 authorisation for Issue the Board of directors authorised the issue of these Financial Statements on 21 September 2011. approval by Directors the directors are pleased to present the Financial Statements of Kathmandu holdings limited for the year ending 31 July 2011 on pages 31 to 72. director director director For and on behalf of the Board of directors 21 September 2011 date 21 September 2011 date date income statements For the year ended 31 July 2011 kAThMANdu annual report 2011 31 Group parent note 2011 2010 2011 2010 nZ$’000 nZ$’000 nZ$’000 nZ$’000 Sales Cost of sales Gross profit Other income Selling expenses Administration and general expenses Finance income Finance expenses Finance costs - net profit before income tax and costs associated with Ipo Costs associated with IPO profit / (loss) before income tax Income tax (expense) / benefit - - - - - (1,235) (1,235) 2 - 2 306,143 (105,560) 200,583 245,812 (90,523) 155,289 - - - - (94,812) (41,751) 64,020 236 (7,039) (6,803) 57,217 - 57,217 (18,151) 4 4 5 6 - 20,341 - (1,868) 18,473 49 - 49 (77,556) (29,278) 48,455 2,277 (11,934) (9,657) 38,798 (16,834) 21,964 (12,577) 18,522 - (1,233) (11,572) 18,522 (12,805) (106) 446 profit / (loss) after income tax 39,066 9,387 18,416 (12,359) Basic earnings per share Diluted earnings per share Weighted average basic ordinary shares outstanding (‘000) Weighted average diluted ordinary shares outstanding (‘000) 30 30 19.5cps 19.2cps 200,000 203,437 0.3cps 0.3cps 2,754,829 2,755,608 32 kAThMANdu annual report 2011 statements of comprehensive income For the year ended 31 July 2011 Group parent note 2011 2010 2011 2010 nZ$’000 nZ$’000 nZ$’000 nZ$’000 profit / (loss) after tax 39,066 9,387 18,416 (12,359) Movement in cash flow hedge reserve Movement in foreign currency translation reserve other comprehensive income for the year, net of tax 22 22 (5,055) 1,409 (3,646) (2,580) (1,515) (4,095) - - - - - - total comprehensive income for the year attributable to shareholders 35,420 5,292 18,416 (12,359) kAThMANdu annual report 2011 33 statements of changes in equity For the year ended 31 July 2011 Group Share Capital Cash Flow Hedge reserve Foreign Currency translation reserve employee Share option reserve retained earnings total equity nZ$’000 nZ$’000 nZ$’000 nZ$’000 nZ$’000 nZ$’000 Balance as at 31 July 2009 Total comprehensive income and expense Issue of share capital Movement in employee share option reserve 96,146 - 100,903 - (1,420) (2,580) - - 3,995 (1,515) - Balance as at 31 July 2010 197,049 (4,000) 2,480 Total comprehensive income and expense Dividends paid Movement in employee share option reserve - - - (5,055) 1,409 - - - Balance as at 31 July 2011 197,049 (9,055) 3,889 - - - 246 246 - - 379 625 33,965 9,387 - - 132,686 5,292 100,903 246 43,352 239,127 39,066 35,420 (20,000) (20,000) - 379 62,418 254,926 parent Balance as at 31 July 2009 Total comprehensive income and expense Issue of share capital Movement in employee share option reserve Balance as at 31 July 2010 Total comprehensive income and expense Dividends paid Movement in employee share option reserve Balance as at 31 July 2011 422,137 Share Capital Cash Flow Hedge reserve Foreign Currency translation reserve employee Share option reserve retained earnings total equity nZ$’000 nZ$’000 nZ$’000 nZ$’000 nZ$’000 nZ$’000 - - 422,137 - 422,137 - - - - - - - - - - - - - - - - - - - - - - - - 246 246 - - 379 625 - - (12,359) (12,359) - - 422,137 246 (12,359) 410,024 18,416 18,416 (20,000) (20,000) - 379 (13,943) 408,819 34 kAThMANdu annual report 2011 balance sheets aS at 31 July 2011 aSSetS Current assets Cash and cash equivalents Trade and other receivables Related party receivable Derivative financial instruments Inventories Current tax assets Total current assets non-current assets Property, plant and equipment Intangible assets Derivative financial instruments Investment in subsidiaries Deferred tax Total non-current assets total assets LIaBILItIeS Current liabilities Trade and other payables Derivative financial instruments Current tax liabilities Total current liabilities non-current liabilities Derivative financial instruments Interest bearing liabilities Total non-current liabilities total liabilities net assets eQuItY Contributed equity - ordinary shares Reserves Retained earnings total equity note Group 2011 nZ$’000 2010 nZ$’000 parent 2011 nZ$’000 2010 nZ$’000 8 9 10 11 12 13 14 11 15 16 17 11 11 18 19 22 22 3,574 2,339 - 2 54,001 - 59,916 32,822 243,685 - - 3,467 279,974 339,890 21,012 10,505 6,666 38,183 301 46,480 46,781 84,964 4,736 3,903 - - 37,416 - 46,055 28,018 241,825 44 - 3,472 273,359 319,414 16,891 4,819 4,297 26,007 315 53,965 54,280 80,287 5 192 84,216 - - 3,214 87,627 - - - 321,234 - 321,234 408,861 42 - - 42 - - - 42 6 181 88,225 - - 1 88,413 - - - 321,234 445 321,679 410,092 68 - - 68 - - - 68 254,926 239,127 408,819 410,024 197,049 (4,541) 62,418 254,926 197,049 (1,274) 43,352 239,127 422,137 625 (13,943) 408,819 422,137 246 (12,359) 410,024 kAThMANdu annual report 2011 35 statements of cash flows For the year ended 31 July 2011 Cash flows from operating activities Cash was provided from: Receipts from customers Dividends received Interest received Cash was applied to: Payments to suppliers and employees Income tax paid Interest paid Group parent note 2011 nZ$’000 2010 nZ$’000 2011 nZ$’000 2010 nZ$’000 306,618 - 179 306,797 246,063 14,175 6,785 267,023 244,422 - 258 244,680 189,699 11,904 10,474 212,077 - 20,000 - 20,000 1,477 2,875 - 4,352 - - 2 2 257 - - 257 net cash inflow from operating activities 7 39,774 32,603 15,648 (255) Cash flows from investing activities Cash was provided from: Proceeds from sale of property, plant and equipment Cash was applied to: Purchase of property, plant and equipment Purchase of intangibles net cash (outflow) from investing activities Cash flows from financing activities Cash was provided from: Proceeds from share issue Proceeds of loan advances Cash was applied to: Costs associated with IPO Dividends paid Repayment of loan advances 13 14 21 - - 11,188 676 11,864 9 9 12,823 746 13,569 (11,864) (13,560) - - - - - - - 240,223 240,223 - 20,000 248,177 268,177 105,426 126,884 232,310 21,357 - 258,511 279,868 - 4,351 4,351 - 20,000 - 20,000 - - - - - - - 261 261 - - - net cash inflow / (outflow) from financing activities (27,954) (47,558) (15,649) 261 net increase / (decrease) in cash held Opening cash and cash equivalents Effect of foreign exchange rates Closing cash (44) (28,515) 4,736 (1,118) 3,574 32,209 1,042 4,736 (1) 6 - 5 8 6 - - 6 36 kAThMANdu annual report 2011 notes to the financial statements 1 GENERAL INFORMATION Kathmandu holdings limited (the Company) and its subsidiaries (together the Group) is a designer, marketer and retailer of clothing and equipment for travel and adventure. It operates in new Zealand, australia and the united Kingdom. the Company is a limited liability company incorporated and domiciled in new Zealand. the address of its registered office is 11 Mary Muller drive, heathcote, Christchurch. these audited consolidated financial statements have been approved for issue by the Board of directors on 21 September 2011. 2 SuMMARY OF SIGNIFICANT ACCOuNTING POLICIES these financial statements have been prepared in accordance with Generally accepted accounting practice in new Zealand. they comply with the new Zealand equivalents to International Financial reporting Standards (nZ IFrS) and other applicable Financial reporting Standards, as appropriate for profit-oriented entities. the financial statements also comply with International Financial reporting Standards (IFrS). the reporting currency used in the preparation of these consolidated financial statements is new Zealand dollars, rounded where necessary to the nearest thousand dollars. (A) BASIS OF PREPARATION the principal accounting policies adopted in the preparation of the financial statements are set out below. these policies have been consistently applied to all periods presented, unless otherwise stated. Reverse Acquisition the acquisition of Milford Group holdings limited by Kathmandu holdings limited in november 2009 was recognised as a reverse acquisition and the 2010 consolidated financial statements were therefore prepared as a continuation of the financial statements of the accounting acquirer, Milford Group holdings limited. as a result: the 2010 retained earnings of the Group represent the retained earnings of Milford Group holdings limited from the date of its incorporation, plus the results of other combining entities from the date of acquisition. the 2010 consolidated balance sheet comprises the existing consolidated net assets of Milford Group holdings limited and its controlled entities measured at their historical cost, except for derivatives which are measured at fair value, plus the fair value of the net assets of the other combining entities. Entities reporting the financial statements for the “parent” are for Kathmandu holdings limited as a separate legal entity. the consolidated financial statements for the “Group” are for the economic entity comprising Kathmandu holdings limited and its subsidiaries. the Group consists of: kathmandu holdings Limited parent Company Milford Group holdings Limited 100% owned by Kathmandu holdings limited kathmandu Limited 100% owned by Milford Group holdings limited kathmandu Pty Limited 100% owned by Milford Group holdings limited kathmandu (u.k.) Limited 100% owned by Milford Group holdings limited the Company and Group are designated as profit oriented entities for financial reporting purposes. Statutory base Kathmandu holdings limited is a company registered under the Companies act 1993. the financial statements have been prepared in accordance with the requirements of the Financial reporting act 1993 and the Companies act 1993. historical cost convention these financial statements have been prepared under the historical cost convention, as modified by the revaluation of certain assets as identified in specific accounting policies below. Comparatives Certain comparatives have been reclassified in order to conform to the current period presentation and disclosure. Critical accounting estimates 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 and brands the group tests annually whether goodwill and brands have suffered any impairment; in accordance with the accounting policy stated in note 2 (q) (i) & (ii). the recoverable amounts of cash-generating units have been determined based on the fair value less cost to sell calculation. these calculations require the use of estimates (note 14). (ii) Stock obsolescence the Group assesses the likely residual value of inventory. a stock provision is recognised for stock which is selling for less than cost. any increase in these provisions is taken as a reduction to inventory on the balance sheet and expensed into gross profit on the income statement. (B) PRINCIPLES OF CONSOLIdATION (i) Subsidiaries Subsidiaries are all 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. the existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. they are de-consolidated from the date that control ceases. the acquisition method of accounting is used to account for business combinations by the Group. the consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. the consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. on an acquisition-by-acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. the excess of the consideration transferred over the amount of any non-controlling interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquiree kAThMANdu annual report 2011 37 over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the income statement. Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. unrealised losses are also eliminated. accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. (ii) Transactions and non-controlling interests the Group treats transactions with non-controlling interests as transactions with equity owners of the Group. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity. (C) SEGMENT REPORTING an operating segment is a component of an entity that engages in business activities which earns revenue and incurs expenses and where the chief decision maker reviews the operating results on a regular basis and makes decisions on resource allocation. the Group is organised into three operating segments, depicting the three geographical regions the Group operates in. (d) FOREIGN CuRRENCY TRANSLATION (i) Functional and presentation currency Items included in the financial statements of each of the subsidiaries’ operations are measured using the currency of the primary economic environment in which it operates (‘functional currency’). the financial statements are presented in new Zealand dollars, which is the Company’s functional currency and Group’s 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 transaction. 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 deferred in equity as qualifying cash flow hedges. translation differences on monetary financial assets and liabilities are reported as part of the fair value gain or loss. 38 kAThMANdu annual report 2011 (iii) Group companies (iv) dividend income the results and financial position of all the Group entities (none of which has the currency of a hyper-inflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: dividend income is recognised when the right to receive payment is established. (F) CuRRENT ANd dEFERREd INCOME TAX 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 average 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 rate on 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 the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders’ equity. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. (E) REVENuE RECOGNITION revenue comprises the fair value of the consideration received or receivable for the sale of goods and services, excluding Goods and Services tax, rebates and discounts and after eliminating sales within the Group. revenue is recognised as follows: (i) Sales of goods Sales of goods are recognised when a Group entity has delivered a product to the customer. retail sales are usually in cash or by credit card. the recorded revenue is the gross amount of sale (excluding GSt), including credit card fees payable for the transaction. Such fees are included in selling expenses. (ii) Sales of services Management fees are recognised in the accounting period in which the services are rendered. (iii) Interest income Interest income is recognised on a time-portion basis using the effective interest method. the tax expense for the year comprises current and deferred tax. tax is recognised in the income statement, except to the extent that it relates to items recognised directly in equity. In this case, the tax is also recognised in equity. the current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company’s subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulations is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. deferred income tax is provided in full, using the liability method, on temporary differences arising between 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. deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. (G) GOOdS ANd SERVICES TAX (GST) the income statement and the cash flow statement have been prepared so that all components are stated exclusive of GSt. all items in the balance sheet are stated net of GSt, with the exception of receivables and payables, which include GSt invoiced. (h) LEASES The Group is the lessee 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. (I) IMPAIRMENT OF NON-FINANCIAL ASSETS assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Intangible assets that have an indefinite useful life, including goodwill, are not subject to amortisation and are tested annually for impairment irrespective of whether any circumstances identifying a possible impairment have been identified. 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). (J) CASh ANd CASh EQuIVALENTS Cash and cash equivalents includes 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. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet. (k) TRAdE RECEIVABLES kAThMANdu annual report 2011 39 the amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. the amount of the provision is recognised in the income statement. (L) INVENTORIES Inventories are stated at the lower of cost and net realisable value. Cost is determined on a weighted average cost method and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. (M) INVESTMENTS ANd OThER FINANCIAL ASSETS the Group classifies its investments in the following categories: loans and receivables, and financial assets at fair value through profit or loss. the classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at the initial recognition and re-evaluates this designation at every reporting date. (i) Loans and receivables loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. they arise when the Group provides money, goods or services directly to a debtor with no intention of selling the receivable. they are included in current assets, except for those with maturities greater than 12 months after the balance sheet date which are classified as non-current assets. (ii) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading. a financial asset is classified in this trade receivables are recognised initially at fair value and category if acquired principally for the purpose of selling in the subsequently measured at amortised cost, less provision for short-term. derivatives are also categorised as held for trading doubtful debts. unless they are designated as hedges. assets in this category are classified as current assets. the collectability of trade receivables is reviewed on an ongoing basis. debts, which are known to be uncollectible, are Financial assets carried at fair value through profit or loss written off. a provision for doubtful receivables is established are initially recognised at fair value, and transaction costs when there is objective evidence that the Group will not be are expensed in the income statement. Financial assets are able to collect all amounts due according to the original terms derecognised when the rights to receive cash flows from the of receivables. Significant financial difficulties of the debtor, investments have expired or have been transferred and the probability that the debtor will enter bankruptcy or financial Group has transferred substantially all risks and rewards of reorganisation, and default or delinquency in payments are ownership. loans and receivables are carried at amortised considered indicators that the trade receivable is impaired. cost using the effective interest method. 40 kAThMANdu annual report 2011 Gains or losses arising from changes in the fair value of ‘financial assets at fair value through profit or loss’ are presented in the income statement, except for foreign exchange movements on monetary assets, which are recognised in the income statement within ‘finance costs – net’. dividend income from financial assets at fair value through profit or loss is recognised in the income statement as part of other income when the Group’s right to receive payments is established. the Group assesses at each balance sheet date whether there is objective evidence that a financial asset of a group of financial assets is impaired. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the securities are impaired. If any such evidence exists for available for sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. (N) dERIVATIVES derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured to their fair value. the method of recognising the resulting gain or loss 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; (1) hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedge); or (2) hedges of highly probable forecast transactions (cash flow hedges). the Group documents at the inception of the transaction 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, both at hedge inception and on an ongoing basis, 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 of hedged items. which the effective interest method is used is amortised to profit and loss over the period to maturity. (ii) Cash flow hedge 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 income statement. amounts accumulated in equity are recycled in the income statement in the periods when the hedged item will affect profit or loss (for instance when the forecast sale that is hedged takes place). however, when the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory) or a non-financial liability, the gains and losses previously deferred in equity are transferred from equity and included in the measurement of the initial cost or carrying amount of the asset or liability. 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. (iii) derivatives that do not qualify for hedge accounting Certain derivative instruments do not qualify for hedge accounting or hedge accounting has not been adopted. Changes in the fair value of these derivative instruments are recognised immediately in the income statement within ‘finance costs – net’. (O) 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 financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined using valuation techniques. the fair value of forward exchange contracts is determined using forward exchange market rates at the balance sheet date. (i) Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for Quoted market prices or dealer quotes for similar instruments are used for long-term debt. other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments. the fair value of interest rate swaps is calculated as the present value of the estimated future cash flows. the fair value of forward foreign exchange contracts is determined using quoted forward exchange rates at the balance sheet date. kAThMANdu annual report 2011 41 the carrying value less impairment provision of trade (Q) INTANGIBLE ASSETS receivables and payables are assumed to approximate their fair values. (i) Goodwill the only financial instruments held by the Group that are measured at fair value are over the counter derivatives. these derivatives have all been determined to be within level 2 (for the purposes of nZ IFrS 7) of the fair value hierarchy as all significant inputs required to ascertain the fair value of these derivatives are observable. (P) PROPERTY, PLANT ANd EQuIPMENT all property, plant and equipment are stated at historical cost less depreciation and impairment. historical cost includes expenditure that is directly attributable to the acquisition of the items. Cost may also include transfers from equity of any gains/losses on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment. 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. all other repairs and maintenance are Goodwill arises on the acquisition of subsidiaries. Goodwill represents the excess of the cost of the acquisition over the Group’s interest in the net fair value of the assets and liabilities of the acquiree. Separately recognised goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Goodwill is allocated to cash-generating units for the purpose of impairment testing. the allocation is made to those cash- generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. (ii) Brand acquired brands are carried at original cost based on independent valuation obtained at the date of acquisition. the brand represents the price paid to acquire the rights to use the Kathmandu brand. the brand is not amortised. Instead the brand 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. charged to the income statement during the financial period in (iii) Software costs which they are incurred. depreciation of property, plant and equipment is calculated using diminishing value method so as to expense the cost of the assets over their useful lives. the rates are as follows: Leasehold Improvements 10 – 25 % Office, Plant and Equipment 10 – 48 % Furniture and Fittings Computer Equipment Motor Vehicles 10 – 48 % 20 – 60% 15 – 30% Software costs have a finite useful life. Software costs are capitalised and written off over the useful economic life of four years. Costs associated with developing or maintaining computer software programs are recognised as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the Group, and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. direct costs include the costs of software development employees. the assets’ residual value and useful lives are reviewed and adjusted if appropriate at each balance sheet date. (R) TRAdE ANd OThER PAYABLES Capital work in progress is not depreciated until available for use. 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. these amounts represent liabilities for goods and services provided to the Group prior to the end of financial year which are unpaid. the amounts are unsecured and are usually paid by the 30th of the month following recognition. trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Gains and losses on disposals are determined by comparing (S) PROVISIONS proceeds with carrying amount. these are included in the income statement. a provision is recognised if, as a result of a past event, the 42 kAThMANdu annual report 2011 Group has a present legal or constructive obligation that can (ii) Long service leave be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. the Group has no provisions at year end. (T) 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 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. (u) ShARE CAPITAL ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Where any group company purchases the company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the company’s equity holders until the shares are cancelled or reissued. Where such shares are subsequently reissued, any consideration received net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company’s equity holders. (V) 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 in respect of employees’ services the liability for long service leave is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. 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 flows. (iii) Equity settled share option plan the employee Share option plan allows Group employees to acquire shares of the Company. the fair value of options granted is recognised as an employee expense in the Income Statement with a corresponding increase in the employee share option reserve. the fair value is measured at grant date and spread over the vesting periods. the fair value of the options granted is measured using the Monte Carlo simulation approach, taking into account the terms and conditions upon which the options are granted. When options are exercised the amount in the share option reserve relating to those options, together with the exercise price paid by the employee, is transferred to share capital. When any vested options lapse, upon employee termination or unexercised options reaching maturity, the amount in the share option reserve relating to those options is also transferred to share capital. (iv) Equity settled long term incentive plan the executive and Senior Management long term Incentive plan grants Group employees performance rights subject to performance hurdles being met. the fair value of rights granted is recognised as an employee expense in the Income Statement with a corresponding increase in the employee share option reserve. the fair value is measured at grant date and amortised over the vesting periods. the fair value of the rights granted is measured using the Kathmandu holdings limited share price as at the grant date less the present value of the dividends forecast to be paid prior to the each vesting date. When performance rights vest, the amount in the share option reserve relating to those rights are transferred to share capital. When any vested performance rights lapse, upon employee termination the amount in the share option reserve relating to those rights is also transferred to share capital. up to the reporting date and are measured at the amounts (W) dIVIdENdS expected to be paid when the liabilities are settled. liabilities for non-accumulating sick leave are recognised when the leave is taken and measured at the rates paid or payable. the liability for employee entitlements is carried at the present value of the estimated future cash flows. dividend distribution to the Company shareholders is recognised as a liability in the Company’s and Group’s financial statements in the period in which the dividends are approved by the Company’s shareholders. kAThMANdu annual report 2011 43 NZ IFRS 9: Financial Instruments (mandatory for periods beginning on or after 1 January 2013) the standard replaces part of nZ IaS 39 and establishes two primary measurement categories for financial assets: amortised cost and fair value, with classification depending on an entity’s business model and the contractual cash flow characteristics of the financial asset. the Company is currently in the process of evaluating the potential effect of this standard. NZ IAS 24: Related Parties Revised (mandatory for periods beginning on or after 1 January 2011) the revised Standard further clarifies the definition of a related party which may result in other related parties being identified. the Company is currently in the process of evaluating the potential effect of this standard. (X) CASh FLOW STATEMENT the following are definitions of the terms used in the Cash Flow Statement: Cash comprises: cash at bank, cash on hand and overdraft balances; operating activities include all transactions and other events that are not investing or financing activities. Investing activities are those activities relating to the acquisition, holding and disposal of property, plant and equipment and of investments. Investments can include securities not falling within the definition of cash; Financing activities are those activities which result in changes in the size and composition of the capital structure of the Company; (Y) ChANGES IN ACCOuNTING POLICIES there were no changes in the accounting policies during the period. 3 STANdARdS, INTERPRETATIONS ANd AMENdMENTS TO PuBLIShEd STANdARdS there are no new standards or amendments to standards which were mandatory and were applied during the period. the following are standards, amendments and interpretations to existing standards applicable to the Group but are not yet effective and have not been early adopted by the Group: 44 kAThMANdu annual report 2011 4 INCOME ANd EXPENSES profit / (loss) before income tax includes the following specific (income) and expenses: Income Dividends received Management Fees expenses Depreciation - Leasehold improvements - Office, plant and equipment - Furniture and fittings - Computer equipment - Motor vehicles Total depreciation Amortisation - Software Total amortisation (Gain) / Loss on sale of property, plant and equipment Rental and operating lease expenses Directors’ fees Donations Employee entitlements: - Wages, salaries and other short term benefits - Employee share based remuneration Finance Costs Interest income Interest expense Other finance costs Net exchange (gain) / loss on foreign currency borrowings Group parent 2011 nZ$’000 2010 nZ$’000 2011 nZ$’000 2010 nZ$’000 - - - - (20,000) (341) - - - - - - - - - - - - - - - - - - - - - - 728 563 - - - - 379 246 - - - (49) (49) (2) - - - (2) 3,902 484 1,555 584 28 6,553 862 862 527 31,918 728 335 52,286 379 (179) 4,443 2,256 283 6,803 3,045 394 1,239 669 32 5,379 594 594 290 25,610 611 109 41,139 246 (258) 7,674 1,674 567 9,657 Remuneration of auditors is detailed in Note 24. Amortisation expenditure is included in administration expense in the income statement. 5 COSTS ASSOCIATEd WITh ThE INITIAL PuBLIC OFFERING (IPO) kAThMANdu annual report 2011 45 Costs associated with Initial public offering: Charged to income statement Equity reduction (refer note 19) The total costs associated with the IPO can be analysed as follows: (a) Direct IPO costs (b) Costs associated with IPO Total costs associated with IPO Group parent 2011 nZ$’000 2010 nZ$’000 2011 nZ$’000 2010 nZ$’000 - - - - - - 16,834 4,523 21,357 18,306 3,051 21,357 - - - - - - 11,572 4,523 16,095 15,714 381 16,095 (a) The direct costs of the IPO include legal, accounting and tax due diligence and advice, Joint Lead Manager’s fees (including the discretionary incentive fee), prospectus design and printing, advertising, marketing, share registry and other expenses. The direct costs have been allocated based on the proportion of new equity raised to the total IPO proceeds and accounted for as either an expense or a reduction in equity as follows: Reduction in equity Charged to income statement - - - 4,523 13,783 18,306 - - - 4,523 13,783 18,306 (b) The costs associated with the IPO have been expensed and comprise primarily the costs of exiting the previous banking facilities together with the related interest rate swaps. 46 kAThMANdu annual report 2011 6 INCOME TAX EXPENSE Income statement Current income tax charge Deferred income tax charge (refer note 16) Income tax charge / (credit) reported in income statement reconciliation of effective tax charge Profit before income tax Income tax calculated at 30% Adjustments to taxation: Adjustments due to different rate in different jurisdictions Non-taxable income Expenses not deductible for tax purposes Effect of change in corporate tax rate Utilisation of tax losses by group companies Tax expense transferred to foreign currency translation reserve Adjustments in respect of prior years Income tax charge / (credit) reported in income statement Group parent 2011 nZ$’000 2010 nZ$’000 2011 nZ$’000 2010 nZ$’000 17,237 914 18,151 10,791 1,786 12,577 (339) 445 106 (1) (445) (446) 57,217 17,165 21,964 6,589 18,522 5,557 (12,805) (3,841) 51 - 967 13 - 202 (247) 18,151 76 (559) 5,143 12 - (529) 1,845 12,577 - (6,000) 189 (5) 365 - - - (71) 3,461 5 - - - 106 (446) On 20 May 2010 the New Zealand Government announced that the company tax rate will reduce from 30% to 28% and tax depreciation on any buildings with an estimated useful life of 50 years or more will reduce to 0%. The changes were substantively enacted on 21 May 2010 and are effective for years beginning on or after 1 August 2011. The effect of these changes on the re-measurement of deferred tax balances has been brought to account in the financial statements for the years ended 31 July 2010 and 2011 unrecognised tax losses the group has estimated tax losses to carry forward from Kathmandu (u.K.) limited of £5,743,723 (nZ$12,016,157) (2010: £4,705,832 (nZ$10,120,069)) which can be carried forward to be offset against future profits generated within the uK. ImputatIon CreDItS reConCILIatIon Group parent opening balance at 1 august Income tax – paid Resident withholding tax on interest received Draw through to consolidated Group ICA Income tax refund received Dividends paid Imputations lost on shareholding change Closing balance at 31 July 2011 nZ$’000 2010 nZ$’000 2011 nZ$’000 2010 nZ$’000 4,207 6,356 8 - (396) (5,696) 6,765 9,372 15 - - - - (11,945) 4,479 4,207 1 - - (1) - - - - - - 1 - - - - 1 The balance of Australian franking credits able to be used by the Group as at 31 July 2011 is A$836,783 (2010: A$1,399,463). kAThMANdu annual report 2011 47 7 RECONCILIATION OF NET PROFIT AFTER TAXATION WITh CASh INFLOW FROM OPERATING ACTIVITIES Group parent 2011 nZ$’000 2010 nZ$’000 2011 nZ$’000 2010 nZ$’000 Profit after taxation 39,066 9,387 18,416 (12,359) Movement in working capital: (Increase) / decrease in trade and other receivables (Increase) / decrease in inventories Increase / (decrease) in trade and other payables Increase / (decrease) in tax liability Add non cash items: Depreciation Amortisation of intangibles Revaluation of derivative financial instruments (Increase) / decrease in deferred taxation Employee share based remuneration Loss on sale of property, plant and equipment Items classified as financing activities: Costs associated with the IPO Intercompany financing 1,564 (16,585) 4,121 2,369 (8,531) (1,274) 2,198 (988) (1,710) (1,774) (11) - (26) (3,213) (3,250) 6,553 5,379 862 913 5 379 527 594 4 1,643 246 290 9,239 8,156 - - - 445 379 - 824 (181) - 68 - (113) - - - (445) 246 - (199) - - 16,834 - - - (342) 12,416 Cash inflow from operating activities 39,774 32,603 15,648 (255) 48 kAThMANdu annual report 2011 8 CASh ANd CASh EQuIVALENTS Group parent 2011 nZ$’000 2010 nZ$’000 2011 nZ$’000 2010 nZ$’000 Cash on hand Cash at bank Short term deposits 155 3,419 - 3,574 The carrying amount of the Group’s cash and cash equivalents are denominated in the following currencies: NZD AUD GBP USD EUR 389 2,499 550 135 1 143 4,593 - 4,736 225 3,747 432 321 11 9 TRAdE ANd OThER RECEIVABLES 3,574 4,736 - 5 - 5 5 - - - - 5 - 6 - 6 6 - - - - 6 Group parent 2011 nZ$’000 2010 nZ$’000 2011 nZ$’000 2010 nZ$’000 Trade receivables Sundry debtors and prepayments 92 2,247 2,339 - 3,903 3,903 Bad and doubtful trade receivables The Group has recognised a loss of $0 (2010: $0) in respect of bad and doubtful trade receivables during the year ended 31 July 2011. The carrying amount of the Group’s trade and other receivables are denominated in the following currencies: NZD AUD GBP USD 1,129 683 527 - 2,339 1,181 2,032 690 - 3,903 - 192 192 192 - - - - 181 181 137 44 - - 192 181 kAThMANdu annual report 2011 49 all subsidiaries within the Group (note 15) are related parties. no amounts owed to related parties have been written off or forgiven during the year. during the year the Company advanced and repaid loans to its subsidiaries by way of an internal current account. In presenting the financial statements of the Group, the effect of transactions and balances between fellow subsidiaries and those with the parent have been eliminated. all transactions with related parties were in the normal course of business and provided on commercial terms. Material amounts outstanding between the parent and subsidiaries at year end were: loans from the parent to subsidiaries (Kathmandu limited) $84,215,544 (2010: $88,225,280). loans to the parent from subsidiaries $0 (2010: $0). Material transactions between the parent and its subsidiaries were: Management fees charged to subsidiaries $341,000 (2010: $0) Group parent 2011 nZ$’000 2,515 1,355 - 246 177 4,293 2010 nZ$’000 2,013 217 - - 246 2,476 2011 nZ$’000 2010 nZ$’000 - - - 246 177 423 - - - - 246 246 Group parent 2011 nZ$’000 728 - - 728 2010 nZ$’000 611 - - 611 2011 nZ$’000 728 - - 2010 nZ$’000 563 - - 728 563 10 RELATEd PARTY dISCLOSuRES Kathmandu holdings limited is the immediate parent, ultimate parent and controlling party. during the year, legal fees of $75,730 (2010: $112,274 (legal Fees) and $413,386 (Ipo costs)) were paid to Chapman tripp for services provided (primarily related to property leases). John holland is both a director of Kathmandu holdings limited and a partner of Chapman tripp. during the year, operating lease costs of $199,000 (2010: $98,000) were paid to Chalmers properties limited, a subsidiary of port otago limited. John harvey is a director of both of these companies. the previous shareholders granted to James Strong, with effect from listing, an option to purchase (“Call option”) 1,764,705 shares. the exercise price of the Call option is a$1.70 per option Share. the call option is only exercisable fourteen days after the audited financial results for the year ended 31 July 2010 is reported, and otherwise during a permitted trading window for dealing in the Company’s securities under applicable laws or the Company’s securities trading policy. the Call option will expire on 23 november 2011. (a) key Management Personnel Salaries Other short-term employee benefits Termination benefits Employee performance rights Employee share option plans (b) Non-Executive directors Total directors fees Share purchase plans Share option plans directors fees for the parent company were paid to the following: James Strong Sandra Mcphee John harvey John holland 50 kAThMANdu annual report 2011 (c) Remuneration detail (as referred to in the Remuneration Report) 2011 SHort-term BeneFItS poSt-empLoY- ment BeneFItS SHare BaSeD paYmentS name Cash Salary and fees Cash bonus non- monetary benefits Super- annuation retirement Benefits Share options performance rights proportion of remuneration as equity related $ $ $ $ $ $ $ % non-executive Directors James Strong John Harvey John Holland Sandra McPhee 283,235 148,174 148,174 148,174 total non-executive Directors 727,757 executive Directors - - - - - - - - - - Peter Halkett Mark Todd 627,627 372,000 350,149 175,000 6,091 2,963 total executive Directors - - - - - - 7,000 - - - - - - - proportion of remuneration as performance related % - - - - - total $ 283,235 148,174 148,174 148,174 727,757 - - - - - - - - - - - - - - - 91,884 26,337 48,815 62,499 12.3% 1,146,417 14.2% 623,948 32.4% 28.0% 977,776 547,000 9,054 7,000 - 118,221 111,314 13.0% 1,770,365 30.9% other Key management personnel Matt Spencer 346,083 175,393 10,590 19,166 Michelle Adams 206,000 105,000 1,182 4,120 Tamalin Morton 277,995 155,105 Paul Stern 304,150 155,105 - - 19,160 19,839 Caleb Nicolson 201,339 102,000 2,963 4,027 Grant Taylor 173,077 92,000 - 138 total other Key management personnel 1,508,644 784,603 14,735 66,450 - - - - - - - 19,511 13,202 18,223 - 7,657 - 58,593 total 3,214,177 1,331,603 23,789 73,450 - 176,814 29,775 18,393 26,277 26,277 17,856 16,071 8.2% 9.1% 9.0% 5.2% 7.6% 5.7% 600,518 347,897 496,760 505,371 335,842 281,286 134,649 245,963 7.5% 2,567,674 8.3% 5,065,796 29.2% 30.2% 31.2% 30.7% 30.4% 32.7% 30.6% 26.3% kAThMANdu annual report 2011 51 2010 SHort-term BeneFItS poSt-empLoY- ment BeneFItS SHare BaSeD paYmentS name Cash Salary and fees Cash bonus non- monetary benefits Super- annuation retirement Benefits Share options performance rights proportion of remuneration as equity related $ $ $ $ $ $ $ % non-executive Directors James Strong John Harvey John Holland Sandra McPhee 225,213 112,607 112,607 112,607 total non-executive Directors 536,034 executive Directors - - - - - - - - - - - 7,076 2,938 - - - - - - 7,193 Peter Halkett Mark Todd 586,447 282,552 50,000 total executive Directors 868,999 50,000 10,014 7,193 other Key management personnel Matt Spencer 339,942 - 9,862 29,466 Michelle Adams Tamalin Morton Caleb Nicolson Bryan Moore 200,582 141,699 1,033 6,846 216,625 161,347 159,789 - - - - 18,806 2,443 2,372 3,227 - total other Key management personnel 1,078,285 141,699 15,710 58,345 total 2,510,318 191,699 25,724 65,538 - - - - - - - - - - - - - - - - - - - - 122,726 35,178 157,904 26,059 17,633 24,340 10,227 9,874 88,133 246,037 - - - - - - - - - - - - - - - proportion of remuneration as performance related % - - - - - total $ 225,213 112,607 112,607 112,607 536,034 - - - - - 17.1% 716,249 9.3% 377,861 0.0% 13.2% 14.4% 1,094,110 4.6% 6.4% 4.8% 9.4% 5.8% 5.7% 405,329 367,793 259,771 177,244 172,035 6.4% 1,382,172 8.1% 3,039,316 0.0% 38.5% 0.0% 0.0% 0.0% 10.3% 6.3% 52 kAThMANdu annual report 2011 11 dERIVATIVE FINANCIAL INSTRuMENTS asset Interest rate swaps - cash flow hedge Foreign exchange contracts - cash flow hedge Less non-current portion: Interest rate swaps - cash flow hedge Foreign exchange contracts - cash flow hedge Current portion Liabilities Interest rate swaps - cash flow hedge Foreign exchange contracts - cash flow hedge Less non-current portion: Interest rate swaps - cash flow hedge Foreign exchange contracts - cash flow hedge Current portion Group parent 2011 nZ$’000 2010 nZ$’000 2011 nZ$’000 2010 nZ$’000 2 - 2 - - 2 340 10,466 10,806 301 - 10,505 44 - 44 44 - - 315 4,819 5,134 315 - 4,819 - - - - - - - - - - - - - - - - - - - - - - - - The above table shows the Group’s financial derivative holdings at year end. Refer to note 2(o) for information on the calculation of fair values. (a) Interest rate swaps - cash flow hedge Interest rate swaps are to exchange a floating rate of interest for a fixed rate of interest. the objective of the transaction is to hedge the core borrowings of the business to minimise interest cost within acceptable levels of risk thereby limiting the volatility on the Group’s financial results. the total amount of interest rate swaps at balance date was $40,284,450 (2010: $39,844,720). the fixed interest rates range between 4.73% and 5.25% (2010: 4.73% and 5.25%). the effectiveness of the contracts is measured by comparing the changes in the present value of the cash flow arising from the hedged forecast interest rate at fixed rate, with the changes in fair value of the forward contract. (b) Foreign exchange contracts - cash flow hedge the objective of these contracts is to hedge highly probable anticipated foreign currency purchases against currency fluctuations. these contracts are timed to mature when import purchases are scheduled for payment. the total of foreign exchange contracts amount to uS$63,050,000, nZ$84,184,649 (2010: uS$53,700,000, nZ$80,033,820). the effectiveness of the contracts is measured by comparing the changes in the present value of the cash flow arising from the hedged forecast purchase at the forward rate, with the changes in fair value of the forward contract. 12 INVENTORIES Trading stock Goods in transit Group parent 2011 nZ$’000 47,146 6,855 54,001 2010 nZ$’000 28,984 8,432 37,416 2011 nZ$’000 2010 nZ$’000 - - - - - - Inventory has been reviewed for stock selling below cost and no provision (2010: $nil) has been made. kAThMANdu annual report 2011 53 13 PROPERTY, PLANT ANd EQuIPMENT Group as at 31 July 2009 Cost or valuation Accumulated depreciation Closing net book value Year ended 31 July 2010 Opening net book value Additions Disposals Depreciation charge Exchange differences Closing net book value as at 31 July 2010 Cost or valuation Accumulated depreciation Closing net book value Year ended 31 July 2011 Opening net book value Additions Disposals Depreciation charge Exchange differences Closing net book value as at 31 July 2011 Cost or valuation Accumulated depreciation Closing net book value Leasehold improvement $’000 office, plant & equipment $’000 Furniture & fittings $’000 Computer equipment $’000 motor vehicles $’000 22,604 (8,212) 14,392 14,392 7,022 (221) (3,045) (382) 17,766 28,373 (10,607) 17,766 17,766 9,134 (137) (3,902) 205 23,066 37,178 (14,112) 23,066 2,990 (1,649) 1,341 1,341 625 (1) (394) (13) 1,558 3,565 (2,007) 1,558 1,558 304 - (484) 27 1,405 3,907 (2,502) 1,405 6,701 (2,741) 3,960 3,960 3,801 (63) (1,239) (35) 6,424 10,301 (3,877) 6,424 6,424 1,025 (28) (1,555) 96 5,962 11,379 (5,417) 5,962 5,877 (4,379) 1,498 1,498 1,351 (5) (669) (22) 2,153 6,990 (4,837) 2,153 2,153 725 (7) (584) 12 2,299 7,621 (5,322) 2,299 335 (200) 135 135 24 (8) (32) (2) 117 314 (197) 117 117 - - (28) 1 90 317 (227) 90 total $’000 38,507 (17,181) 21,326 21,326 12,823 (298) (5,379) (454) 28,018 49,543 (21,525) 28,018 28,018 11,188 (172) (6,553) 341 32,822 60,402 (27,580) 32,822 54 kAThMANdu annual report 2011 14 INTANGIBLE ASSETS Group as at 31 July 2009 Cost or valuation Accumulated amortisation and impairment Closing net book value Year ended 31 July 2010 Opening net book value Additions Disposals Amortisation Exchange differences Closing net book value as at 31 July 2010 Cost or valuation Accumulated amortisation and impairment Closing net book value Year ended 31 July 2011 Opening net book value Additions Disposals Amortisation Exchange differences Closing net book value as at 31 July 2011 Cost or valuation Accumulated amortisation and impairment Closing net book value Goodwill nZ$’000 Brand nZ$’000 Software nZ$’000 total nZ$’000 76,677 (1,271) 75,406 167,455 - 2,331 (1,337) 246,463 (2,608) 167,455 994 243,855 994 746 - (594) (12) 243,855 746 - (594) (2,182) 1,134 241,825 3,065 (1,931) 1,134 245,027 (3,202) 241,825 1,134 676 - (862) 23 971 241,825 676 - (862) 2,046 243,685 75,406 167,455 - - - - 75,406 76,677 (1,271) 75,406 - - - (2,170) 165,285 165,285 - 165,285 75,406 165,285 - - - 2,023 167,308 - - - - 75,406 76,677 (1,271) 75,406 167,308 - 3,764 (2,793) 247,749 (4,064) 167,308 971 243,685 Impairment tests for goodwill and brand the aggregate carrying amounts of goodwill and brand allocated to each unit are as follows: Group GooDWILL BranD New Zealand Australia 2011 nZ$’000 28,654 46,752 75,406 2010 nZ$’000 28,654 46,752 75,406 2011 nZ$’000 51,000 116,308 167,308 2010 nZ$’000 51,000 114,285 165,285 kAThMANdu annual report 2011 55 For the purposes of goodwill and brand impairment testing, the Group operates as two cash generating units, new Zealand and australia. the recoverable amount of the cash generating units has been determined based on the fair value less cost to sell. In the prior year three valuation methodologies were used, however due to the significant headroom between all valuation methodologies and the carrying value of goodwill and brand, only the discounted cash flow method will be used going forward. the discounted cash flow valuations were calculated using projected five year future cash flows, based on Board approved business plans. Growth is expected to continue as the store rollout programme (approximately fifteen stores per year) continues and like for like sales increase. Cash flows beyond five years have been extrapolated using the following key assumptions: 2011 2010 Terminal growth rate 2.5% 2.5% New Zealand CGU pre-tax discount rate Australia CGU pre-tax discount rate 15.7% 15.4% 15.4% 14.7% Consolidated pre-tax discount rate 15.6% 15.1% the calculations confirmed that there was no impairment of goodwill and brand during the year (2010: nil). the Board believes that any reasonably possible change in the key assumptions used in the calculations would not cause the carrying amount to exceed its recoverable amount. the expected continued promotion and marketing of the Kathmandu brand supports the assumption that the brand has an indefinite life. INVESTMENT IN SuBSIdIARIES 15 the consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 2: name of entity Milford Group Holdings Limited Kathmandu Limited Kathmandu Pty Limited Kathmandu (U.K.) Limited equity holding 2011 100% 100% 100% 100% 2010 100% 100% 100% 100% all subsidiary entities have a balance date of 31 July. Kathmandu pty limited and Kathmandu (u.K.) limited are incorporated in australia and united Kingdom, respectively. all other subsidiary entities are incorporated in new Zealand. the principal activities of the subsidiaries are: Country of registration principal activity Milford Group Holdings Limited Kathmandu Limited Kathmandu Pty Limited Kathmandu (U.K.) Limited Investment in subsidiaries Milford Group Holdings Limited Kathmandu Limited Kathmandu Pty Limited Kathmandu (U.K.) Limited New Zealand New Zealand Australia United Kingdom 2011 nZ$ Holding company Outdoor retailer Outdoor retailer Outdoor retailer 2010 nZ$ 321,233,808 321,233,808 - - - - - - 321,233,808 321,233,808 56 kAThMANdu annual report 2011 16 dEFERREd TAXATION the following are the major deferred taxation liabilities and assets recognised by the Group and movements thereon during the current and prior year. Group tax depreciation nZ$’000 employee obligations nZ$’000 Losses nZ$’000 other timing differences nZ$’000 reserves total nZ$’000 nZ$’000 As at 31 July 2009 Credit to the income statement Charge to other comprehensive income As at 31 July 2010 Credit to the income statement Charge to other comprehensive income As at 31 July 2011 11 (2) - 9 59 - 68 1,207 (512) - 695 235 1 931 570 - 175 745 - 869 1,614 5,115 (1,818) 175 3,472 (914) 909 3,467 409 (43) - 366 (365) - 1 2,918 (1,261) - 1,657 (843) 39 853 parent As at 31 July 2009 Charge to the income statement As at 31 July 2010 Credit to the income statement As at 31 July 2011 tax depreciation nZ$’000 employee obligations nZ$’000 Losses nZ$’000 other timing differences nZ$’000 reserves total nZ$’000 nZ$’000 - - - - - - 69 69 (69) - - 365 365 (365) - - 11 11 (11) - - - - - - - 445 445 (445) - Certain deferred taxation assets and liabilities have been offset. the following is the analysis of the deferred taxation balances (after offset) for financial reporting purposes: Deferred taxation assets: - Deferred tax asset to be recovered after more than 12 months - Deferred tax asset to be recovered within 12 months Deferred taxation liabilities: - Deferred tax liability to be recovered after more than 12 months - Deferred tax liability to be recovered within 12 months Group parent 2011 nZ$’000 2010 nZ$’000 2011 nZ$’000 2010 nZ$’000 1,445 3,057 - (1,035) 3,467 1,289 2,411 - (228) 3,472 - - - - - 69 376 - - 445 Movements the gross movement on the deferred income tax account is as follows: Opening balance Income statement charge Tax charged directly to equity Closing balance Effective tax rate reconciliation: Re-measurement of deferred tax - company tax rate change from 30% to 28% Re-measurement of deferred tax - removal of depreciation on buildings 17 TRAdE ANd OThER PAYABLES kAThMANdu annual report 2011 57 Group parent 2011 nZ$’000 2010 nZ$’000 2011 nZ$’000 2010 nZ$’000 3,472 (914) 909 3,467 5,115 (1,818) 175 3,472 445 (445) - - - 445 - 445 Group parent 2011 nZ$’000 2010 nZ$’000 2011 nZ$’000 2010 nZ$’000 (13) - (13) (12) - (12) 5 - 5 (5) - (5) Group parent 2011 nZ$’000 2010 nZ$’000 2011 nZ$’000 2010 nZ$’000 Trade payables Employee entitlements Sundry creditors and accruals 6,685 4,979 9,348 4,463 2,818 9,610 21,012 16,891 the carrying amount of the Group’s trade and other payables are denominated in the following currencies: NZD AUD GBP USD 5,624 8,722 810 5,856 21,012 2,916 6,488 954 6,533 16,891 - - 42 42 24 18 - - 42 - - 68 68 58 10 - - 68 58 kAThMANdu annual report 2011 18 INTEREST BEARING LIABILITIES Current portion Non-current portion Total term loans Group parent 2011 nZ$’000 - 46,480 46,480 2010 nZ$’000 2011 nZ$’000 2010 nZ$’000 - 53,965 53,965 - - - - - - the bank loan is part of a facility agreement with anZ national Bank, Bank of new Zealand and Commonwealth Bank of australia dated 19 november 2009. the loan is repayable in full on final maturity date of the facility being 13 november 2012. Interest is payable based on the BKBM rate ($nZ borrowings) or the BBSy rate ($a borrowings) plus a margin of up to 1.25%. the bank loan is secured against the assets of the company and its subsidiaries. and amortisation (eBItda) plus lease rental costs to exceed total fixed charges (net interest expense and lease rental costs) at the end of each quarter during the financial year. Similarly eBItda must be no less than a specified proportion of total net debt at the end of each quarter. the calculations of these covenants are specified in the bank syndicated facility agreement of 19 november 2009 and have been complied with at the end of each quarter of the year ended 31 July 2011. the covenants entered into by the Group require specified calculations of Group earnings before interest, tax, depreciation the current interest rates, prior to hedging, on the term loans ranged between 3.65% - 5.99% (2010: 4.24% - 5.81%). The maturity analysis of interest bearing liabilities is: Payable within 1 year Payable 1 to 2 years Payable 2 to 3 years Payable 3 to 4 years Group parent 2011 nZ$’000 2010 nZ$’000 2011 nZ$’000 2010 nZ$’000 - 46,480 - - - - 53,965 - 46,480 53,965 - - - - - - - - - - kAThMANdu annual report 2011 59 19 CONTRIBuTEd EQuITY - ORdINARY ShARES Ordinary shares fully paid ($) Balance at beginning of year Shares issued during the year Less capital raising costs (refer note 5) Balance at end of year numBer oF autHorISeD SHareS Group parent 2011 nZ$’000 197,049 197,049 - - 197,049 2010 nZ$’000 197,049 96,146 105,426 (4,523) 197,049 2011 nZ$’000 422,137 422,137 - - 422,137 Group 2011 ’000 2010 ’000 parent 2011 ’000 Ordinary shares on hand at beginning of the year 200,000 9,081,072 200,000 Shares issued during the year Shares repurchased - - 200,000 (9,081,072) - - 2010 nZ$’000 422,137 - 426,660 (4,523) 422,137 2010 ’000 - 200,000 - Ordinary shares on hand at end of the year 200,000 200,000 200,000 200,000 Ordinary shares as at 31 July 2009 there were 9,081,072,589 issued shares in Milford Group holdings limited. as a result of the Initial public offer (november 2009) and subsequent reverse acquisition transaction as at 31 July 2010 there were 200,000,000 ordinary issued shares in Kathmandu holdings limited and these are classified as equity. no shares were issued during the year ending 31 July 2011. all ordinary shares carry equal rights in respect of voting and the receipt of dividends. ordinary shares do not have a par value. 20 EMPLOYEE ShARE BASEd REMuNERATION Executive Share Option Plan 16 October 2009: on 16 october 2009 the Board approved an executive Share option plan to issue options to selected senior executives and subject to shareholder approval to executive directors. options will vest annually in part or in full with the holder, in three tranches commencing 1 october 2010. all options not vested expire on 1 october 2013, and all options vested must be exercised within five years from date of grant. entitlement to exercise is conditional on the Company achieving in relation to each tranche a compound total shareholder return of 15% per annum over the period of trading that is measured in relation to that tranche. each option entitles the holder to one ordinary share in the capital of the Company. the exercise price is determined by the Board but is generally $2.1333 for new Zealand based employees and a$1.70 for australian based employees. during the financial year the Company issued nil options (2010: 1,119,976) to executive directors and senior executives. the fair value of options issued during the financial year is $nil (2010: $518,590). the options issued during 2010 were valued under a Monte Carlo simulation approach factoring in the total shareholder return condition using the following assumptions: Current price at issue date Risk free interest rate Expected life (years) Expected share volatility $2.14 5.40% 5 30% a 50% net profit after tax dividend payout ratio was factored into the valuation of the options based on management budgets. the expected volatility has been estimated based on the historical volatility of comparable listed retail businesses. the estimated fair value for each tranche of options issued is amortised over the vesting period from the grant date. the Company has recognised a compensatory expense in the income statement of $168,587 (2010: $246,037) which represents this amortisation. 60 kAThMANdu annual report 2011 Movements in the number of share options outstanding and their related weighted average exercise price are as follows: Balance at beginning of year Issued Forfeited Balance at end of year 2011 2010 average exercise price $ per share 2.1333 - 2.1333 2.1333 options ‘000 1,120 - (46) 1,074 average exercise price $ per share - 2.1333 2.1333 Share options outstanding at the end of the year have the following expiry date, exercise dates and exercise prices. First Vesting month October 2010 October 2011 October 2012 Last Vesting month October 2013 October 2013 October 2013 exercise price $2.1333 $2.1333 $2.1333 2011 ‘000 358 358 358 1,074 options ‘000 - 1,120 1,120 2010 ‘000 373 373 374 1,120 Executive and Senior Management Long Term Incentive Plan 24 November 2010 on 24 november 2010, shareholders approved at the annual General Meeting the establishment of an employee long term Incentive plan (ltI) to grant performance rights to executive directors, Key Management personnel and other Senior Management. performance rights will vest subject to the satisfaction of performance conditions which will be different for Senior Management as compared with the executive directors and Key Management personnel. Executive directors and key Management Personnel on 29 november 2010 the Company granted 374,292 performance rights to two executive directors and six Key Management personnel. the performance rights will vest in three equal tranches: tranche Tranche 1 Tranche 2 Tranche 3 Vesting Date 1 December 2012 1 December 2013 1 December 2014 number 124,764 124,764 124,764 374,292 In each tranche 50% of the rights are subject to a relative total Shareholder return (tSr) hurdle and the remaining 50% are subject to an epS growth hurdle. the proportion of rights subject to the relative tSr hurdle is dependent on Kathmandu holdings limited’s tSr performance relative to a defined comparable group of companies, which is currently comprised of 18 retail companies in new Zealand and australia listed on either the aSX or nZX. the percentage of tSr related rights vest according to the following performance criteria: Kathmandu Holdings Limited relative tSr ranking Below the 50th percentile 50th percentile 51st – 74th percentile 75th percentile or above % Vesting 0% 50% 50% + 2% for each percentile above the 50th 100% kAThMANdu annual report 2011 61 prior to the each vesting date. the estimated fair value for each tranche of options issued is amortised over the vesting period from the grant date. the Company has recognised a compensatory expense in the income statement of $61,194 (2010: $0) which represents this amortisation. Senior Management on 29 november 2010 the Company granted 177,977 performance rights to selected senior management employees. 50% of the rights granted to each employee vest if an earnings per share (epS) of 15.275 cps is achieved for the year ended 31 July 2011. the remaining 50% vest if epS exceeds 15.975 cps. In both instances, if vesting occurs, it takes place on 31 July 2012, provided the employee remains in employment with the company to that date. earnings per share exceeded 15.975 cps for the year ended 31 July 2011. the fair value of the rights have been assessed as the Kathmandu holdings limited share price as at the grant date less the present value of the dividends forecast to be paid prior to the 31 July 2012 vesting date. the fair value of each right has been calculated to be nZ$1.50 per right. the value of each right is amortised over the period from the grant date to the vesting date. the Company has recognised a compensatory expense in the income statement of $107,318 (2010: $0) which represents this amortisation. the tSr performance is calculated for the following performance periods: tranche Tranche 1 Tranche 2 Tranche 3 performance period 24 months to 1 December 2012 24 months to 1 December 2013 24 months to 1 December 2014 the fair value of the tSr rights have been valued at $173,422 under a Monte Carlo simulation approach predicting Kathmandu holdings limited’s tSr relative to the comparable group of companies at the respective vesting dates for each tranche. the future share prices were simulated using a random-walk process using the following assumptions: Current price at issue date Risk free interest rate Expected life (years) Expected share volatility $1.62 4.79% 2-4 38% the estimated fair value for each tranche of options issued is amortised over the vesting period from the grant date. the Company has recognised a compensatory expense in the income statement of $41,948 (2010: $0) which represents this amortisation. the proportion of rights subject to the epS growth hurdle is dependent on the compound average annual growth in Kathmandu holdings limited’s epS relative to the year ending 31 July 2010. the applicable performance periods are: tranche Tranche 1 Tranche 2 Tranche 3 performance period FY12 EPS relative to FY10 EPS FY13 EPS relative to FY10 EPS FY14 EPS relative to FY10 EPS the percentage of the epS growth related rights scales according to the compound average annual epS growth achieved as follows: epS Growth < 10% >=10%, < 11% >=11%, < 12% >=12%, < 13% >=13%, < 14% >=14%, < 15% >=15% % Vesting 0% 50% 60% 70% 80% 90% 100% the fair value of the rights have been assessed as the Kathmandu holdings limited share price as at the grant date less the present value of the dividends forecast to be paid 62 kAThMANdu annual report 2011 21 REVERSE ACQuISITION under the terms of nZ IFrS 3 Business Combinations, Milford Group holdings limited was deemed to be the accounting acquirer in the business combination. this transaction has therefore been accounted for as a reverse acquisition under nZ IFrS 3. accordingly the consolidated financial statements of Kathmandu holdings limited have been prepared as a continuation of the consolidated financial statements of Milford Group holdings limited as the deemed acquirer. although legally the transaction involved Kathmandu holdings limited raising $426.6m by the issue of new shares and the expending of $321.3m in cash for the acquisition of Milford Group holdings limited, the substance from a group perspective is that $105.4m of new capital was raised. of this $19.7m was used to settle the costs associated with the Ipo and $85.7m was used to repay debt. the substance is reflected in the reverse acquisition accounting adopted in these consolidated financial statements. Kathmandu holdings limited was incorporated on 1 october 2009 and did not commence trading until 13 november 2009. In the period between 13 november 2009 and 31 July 2010 Kathmandu holdings limited did not generate any income, and incurred expenses which primarily related to directors and annual listing costs, and the cost associated with the Ipo as set out in note 5. at the date of acquisition the net assets of Kathmandu holdings limited comprised cash of $105,426. there was no goodwill. 22 RESERVES ANd RETAINEd EARNINGS (a) reSerVeS (i) Cash flow hedging reserve Opening balance Revaluation - gross Deferred tax Transfer to net profit - gross Closing balance (ii) Foreign Currency Translation Reserve Opening balance Currency translation differences Closing balance (iii) Share Option Reserve Opening balance Current year amortisation Closing balance Total Reserves Group parent 2011 nZ$’000 2010 nZ$’000 2011 nZ$’000 2010 nZ$’000 (4,000) (6,161) 869 237 (1,420) (2,908) 175 153 (9,055) (4,000) 2,480 1,409 3,889 246 379 625 3,995 (1,515) 2,480 - 246 246 (4,541) (1,274) - - - - - - - - 246 379 625 625 - - - - - - - - - 246 246 246 Nature and purpose of reserves (i) Cash flow hedging reserve the hedging reserve is used to record gains or losses on a hedging instrument in a cash flow hedge that are recognised directly in equity, as described in note 2 n (ii). the amounts are recognised in profit and loss when the associated hedged transaction affects profit and loss. (ii) Foreign currency translation reserve the foreign currency translation reserve is used to record gains or losses on investments in foreign operations. the amounts are accumulated in equity and recognised in profit and loss when the foreign operation is partially disposed of or sold. (iii) Share option reserve the employee share option reserve is used to recognise the fair value of options granted but not exercised or lapsed. amounts are transferred to share capital when the vested options are exercised by the employee or lapse upon expiry. kAThMANdu annual report 2011 63 (B) retaIneD earnInGS Group parent Opening retained earnings Profit / (loss) for the year Less dividends paid Balance at 31 July 23 dIVIdENdS Prior year final dividend paid Current year interim dividend paid Dividends paid ($0.10 per share (2010; $0.00)) 2011 nZ$’000 2010 nZ$’000 2011 nZ$’000 2010 nZ$’000 43,352 39,066 (20,000) 62,418 33,965 9,387 - 43,352 (12,359) 18,416 (20,000) (13,943) - (12,359) - (12,359) Group parent 2011 nZ$’000 2010 nZ$’000 2011 nZ$’000 2010 nZ$’000 14,000 6,000 20,000 - - - 14,000 6,000 20,000 - - - 24 REMuNERATION OF AudITORS during the year the following fees were paid or payable for services provided by the auditor of the parent entity, its related practices and other network audit firms: (a) audit services PricewaterhouseCoopers Statutory audit Half year review Other assurance services Total remuneration for audit services (b) other services Accounting standards advice IPO due diligence Total remuneration for other services Total auditor remuneration Group parent 2011 nZ$’000 2010 nZ$’000 2011 nZ$’000 2010 nZ$’000 106 25 7 138 - - - 138 102 38 5 145 59 533 592 737 57 25 - 82 - - - 82 55 38 - 93 - 495 495 588 64 kAThMANdu annual report 2011 25 CONTINGENT LIABILITIES Liabilities outstanding under letters of credit Rent guarantees Financial guarantees Group parent 2011 nZ$’000 2,497 2010 nZ$’000 1,767 8,530 1,188 7,643 1,430 2011 nZ$’000 2010 nZ$’000 - - - - - - Financial guarantees cover internal overdrafts and credit card limits between banks across the Group. 26 CONTINGENT ASSETS there are no contingent assets in 2011 (2010: nil). 27 COMMITMENTS (a) Capital commitments Capital commitments contracted for at balance date are: Property, plant and equipment Intangible assets Group parent 2011 nZ$’000 2010 nZ$’000 2011 nZ$’000 2010 nZ$’000 131 159 290 440 339 779 - - - - - - (b) Operating lease commitments Group company as lessee: rent expenses reported in these financial statements relate to non-cancellable operating leases. the future commitments on these leases are as follows: Due within 1 year Due within 1-2 years Due within 2-5 years Due after 5 years Group parent 2011 nZ$’000 2010 nZ$’000 2011 nZ$’000 2010 nZ$’000 31,708 28,885 62,889 23,785 23,834 21,459 46,580 17,760 147,267 109,633 - - - - - - - - - - Some of the existing lease agreements have right of renewal options for varying terms. the Group leases various properties under non-cancellable lease agreements. these leases are generally between 1 - 10 years. kAThMANdu annual report 2011 65 28 FINANCIAL RISk MANAGEMENT the Group’s activities expose it to a variety of financial risks, market risk (including currency risk and 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 foreign exchange contracts and options and interest rate swaps to manage certain risk exposures. derivatives are exclusively used for economic hedging purposes, i.e. not as trading or other speculative instruments, however not all derivative financial instruments qualify for hedge accounting. risk management is carried out based on policies approved by the Board of directors. the Group treasury policy provides written principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk. the parent is not directly exposed to any significant financial risk. (a) Market risk Foreign exchange risk the Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the aud, uSd and the GBp. the Group is exposed to currency risk on conversion of the trading results from its subsidiaries operating in australia and the united Kingdom, and any cash remitted between australia and the united Kingdom and new Zealand. the Group does not hedge for such remittances. the Group is exposed to purchases that are denominated in a currency other than the functional currency of Group entities, and over 90% of purchases are denominated in united States dollars. hedging of this exposure is detailed in note 11. Interest on borrowings is denominated in either new Zealand dollars or australian dollars currency, and is paid for out of surplus operating cashflows generated in new Zealand or australia. refer to note 11 which shows the forward foreign exchange contracts and options held by the Group as derivative financial instruments at balance date. a sensitivity analysis of foreign exchange rate risk on the Group’s financial assets and liabilities is provided in the table below. Cash flow and fair value interest rate risk the Group’s main interest rate risk arises from floating rate borrowings drawn down under bank debt facilities. the Group uses interest rate swaps to hedge floating rate borrowings in accordance with the Group treasury policy. Interest rate swaps have the economic effect of converting borrowings from floating to fixed rates. refer to note 11 for notional principal amounts and valuations of interest rate swaps outstanding at balance date. a sensitivity analysis of interest rate risk on the Group’s financial assets and liabilities is provided in the table below. refer to note 18 for further details of the Group’s borrowings. at the reporting date the interest rate profile of the Group’s banking facilities was: CarrYInG amount Total secured loans less principal covered by interest rate swaps Principal on floating interest Group parent 2011 nZ$’000 2010 nZ$’000 2011 nZ$’000 2010 nZ$’000 46,480 (40,284) 6,196 53,965 (39,845) 14,120 - - - - - - Interest rates on loans currently range from 3.65% – 5.99% (2010: 4.24% - 5.81%). the Company has entered into interest rate swap agreements to reduce the impact of changes in interest rates on its long-term debt. the cashflow hedge (gain)/loss on interest rate swaps at balance date was $338,244 (2010: $271,285). 66 kAThMANdu annual report 2011 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. a sensitivity of -15% / +5% for foreign exchange risk has been selected. While it is unlikely that an equal movement of the new Zealand dollar would be observed against all currencies an overall sensitivity of -15% / +5% is reasonable given the exchange rate volatility observed on an historic basis for the preceding five year period and market expectation for potential future movements. a sensitivity of 1% has been selected for interest rate risk. the 1% is based on reasonably possible changes over a financial year, using the observed range of historical data for the preceding five year period. amounts are shown net of income tax. all variables other than applicable interest rates and exchange rates are held constant. Group IntereSt rate rISK ForeIGn exCHanGe rISK 31 July 2011 Derivative financial instruments (asset) / liability Financial assets Cash Financial liabilities Trade payables Borrowings Carrying amount $’000 -1% +1% -15% +5% profit equity profit equity profit equity profit equity $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 10,804 (403) 323 403 (331) - (12,930) - 3,489 3,574 (26) 21,012 46,480 - 465 465 - - - - 26 - (465) (465) - - - - 405 (1,955) - (1,955) - - (2,539) (2,539) (109) 528 - 528 - - 685 685 total increase / decrease 36 323 36 (331) (1,550) (15,469) 419 4,174 Group IntereSt rate rISK ForeIGn exCHanGe rISK 31 July 2010 Derivative financial instruments (asset) / liability Financial assets Cash Financial liabilities Trade payables Borrowings Carrying amount $’000 -1% +1% -10% +10% profit equity profit equity profit equity profit equity $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 5,090 (398) 603 398 (668) - (8,322) - 6,785 4,736 (34) 16,891 53,965 - 539 539 - - - - 34 - (539) (539) - - - - 361 (865) - (865) - - (2,117) (2,117) (295) 707 - 707 - - 1,732 1,732 total increase / decrease 107 603 (107) (668) (504) (10,439) 412 8,517 the parent is not sensitive to either interest rate or foreign exchange risk. kAThMANdu annual report 2011 67 (b) Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. this would arise principally from the Group’s receivables from customers. the nature of the customer base is such that there is no individual customer concentration of credit risk. other financial instruments which potentially subject the Company to credit risks principally consist of bank balances, loans, advances and refund of taxes. Trade and other receivables the nature of the customer base is such that there is no individual customer concentration of credit risk. the Company does not carry out credit evaluations for all new customers requiring credit. Credit is generally only given to government or local council backed institutions. Exposure to credit risk the balances below are recorded at their carrying amount after any provision for loss on these financial instruments. the maximum exposure to credit risk at reporting date was: CarrYInG amount Group parent Cash and cash equivalents Trade receivables Sundry debtors 2011 nZ$’000 2010 nZ$’000 2011 nZ$’000 2010 nZ$’000 3,574 92 407 4,073 4,736 - 865 5,601 5 - - 5 6 - - 6 As at balance date the carrying amount is also considered the fair value for each of the financial instruments. (c) Liquidity risk liquidity risk is the risk that an unforeseen event or miscalculation in the required liquidity level will result in the Group foregoing investment opportunities or not being able to meet its obligations in a timely manner, and therefore gives rise to lower investment income or to higher borrowing costs than normal. prudent liquidity risk management includes maintaining sufficient cash, and ensuring the availability of funding from adequate amounts of credit facilities. the Group’s liquidity exposure is managed by ensuring sufficient levels of liquid assets and committed facilities are maintained based on regular monitoring of cash flow forecasts. the Group has lending facilities of $126,311,631 (2010 : $125,201,863) and operates well within this facility. this includes short term bank overdraft requirements, and at balance date no bank accounts were in overdraft. the table below analyses the Group’s financial liabilities and net-settled derivative financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date. the amounts disclosed in the table are the contractual undiscounted cash flows. Group 2011 Trade and other payables Guarantees Borrowings Group 2010 Trade and other payables Guarantees Borrowings Less than 1 year nZ$’000 Between 1 and 2 years nZ$’000 Between 2 and 5 years nZ$’000 over 5 years nZ$’000 21,012 12,215 2,163 35,390 16,891 10,840 2,599 30,330 - - 47,274 47,274 - - 2,599 2,599 - - - - - - 54,915 54,915 - - - - - - - - 68 kAThMANdu annual report 2011 the Group enters into forward exchange contracts to manage the risks associated with the purchase of foreign currency denominated products. the table below analyses the Group’s derivative financial instruments that will be settled on a gross basis into relevant at 31 July 2011 Forward foreign exchange contracts - - Inflow Outflow Net Inflow / (Outflow) Net settled derivatives – interest rate swaps Net (Outflow) at 31 July 2010 Forward foreign exchange contracts - - Inflow Outflow Net Inflow / (Outflow) Net settled derivatives – interest rate swaps Net (Outflow) maturity groupings based on the remaining period of the balance sheet to the contractual maturity date. the amounts disclosed in the table are the contractual undiscounted cash flows. they are expected to occur and affect the profit or loss at various dates between balance date and the following five years. Less than 1 year nZ$’000 Between 1 and 2 years nZ$’000 Between 2 and 5 years nZ$’000 73,719 (84,185) (10,466) - - - (254) (84) 75,214 (80,033) (4,819) - - - (181) (90) - - - - - - - - Fair values the following methods and assumptions were used to estimate the fair values for each class of financial instrument. Foreign exchange contracts and interest rate swaps the fair value of these instruments is estimated based on the quoted market price of these instruments. Trade debtors, trade creditors and bank balances the carrying value of these items is equivalent to their fair value. Term liabilities the fair value of the Group’s term liabilities is estimated based on current market rates available to the Group for debt of similar maturity. Guarantees and overdraft facilities the fair value of these instruments is estimated on the basis that management do not expect settlement at face value to arise. the carrying value and fair value of these instruments is nil. details of guarantees are included in note 25. all guarantees are repayable on demand. kAThMANdu annual report 2011 69 Financial instruments by category Loans and receivables nZ$’000 Derivatives used for hedging nZ$’000 measured at amortised cost nZ$’000 total nZ$’000 Group at 31 July 2011 Cash and cash equivalents Trade and other receivables Derivative financial instrument assets Total financial assets Trade and other payables Interest bearing liabilities Derivative financial instrument liabilities Total financial liabilities at 31 July 2010 Cash and cash equivalents Trade and other receivables Derivative financial instrument assets Total financial assets Trade and other payables Interest bearing liabilities Derivative financial instrument liabilities Total financial liabilities parent at 31 July 2011 Cash and cash equivalents Trade and other receivables Related party receivable Total financial assets Trade and other payables Related party payable Total financial liabilities at 31 July 2010 Cash and cash equivalents Trade and other receivables Related party receivable Total financial assets Trade and other payables Related party payable Total financial liabilities 3,574 499 - 4,073 - - - - 4,736 865 - 5,601 - - - - 5 - 84,216 84,221 - - - 6 - 88,225 88,231 - - - - - 2 2 - - 10,806 10,806 - - 44 44 - - 5,134 5,134 - - - - - - - - - - - - - - - - - - 21,012 46,480 - 67,492 - - - - 16,891 53,965 - 70,856 - - - - 42 - 42 - - - - 68 - 68 3,574 499 2 4,075 21,012 46,480 10,806 78,298 4,736 865 44 5,645 16,891 53,965 5,134 75,990 5 - 84,216 84,221 42 - 42 6 - 88,225 88,231 68 - 68 70 kAThMANdu annual report 2011 Capital risk management the Group’s capital includes contributed equity, reserves and retained earnings. the Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt or draw down more debt. Externally imposed capital requirements the Group is subject to various covenants with its banking syndicate in relation to the ratios of earnings to total debt and interest on that debt, which were complied with during and at the end of the year. 29 SEGMENTAL INFORMATION the Group operates in three geographical areas: new Zealand, australia and the united Kingdom. 31 July 2011 new Zealand nZ$’000 australia nZ$’000 united Kingdom nZ$’000 elimination total nZ$’000 nZ$’000 Segment profit / (loss) before income tax and IPO costs 27,311 33,149 (2,568) (675) 57,217 Costs associated with IPO Income tax expense Profit / (loss) after tax Segment profit / (loss) before income tax and IPO costs includes the following specific income and (expenses): Sales to external customers Cost of sales Net interest income/(expense) Net other finance income/(expense) Intercompany net finance income/(expense) Intercompany recharges income/(expense) Depreciation and software amortisation Other income from reversal of UK Loan provision Total current assets Total non-current assets (excl deferred tax) Total assets Total current liabilities Total non-current liabilities Total liabilities - (18,151) 39,066 306,143 (105,560) (4,263) (2,540) - - (7,415) - 59,916 276,507 336,423 (38,183) (46,781) (84,964) 110,335 (43,469) 187,565 (58,578) (1,875) (1,043) 3,556 6,872 (2,371) - 388,794 333,655 722,449 (11,270) (26,724) (37,994) (2,388) (417) (3,556) (6,872) (4,628) - 32,381 136,985 169,366 (88,755) (20,057) (108,812) 8,243 (3,513) - (340) - - (416) - 3,103 695 3,798 - - - (740) - - - - (364,362) (194,828) (559,190) (3,721) 65,563 - - (3,721) 65,563 kAThMANdu annual report 2011 71 31 July 2010 new Zealand $’000 australia $’000 united Kingdom $’000 elimination $’000 total $’000 Segment profit / (loss) before income tax and IPO 36,244 12,966 (3,818) (6,594) 38,798 Costs associated with IPO Income tax expense Profit / (loss) after tax Segment profit / (loss) before income tax and IPO includes the following specific income and (expenses): Sales to external customers Cost of sales Net interest income/(expense) Net other finance income/(expense) Intercompany net finance income/(expense) Intercompany recharges income/(expense) Depreciation and software amortisation Other income from reversal of UK Loan provision Total current assets Total non-current assets (excl deferred tax) Total assets Total current liabilities Total non-current liabilities Total liabilities (16,834) (12,577) 9,387 245,812 (90,523) (7,416) (2,241) - - (5,974) - 46,055 269,887 315,942 (26,007) (54,280) (80,287) 94,294 (37,411) (1,372) (964) 2,990 7,495 (1,788) 8,346 372,966 331,785 704,751 (9,074) (27,762) (36,836) 141,876 (48,986) (6,044) (898) (2,990) (7,495) (3,606) - 21,363 131,786 153,149 (67,995) (26,518) (94,513) 9,642 (4,126) - - - - (2,132) 1,753 - - (580) - 3,127 1,144 4,271 - - - (8,346) (351,401) (194,828) (546,229) (1,327) 52,389 - - (1,327) 52,389 Revenue is allocated based on the country in which the customer is located. New Zealand includes holding company costs and head office charges. Assets / liabilities are allocated based on where the assets / liabilities are located. The Group operates in one industry being outdoor clothing and equipment. 72 kAThMANdu annual report 2011 30 EARNINGS PER ShARE due to the reverse acquisition referred to in note 2 and note 21 above, the capital structure of the Group changed in november 2009. 9,081,072,000 Milford Group holdings limited shares were on issue prior to the Ipo. 200,000,000 shares were issued in the Ipo by Kathmandu holdings limited. as a consequence there remains a significant variation in the weighted average number of shares between 2010 and 2011. 31 EARThQuAkE dISCLOSuRES the Christchurch earthquake that occurred on 22 February 2011 is not expected to have a significant impact on future trading. Kathmandu has business interruption insurance that provides cover for this event. as at the date of this report one store (Cashel St) remains closed and will be for the foreseeable future. a new store in Christchurch (papanui) was opened on 23 March 2011 to mitigate the expected on-going closure of Cashel Street. a business interruption claim following the 22 February 2011 event has been lodged and is in process. a further material damage claim has been lodged to cover any loss of inventory and damage to fixtures and fittings in our Cashel Street store. no expected insurance proceeds from these claims have been recognised in the financial statements. the company is not aware of any reason why its insurance would not cover all material costs or loss of profits in the current financial year that were incurred as a result of the earthquake. 32 EVENTS OCCuRRING AFTER ThE BALANCE dATE there are no events occurring after balance date that materially affect the information within the financial statements. kAThMANdu annual report 2011 73 74 kAThMANdu annual report 2011 statutory information EMPLOYEE REMuNERATION the Group operates in new Zealand, australia and the uK where remuneration market levels differ. the offshore remuneration amounts are converted into new Zealand dollars. of the employees noted in the table below, 55% are employed by the Group outside new Zealand. during the year a number of employees or former employees, not being non-executive directors of the Group, received remuneration and other benefits that exceeded nZ$100,000 in value as follows: remuneratIon numBer oF empLoYeeS $ 100,000 110,001 120,001 130,001 140,001 150,001 160,001 180,001 190,001 200,001 220,001 250,001 280,001 320,001 330,001 340,001 490,001 500,001 600,001 620,001 1,140,001 - - - - - - - - - - - - - - - - - - - - - $ 110,000 120,000 130,000 140,000 150,000 160,000 170,000 190,000 200,000 210,000 230,000 260,000 290,000 330,000 340,000 350,000 500,000 510,000 610,000 630,000 1,150,000 5 4 5 3 1 1 2 1 2 1 1 1 1 1 1 1 1 1 1 1 1 dISTRIBuTION OF ShAREhOLdERS ANd hOLdINGS number of Holders 1 to 999 1,000 to 4,999 5,000 to 9,999 10,000 to 99,999 100,000 and over Total 377 1,039 441 456 51 % 16% 44% 19% 19% 2% 2,364 100% number of ordinary Shares 218,292 2,651,152 3,185,415 10,958,005 182,987,136 200,000,000 % 0% 1% 2% 5% 91% 100% the details set out above were as at 9 September 2011. the Company has only one class of shares on issue, ordinary shares, and these shares are listed on the nZX and aSX. there are no other classes or equity security currently on issue. the Company’s ordinary shares each carry a right to vote on any resolution on a poll at a meeting of shareholders. holders of ordinary shares may vote at a meeting in person, or by proxy, representative or attorney. Voting may be conducted by voice, by show of hands, or poll. there are no voting rights attached to options. there were 72 shareholders holding less than a marketable parcel, as defined by aSX listing rules, of the Company’s ordinary shares, based on the market price as at 9 September 2011. there are no restricted securities or securities subject to voluntary escrow on issue. LIMITATIONS ON ThE ACQuISITION OF SECuRITIES the Company is not subject to Chapters 6, 6a, 6B and 6C of the Corporations act 2001 (australia) dealing with the acquisition of shares (i.e. substantial holdings and takeovers). limitations on the acquisition of the securities imposed by the jurisdiction in which the Company is incorporated (new Zealand) are: a. In general, securities in the Company are freely transferable and the only significant restrictions or limitations in relation to the acquisition of securities are those imposed by new Zealand laws relating to takeovers, overseas investment and competition. b. the new Zealand takeovers Code creates a general rule under which the acquisition of 20% or more of the voting rights in the Company or the increase of an existing holding of 20% or more of the voting rights of the Company AMP (3 August 2011) Commonwealth Bank of Australia (8 August 2011) Eley Griffiths (17 May 2011) AusBil Dexia (25 November 2009) National Australia Bank (26 August 2011) kAThMANdu annual report 2011 75 can only occur in certain permitted ways. these include a full takeover offer in accordance with the takeovers Code, a partial takeover offer in accordance with the takeovers Code, an acquisition approved by an ordinary resolution, an allotment approved by an ordinary resolution, a creeping acquisition (in certain circumstances) or compulsory acquisition of a shareholder holds 90% or more of the shares of the Company. c. the new Zealand overseas Investment act 2005 and overseas Investment regulations 2005 (new Zealand) regulate certain investments in new Zealand by overseas persons. In general terms, the consent of the new Zealand overseas Investment office is likely to be required where an “overseas person” acquires shares in the Company that amount to 25% or more of the shares issued by the Company, or if the overseas person already holds 25% or more, the acquisition increases that holding. d. the new Zealand Commerce act 1986 is likely to prevent a person from acquiring shares in the Company if the acquisition would have, or would be likely to have, the effect of substantially lessening competition in the market. SuBSTANTIAL SECuRITY hOLdERS according to notices given under the Securities Markets act 1988 (new Zealand), the substantial security holders in ordinary shares (being the only class of listed voting securities) of the Company and their relevant interests according to the substantial security holder file as at 9 September 2011, were as follows: ordinary shares 20,764,707 17,962,113 12,332,516 10,512,000 10,100,031 % 10.4% 9.0% 6.2% 5.3% 5.1% as at 9 September 2011, the Company had 200,000,000 ordinary shares on issue. 76 kAThMANdu annual report 2011 PRINCIPAL ShAREhOLdERS the names and holdings of the twenty largest registered shareholders as at 9 September 2011 were: name ordinary Shares 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 20 J P MORGAN NOMINEES AUSTRALIA LIMITED NEW ZEALAND CENTRAL SECURITIES DEPOSITORY LIMITED NATIONAL NOMINEES LIMITED CITICORP NOMINEES PTY LIMITED COGENT NOMINEES PTY LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED COGENT NOMINEES PTY LIMITED AMP LIFE LIMITED CITICORP NOMINEES PTY LIMITED BOND STREET CUSTODIANS LIMITED PETER HALKETT NEW ZEALAND DEPOSITORY NOMINEE LIMITED QUEENSLAND INVESTMENT CORPORATION RBC DEXIA INVESTOR SERVICES AUSTRALIA NOMINEES PTY LIMITED CITICORP NOMINEES PTY LIMITED FRANED PTY LIMITED BUTTONWOOD NOMINEES PTY LTD UBS WEALTH MANAGEMENT AUSTRALIA NOMINEES PTY LTD FNZ CUSTODIANS LIMITED QUADRANT PRIVATE EQUITY MANAGEMENT PTY LIMITED QUADRANT PRIVATE EQUITY SERVICES PTY LIMITED dIRECTORS’ ShAREhOLdINGS directors held interests in the following shares of the Company at 31 July 2011: James Strong Peter Halkett Mark Todd John Harvey John Holland Sandra McPhee beneficially owned beneficially owned beneficially owned not beneficially owned beneficially owned beneficially owned beneficially owned 43,132,497 38,579,680 38,171,239 16,374,706 12,629,580 9,580,307 3,936,023 3,861,388 1,822,363 1,733,120 1,409,832 1,264,090 643,387 642,220 596,793 544,600 542,557 527,352 502,153 441,176 441,176 176,470 1,429,832 361,418 43,437 51,563 82,033 58,823 % 21.57% 19.29% 19.09% 8.19% 6.31% 4.79% 1.97% 1.93% 0.91% 0.87% 0.70% 0.63% 0.32% 0.32% 0.30% 0.27% 0.27% 0.26% 0.25% 0.22% 0.22% kAThMANdu annual report 2011 77 ShARE dEALINGS BY dIRECTORS In accordance with Section 148(2) of the Companies act 1993, the Board has received disclosures from the directors named below of acquisitions or disposals of relevant interests in the Company between 1 august 2010 and 31 July 2011, the details of those dealings were entered in the Company’s interests register. the particulars of such disclosures are: Director Peter Halkett Mark Todd nature of Interest Beneficial Non-Beneficial Shares acquired 20,000 20,000 Consideration NZD 2.38 NZD 1.92 Date 03/04/2011 04/10/2010 SuBSIdIARY COMPANY dIRECTORS Section 211(2) of the Companies act 1993 requires the Company to disclose, in relation to its subsidiaries, the total remuneration and value of other benefits received by directors and former directors, and particulars of entries in the interests registers made during the year ended 31 July 2011. no subsidiary has directors who are not full-time employees of the Group. the remuneration and other benefits of such employees (received as employees) totalling $100,000 or more during the year ended 31 July 2011, are included in the relevant bandings for remuneration disclosed at the beginning of the “Statutory Information” section of this annual report. no employee of the Group appointed as a director of Kathmandu holdings limited or its subsidiaries receives or retains any remuneration or other benefits in their capacity as a director. the persons who held office as directors of subsidiary companies at 31 July 2010, and those who ceased to hold office during the year ended 31 July 2011, are as follows: Milford Group holdings Limited peter halkett, Mark todd kathmandu Limited peter halkett, Mark todd kathmandu Pty Limited peter halkett, Mark todd, Matthew Spencer kathmandu (u.k.) Limited peter halkett, Mark todd 78 kAThMANdu annual report 2011 dISCLOSuRE OF INTERESTS BY dIRECTORS In accordance with Section 140(2) of the Companies act 1993, the directors named below have made a general disclosure of interest, by a general notice disclosed to the Board and entered in the Company’s interests register. General notices given by directors which remain current as at 31 July 2011 are as follows: James Strong Chairman of: Woolworths limited australian Council for the arts local organising Committee for the ICC Cricket World Cup 2015 (appointed 17 august 2011) Insurance australia Group limited (resigned 26 august 2010) John harvey A director of: dnZ property Fund limited port otago limited new Zealand opera limited heartland Building Society apn news & Media limited (appointed 1 January 2011) A director of: Qantas airways limited IaG Finance new Zealand limited (resigned 26 august 2010) An advisor to the board of: resource Coordination partnership limited John holland A partner of: Chapman tripp A member of: Securities Commission of new Zealand (disestablished 1 May 2011) A member of: nomura australia limited advisory Board australian Grand prix Corporation Sandra Mcphee A director of: aGl energy limited tourism australia Fairfax Media limited Westfield retail trust (appointed 21 december 2010) A vice president of: the art Gallery of nSW trust A member of: Jp Morgan advisory Council advisory Board of MMC St Vincents and Mater health Sydney Community advisory Council kAThMANdu annual report 2011 79 dIRECTORS’ ANd OFFICERS’ INSuRANCE ANd INdEMNITY the Group has arranged, as provided for under the Company’s Constitution, policies of directors’ and officers’ liability Insurance which, with a deed of Indemnity entered into with all directors, ensures that generally directors will incur no monetary loss as a result of actions undertaken by them as directors. Certain actions are specifically excluded, for example, the incurring of penalties and fines which may be imposed in respect of breaches of the law. uSE OF COMPANY INFORMATION there were no notices from directors of the Company requesting to use Company information received in their capacity as directors which would not otherwise have been available to them. GROuP STRuCTuRE Kathmandu holdings limited owns 100% of the following companies: Milford Group holdings limited Kathmandu limited Kathmandu pty limited Kathmandu (uK) limited dIRECTORS’ dETAILS James Strong peter halkett Mark todd John harvey John holland Sandra Mcphee Chairman, non-executive Managing director and Chief executive officer Finance director and Chief Financial officer and Company Secretary non-executive director non-executive director non-executive director EXECuTIVES’ dETAILS peter halkett Mark todd Chief executive officer Chief Financial officer dIRECTORY the details of the Company’s principal administrative and registered office in new Zealand is: 11 Mary Muller drive heathcote po Box 1234 Christchurch 8140 80 kAThMANdu annual report 2011 ShARE REGISTRY In new Zealand: physical address: link Market Services (lInK) level 16, Brookfields house, 19 Victoria Street West, auckland 1010 new Zealand postal address: po Box 91976, auckland, 1142 new Zealand telephone: Investor enquiries: +64 9 375 5999 +64 9 375 5998 Facsimile: Internet address: +64 9 375 5990 www.linkmarketservices.com In australia: link Market Services (lInK) physical address: postal address: level 1, 333 Collins Street Melbourne, VIC 3000 australia locked Bag a14 Sydney, South nSW 1235 australia telephone: Investor enquiries: Facsimile: Internet address: +61 2 8280 7111 +61 2 8280 7111 +61 2 9287 0303 www.linkmarketservices.com.au STOCk EXChANGES the Company’s shares are listed on the nZX and the aSX. INCORPORATION the Company is incorporated in new Zealand. store locations store locations AUSTRALIA AUSTRALIA VIC VIC Smith St Smith St Fitzroy Fitzroy Blackburn Blackburn Hampton East Hampton East Melbourne (Bourke St) Melbourne (Bourke St) Knox Knox Richmond Richmond Highpoint (Maribyrnong) Highpoint (Maribyrnong) Camberwell Camberwell Melbourne (Spencer St) Melbourne (Spencer St) Chadstone Chadstone Doncaster Doncaster Frankston Frankston Chapel St Chapel St South Wharf DFO South Wharf DFO Bendigo Bendigo Geelong Geelong Ballarat Ballarat Southland (Cheltenham) Southland (Cheltenham) NSW NSW Albury Albury Sydney (Kent St) Sydney (Kent St) Chatswood Chatswood Cronulla Cronulla Birkenhead Point Birkenhead Point Redyard (Auburn) Redyard (Auburn) Bondi Junction Bondi Junction Hornsby Hornsby Warringah Warringah Newcastle Newcastle Castle Towers Castle Towers Macquarie Macquarie Rouse Hill Rouse Hill Parramatta Parramatta Macarthur Macarthur Erina Fair Erina Fair Orange Orange Wollongong Wollongong Wagga Wagga Wagga Wagga SA SA Adelaide (Rundle St) Marion Tea Tree Adelaide Harbourtown Adelaide (Rundle St) Marion Tea Tree Adelaide Harbourtown ACT ACT Canberra Civic Canberra Civic Woden Woden Canberra Centre Canberra Centre Belconnen Belconnen QLD QLD Brisbane (Albert St) Brisbane (Albert St) Fortitude Valley Fortitude Valley Chermside Chermside Logan Logan Kawana Kawana Pacific Fair (Broadbeach) Pacific Fair (Broadbeach) Townsville Townsville Cairns Cairns Toowoomba Toowoomba Southport Southport TAS TAS Hobart Hobart Devonport Devonport Launceston Launceston WA WA Perth (Hay St) Perth (Hay St) Cottesloe Cottesloe Innaloo Innaloo Carousel (Cannington) Carousel (Cannington) Fremantle Fremantle Whitford Whitford Perth Harbourtown Perth Harbourtown NEW ZEALAND NEW ZEALAND UNITED KINGDOM UNITED KINGDOM NORTH ISLAND NORTH ISLAND Albany Albany Auckland (Queen St) Auckland (Queen St) Auckland (Victoria St) Auckland (Victoria St) Botany Botany Gisborne Gisborne Hamilton Hamilton Hastings Hastings Lyall Bay Lyall Bay Manukau Manukau Napier Napier New Plymouth New Plymouth Newmarket Newmarket Onehunga Onehunga Otaki Otaki Palmerston North Palmerston North Petone Petone Rotorua Rotorua Sylvia Park Sylvia Park Takapuna Takapuna Taupo Taupo Tauranga Tauranga Tauranga CBD Tauranga CBD Te Rapa Te Rapa Waitakere Waitakere Wanganui Wanganui Wellington Wellington Whakatane Whakatane Whangarei Whangarei SOUTH ISLAND SOUTH ISLAND Blenheim Blenheim Christchurch (Cashel St) Christchurch (Cashel St) Christchurch (Tower Junction) Christchurch (Tower Junction) Dunedin Dunedin Invercargill Invercargill Nelson Nelson Queenstown Queenstown Riccarton Riccarton Timaru Timaru Papanui Papanui Ashburton Ashburton Brighton Brighton Bristol Bristol London (Berners St) London (Berners St) London (Covent Garden) London (Covent Garden) London (Spitalfields) London (Spitalfields) London (White City) London (White City) This book is printed on environmentally This book is printed on environmentally responsible paper manufactured using responsible paper manufactured using FSC-certified, mixed-source pulp harvested FSC-certified, mixed-source pulp harvested from sustainable well-managed forests and from sustainable well-managed forests and using an elemental chlorine-free process. using an elemental chlorine-free process. Vegetable based inks and water-based Vegetable based inks and water-based aqueous coating were used. aqueous coating were used. Designed and printed by GEON print and communication solutions www.geongroup.com Designed and printed by GEON print and communication solutions www.geongroup.com 423644 Kathmandu AR Cover FINAL.indd 2 423644 Kathmandu AR Cover FINAL.indd 2 5/10/11 12:38 PM 5/10/11 12:38 PM K A T H M A N D U H O L D I N G S L I M I T E D A N N U A L R E P O R T 2 0 1 1 KATHMANDU HOLDINGS LIMITED ANNUAL REPORT 2011 423644 Kathmandu AR Cover FINAL.indd 1 5/10/11 12:38 PM 

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