Kathmandu Holdings Ltd
Annual Report 2012

Plain-text annual report

kathmandu annual report 2012 1 contents Chairman’s Report Highlights For The Year Chief Executive’s Report Board Management Directors’ Report Corporate Governance Auditor’s Independence Declaration Financial Statements Statutory Information Share Registry 2 4 6 12 13 15 24 27 29 74 80 notice of annual General meetinG 11.00am Friday 16 November 2012 Sofitel Hotel, 61-101 Phillip Street, Sydney Australia 2 annual report 2012 kathmandu chairman’s report James strong Chairman I am pleased to report on another successful year for Kathmandu Holdings Limited. Kathmandu was unable to match last year’s record earnings result, but the achievement of both a solid increase in same store sales and a growth in second half year profits was a good result for the Company in what are particularly difficult economic times. A number of important projects were also delivered that will support future growth. retail conditions the retail sector today, particularly in australia, is re-aligning to an economic environment where consumers will likely spend less in real terms on discretionary purchases for several years ahead. this coincides with the acceleration of multichannel retailing and in particular, access to international brands via online selling, which is changing consumer buying patterns quickly and significantly across most discretionary retail categories. as a fully vertical brand with total control over how we distribute our products we are well positioned to benefit from this situation. It still requires us to grow our market share and efficiently manage our costs to achieve profit growth. Kathmandu’s strategy to obtain market share through increased and sustained investment in its brand, product and retail channels is unchanged. through this investment we will maintain our leadership in the outdoor travel and adventure category, and deliver future profitable growth for our shareholders. financial results the key financial highlights for the year ended 31 July 2012 were: Growth in sales by 13.4% to $347.1 million Gross profit margin of 63.2% Decrease in earnings before interest and tax of 10.9% from nZ$64 million to nZ$57 million associated with investment in infrastructure. Store numbers increased by 13, slightly below our target for the year. overall eBIt margin reduced from 20.9% to 16.4% of sales. Growth strateGy Kathmandu continues to focus on the key growth strategies outlined at the time of our Ipo in 2009, specifically: Continue new store rollout in australia and new Zealand; Improve existing store network; enhance product offering; Grow our Summit Club; and Develop and grow online and digital channel capabilities. Maximising the value of the Kathmandu brand is supported by all of these strategies, and their successful execution as the channels to market grow will differentiate us from the retailers who don’t control their own brand. new store rollout opportunities, particularly in australia, remain our most significant and immediate growth opportunity. the new store rollout programme, the improvement of existing stores through refurbishment and relocation, and for both strategies the optimisation of store format and footprint will underpin our on-going market penetration. Similarly, most of our future growth in Summit Club will be driven by membership number increases in australia. there was satisfactory same store sales growth in both australia (6.5%) and new Zealand (9.2%). Gross profit margin was in line with that achieved in FY2010 and the Company’s long term targets, and whilst operating costs increased at a higher rate than sales, this was primarily as a result of non-recurring first half expenditure and expenses the online channel and the associated development of ever improving direct to customer communication and marketing opportunities through electronic and social media will bring about a fundamental change in retailing and a clear opportunity for our brand. the introduction of our new online platform is a significant step in the development of our capability to sell and service customers globally and growing our online business in the uK is a first step in this strategy. We intend to invest further to support the international growth opportunity for Kathmandu that this, and other related channels will provide us. Kathmandu’s product range growth in the past two years has supported sales growth over that time. Investment in new and innovative product will always be a focus, but our strategy in the near term will be to align our ranging to our store network and the variations that we have in the regions we sell to and the formats of those stores. at the same time we expect inventory levels (units and $) will grow in line with overall sales growth, as compared to the lift in levels in FY2012 and FY2013 that were primarily range growth related. capital inVestment the uplifted three year capital expenditure programme that was initiated last year has involved substantial investment in enlarged and improved distribution facilities, the establishment of a new office in Melbourne for our australian domiciled support team, and completion of the targeted portion of the rollout of the new brand identity to our stores. the bulk of planned physical infrastructure investment that is not directly related to our store network is now complete, but we will be investing greater amounts in store refurbishments and relocations going forward, as well as new store rollouts. our investment in improved information systems continues, with our prime focus now being on enhancing the customer experience in store and online and ensuring we have the foundation to be able to deliver to the global market. diVidend the Directors are again 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. kathmandu annual report 2012 3 the 50% to 60% range during the period in which capital expenditure also runs at a similar ratio. people the Board thanks Kathmandu’s Chief executive officer, peter Halkett and his team for the result achieved by the Company in a challenging year. It is pleasing to be writing this report with a positive outlook for our team domiciled in Christchurch after the challenging last two years, and the opening of our new Zealand distribution centre in august was a highlight in the recovery now underway in our home city. We continue to grow the depth and competency of our team in all the countries that Kathmandu operates in, and we welcomed a number of them as shareholders for the first time this year under our long term incentive plan. our future growth is being supported by a diverse and talented team of people. outlook the economic prospects both globally and in australasia have to be viewed with real caution. our approach to the uK exemplifies the care that your Board is taking in future expansion, but there is no change to your Board’s view that the Kathmandu brand has genuine potential to be a significant global presence in the outdoor travel and adventure market. We are very clear that in the short term our key strategy remains to invest to grow the business and build the Kathmandu brand in the australasian market. It is essential that we both grow profitably and maintain our strategic competitive advantage, and we will thus ensure our investment in growth opportunities continues to focus primarily on this market where we know we can deliver further profit growth. We expect this investment, in conjunction with effective management of operating expenses, will result in an improved performance next year and further develop the wider capabilities the Company requires in order to pursue new growth opportunities for Kathmandu. this dividend represents a payout ratio of 57% and the Board continues to expect the payout ratio will remain in James strong Chairman Victoria street, auckland newmarket, auckland 4 annual report 2012 kathmandu highlights for the year Sales up 13.4%, 7% same store sales increase Store count increased to 124 New brand identity rolled out Summit Club membership lifted by over 30% New online platform launched kathmandu annual report 2012 5 SALES (NZ$m) fy2008 fy2009 fy2010 fy2011 fy2012 EBIT (NZ$m)* fy2008 fy2009 fy2010 fy2011 fy2012 NPAT (NZ$m)* fy2008 fy2009 fy2010 fy2011 fy2012 * FY2008 - 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. $245.8$215.6$192.8$25.2$14.9$8.0$48.5$44.1$32.9$306.1$64.0$39.1$347.1$57.0$34.96 annual report 2012 kathmandu chief executive’s report peter halkett Managing Director and Chief executive officer key hiGhliGhts Sales were up 13.4% to $347.1m. Same store sales growth of 7% at constant exchange rates. New loyalty incentive for Summit Club grew sales and membership lifted by over 30%. Net profit after tax was $34.9m; earnings per share 17.4c. Total store count increased by 13 to 124. Over 70% of stores now have new Kathmandu brand identity. New distribution centre in New Zealand opened, and Australian distribution centre has been enlarged. New ERP and warehouse management systems operational. Global online platform live in September 2012. result oVerView In the 2012 financial year there was an uplift in the level of on-going investment made in the business, which will support future growth for Kathmandu. this has occurred at a time when the retail environment is, and looks likely to remain difficult and it reflects our focus on positioning Kathmandu to grow our market share in the medium and long-term. although the increase in sales in FY2012 of $41 million was not matched by an improvement in profit, this was primarily due to costs associated with the growth focussed strategic investments that we made. In particular, we introduced loyalty incentives for Summit Club members who are regular buyers of Kathmandu product, and this long– term initiative enhanced sales but reduced our gross margins. operating expenses, whilst well controlled, were also impacted by unbudgeted and non-recurring costs associated with the implementation of new warehouse management systems and the re-organisation of our uK business. In FY2012, we opened a further 10 permanent new stores, and overall we are trading in 124 locations at 31 July (including four short term leases), compared to 111 stores at the same date last year. this growth of 13 additional stores was short of our annual target of 15 and, as a result, the new store profit contribution in FY2012 was below both our expectations and the FY2011 performance. However, it was much more significant for our future growth expectations that in this year we successfully: opened new format flagship stores in Willis Street (Wellington), newmarket (auckland), Camberwell (Melbourne) and Chatswood (Sydney); and finalised new small format layouts for high profile destinations such as Chapel Street and the rocks, and a number of future prime mall locations opening in FY2013 and beyond. the year-on-year reduction of just over 10% in net profit after tax was disappointing, but it was pleasing that as a result of sales performance and tight management of expenses in the second half of the year, operating costs as a percentage of sales were down and second half profits of just under $29m were up on the same period last year. the overall financial performance, the success of new Kathmandu stores and the successful implementation of our new brand identity continue to reinforce that the Company’s strategies are still appropriate and Kathmandu is well positioned to deliver profit growth in future years. Business oVerView the kathmandu Brand and customer We believe the strength of our brand is vital to the success of the business. our popularity and brand recognition amongst customers is strong in new Zealand and australia. the effectiveness of our focus on Summit Club membership growth has been a critical contributing factor to our continually improving brand positioning. We remain confident that by 2015, in tandem with our store rollout programme, we will have one million active Summit Club members across new Zealand and australia. the rollout of the new Kathmandu brand identity in stores and across the full product range has continued throughout the year. all products that are new to the market now carry our new brand identity, and we have re-branded over 70% of the store portfolio. Most of the remaining stores will be re-branded in tandem with either a lease renewal or programmed store refurbishment. all of the initiatives we are undertaking will support our objective to increase australian brand awareness to the level achieved in new Zealand, and as a result substantially improve our market penetration and sales per capita in kathmandu annual report 2012 7 the country that still provides our most significant growth the permanent new stores opened during the year were: opportunity in the short and medium term. We will continue to grow our customer database and enhance the relationship we have with those customers. our customers are a key asset to Kathmandu in the world of multichannel retailing. store network the focus on building our brand positioning and customer relationships is linked to the requirement for our store network strategy to adjust to the significant changes that are occurring in retail property as we decide on our best options for new and replacement stores. the key drivers of change are the weaker economic environment and the accelerated growth in online sales. the choices made today on store footprint, location and layout have never been more important. australia: Warnambool, Chatswood*, tamworth, Shellharbour, the rocks (Sydney) and Moorabbin DFo (Melbourne). new Zealand: Coastlands (Wellington), the palms (Christchurch), Willis St* (Wellington) and Masterton. *Both these stores are relocations, and the previous store has been converted to an outlet site that will likely become a permanent store. the relocation of newmarket and Camberwell stores to new enlarged sites meant the old sites for these stores are being traded temporarily as outlet stores until lease expiry in 2013. our other temporary stores are the central Christchurch store in the post-earthquake re-start retail precinct and Moonee ponds (Melbourne). ten permanent new stores were opened in FY2012, and total store numbers increased by 13 stores year-on- year. this number was less than we had targeted, but it reflects our caution on site choices as we assessed the environment and our options in store formats in a number of local markets. permanent store numbers totalled 120 as at 31 July: australia 72, new Zealand 42 and uK 6. Stores currently open total 124. as a result of the combination of the timing of our permanent new store openings in FY2012 and the lesser number opened (10 versus 14 in FY2011) there was a reduction in the earnings (at an eBItDa level) from new stores in FY2012 compared to FY2011. In FY2013, we have a substantial number of our annual target of 15 new stores already locked in. ten new store lease agreements have been negotiated and we expect 8 annual report 2012 kathmandu camberwell, Victoria execution of this strategy is directly relevant to the same store sales growth achieved in FY2011 and FY2012. total inventories, $73.3m at 31 July 2012 increased by 35% on the previous year. this increase was in line with our targets, apart from the impact of opening fewer new stores than planned. also the adjusted summer season delivery schedule meant levels of goods in transit increased at 31 July by 88% (c. $6m) on the same time last year. on a per store basis, there was an 11% increase in inventory after adjusting for these one-off variations. We anticipate that in the future, our investment in inventory will generally increase in line with the rate of increase in sales and store numbers. our primary focus is now on the management of our inventory range, investing in highest growth product groups and range planning to match the variation in our store formats and geographical locations, particularly in australia. uk Business our uK store portfolio is under review, but we remain committed to maintaining a small retail network to support the brand in that market. In FY2012, we closed our uK regional office and warehouse, and integrated management of the uK business back into the applicable functional responsibilities of the australasian based Kathmandu executive team. Costs associated with this re-organisation had a one-off impact on earnings of c. $1m. Warehousing and distribution are now being undertaken by a third party provider. We envisage future sales growth in the uK will be derived primarily from the online channel. We intend to support the brand and our long-term emphasis on web based selling with retail stores merchandised and fitted out to best present the new brand identity, and located primarily in london. Where required we will realign our retail portfolio accordingly. infrastructure We completed several major infrastructure projects during FY2012. Both the new Zealand and australian distribution centres have been enlarged and will meet our projected capacity requirements in the medium term. the new Zealand distribution centre in Christchurch was a design build project for Kathmandu, and became operational at the start of FY2013. the lease of our previous site has been exited. the Melbourne distribution centre had its floor area increased by one-third following the end of a sublease arrangement, and the full site will be re-laid prior to this year’s Christmas sale. these projects will substantially enhance distribution efficiency going forward. our Melbourne support office was relocated at the beginning of 2012. no other major physical projects relating to our distribution centres or support offices are envisaged for at least the next two years. systems and online We will continuously invest in improved systems to support business growth. In august 2011, our upgraded to have nine of these stores trading before the end of 2012. these will include our flagship site in pitt Street Mall, Sydney. During that same period, we will also complete four major store refurbishments or relocations, including our new flagship site in Hay Street perth. Given this development programme, we are confident that by comparison to FY2012, the rollout of the new stores will contribute incremental earnings in FY2013. We are committed to continuing re-investment in our store portfolio, where justified on the basis of both return on investment and the continuing improvement of our brand positioning in key markets. In FY2012, we enlarged our stores in newcastle and Hobart and refurbished our Victoria Street store in auckland. all of these stores are in prime Kathmandu markets and locations, and there will be a number of similar projects undertaken each year, generally in conjunction with lease renewals. In the first quarter of FY2013, we refurbished our Highpoint and Knox City stores in Melbourne, and relocated our nelson store to larger and more central premises. Store formats will continue to be evaluated and potentially modified in response to the wider retail and economic trends, but also in response to local opportunities. In particular we are confident from our experience in the past two years that we have a number of new small format store opportunities in australia which we will now pursue within our overall network plan. product range and inventory effective and relevant expansion of our product range has been a core growth strategy since the Company listed in 2009. During this period, we have increased our total SKu count by approximately 30%. this range expansion occurred through expanded product categories with new styles, additional colours and sizes in existing styles, and new fabrications or technologies offered. the successful erp and new warehouse management systems went live. this change over was not without operational problems, however these systems are now meeting expected performance standards and are critical to the efficient servicing of our ever increasing retail network. our next major area for systems development is software for product forecasting and planning, and a point of Sale / CrM solution with global capability. Vendor selection for these projects is complete, and we plan to implement new systems in these areas by the end of FY2013. our spend on new systems will be elevated for several years as we continue to build a robust platform capable of supporting the australasian business, future development of multichannel retail options locally, and potentially globally. the primary focus in systems development throughout the balance of FY2012 has been the new online platform, which is now live. this platform will underpin our future strategy to expand online selling into other markets. We previously maintained three separate sites for each of the countries we trade in, and had no capability to sell in other countries. our effectiveness in growing uK sales via the new site will be our first focus and a good trial market relative to future expansion options. market oVerView and emerGinG trends the general consumer in all our current markets is now, compared to pre-GFC, a more cautious spender who is likely to be deleveraging where he or she has a choice between consciously paying off debt before engaging in the luxuries of life. our strategy must continue to adapt as we grow to deal with this new normal and its associated emerging trends. these trends are most obvious in the changing face of retail stores and the growth of multichannel retailing with direct buying from global online businesses. the outdoor category remains an attractive sector, both locally and globally, as evidenced by the continuing growth of new entrants and new stores selling outdoor and travel goods. We are careful to manage and develop our business in a planned manner as we modify our product mix and range and adjust our store strategies with regard to size, product offer and location. We believe Kathmandu remains well placed in this market, and absolute control of our brand is a fundamental competitive advantage. financial performance Group sales $347.1m increased by 13.4% over the previous year. We consider the increase in same store sales (by 5.7% overall, 7.0% at a constant exchange rate) to be a good outcome, given market conditions. Country by country change in same store sales was as follows: australia 6.5% new Zealand 9.2% uK (7.7%) kathmandu annual report 2012 9 In the three years since Kathmandu Holdings ltd was listed, we have achieved an overall average per annum same store sales increase of more than 7% per annum in both australia and new Zealand. the increase in total gross profit for FY2012 was $18.9m, an increase of 9.4% compared to a 29.2% uplift in FY2011. the sales increase was more than offset by a reduction in gross margin by 230bps, to 63.2% overall. this is the same rate of gross margin as we earned in FY2010, and sits comfortably within our long term target range of 62% to 64%. Gross margins were down by 300bps in new Zealand and 190bps in australia. as previously noted, the key reason for the reduction of gross margins was the introduction of the new loyalty incentive to enhance the value of Summit Club membership. We will continue to reward our best and most loyal customers with this, and other similar benefits in the future. the other drivers of change in gross margin over the year were generally less significant. In particular, improvement in hedging rates we received on uSD purchasing in FY2012 generally enabled us to manage input cost increases without lifting retail price points. expenses, excluding depreciation, amortisation and financing costs, increased by $23.8m (18.4%). this was an increase as a percentage of sales from 42.2% to 44.1%. Most of this increase was in: property rent, which increased by $7.7m and by 100bps as a percentage of sales; and warehousing and distribution costs, which increased by over $3.3m (excluding rent and rates costs) and by 60bps as a percentage of sales. the uplift in property rent arose primarily from: opening new prime flagship sites during the year, coupled with a cross-over of occupancy costs from retention of current sites on either a temporary basis or as a permanent conversion to outlet stores; warehousing, some of which was temporary in nature as we dealt with capacity constraints in both networks; and new Melbourne head office costs. In future years, we will continue to see growth in rental costs primarily related to store rollout. Most incremental occupancy costs arising from infrastructure improvement are now in place, apart from the new new Zealand distribution centre, operational from august 2012. as a result, from FY2013 and beyond, we expect overhead rent and rates costs to flatten and then reduce as a percentage of sales, whilst store rental costs will likely increase slightly year-on-year as our weighting of stores into the more expensive australian market continues. 10 annual report 2012 kathmandu We estimate that up to $2m of the costs of warehousing our strategy of significant capital investment is expected and distribution incurred in FY2012 will not be repeated in to deliver: FY2013, because these costs were incurred in response to the difficulties we encountered in the first half of the year as we introduced new warehouse management systems. these areas of the business are running reliably and more efficiently than was the case a year ago. operating expenses, after adjusting for one-off costs and asset write-offs, were similar as a percentage of sales in the second half of FY2012 compared to FY2011. In this period total expenses (excluding depreciation, amortisation and financing costs) increased by $7.8m, up 11.1% and overall operating leverage was achieved. the mix of our operating costs between fixed and variable and between first and second half periods, in tandem with our sales being weighted to our second half does impact on our earnings profile and rate of growth between the two periods. overall as our earnings are derived primarily in the second half of each year, the benefits from the future trend we expect for operating expenses to remain relatively constant as a percentage of sales will mainly impact earnings in that second half. this is the scenario we anticipate in FY2013, when a large number of new stores are planned for opening in the second quarter of the year. the rollout of most of the balance of our optimum store network, particularly in australia within the next three years; progress the optimisation of the existing store portfolio; and support our growth with adequate and efficient physical infrastructure and top tier systems. sustainaBility In 2011, Kathmandu launched the Sustain the Dream plan 2011-2013. this plan outlines our sustainability objectives, model and action plan as we seek to integrate sustainability into the way we conduct our business. In developing the plan, we incorporated the views of a range of team members from different functions to ensure a holistic and integrated approach to sustainability, to align our approach with our core purpose and values, and to reflect the importance of this area to our customers and team members. the Sustain the Dream plan is divided into five impact areas: the uplift in our level of capital expenditure in FY2012 minimise our environmental footprint; resulted in an increase in depreciation and amortisation expense of $2.1m, 28.4%. We expect a similar rate of increase will continue for several years ahead, as we plan to maintain levels of new capital expenditure each year protect human rights; add economic value; strengthen communities; and at $20m or more in the next two to three years. partly develop our team. offsetting this will be reduced costs of financing arising from the terms negotiated in our new bank facility, which is in place to the end of 2014. these cost savings were not In parallel with this year’s annual report, Kathmandu will release its first public sustainability report that highlights significant in FY2012. as a result, the rate of reduction in the progress of the plan. the report was developed in line both earnings before Interest and tax (down 10.9%) and with the Global reporting Initiative guidelines to ensure a net profit after tax (down 10.7%) were similar. quality and transparent report. tamworth, new south wales the palms, christchurch kathmandu annual report 2012 11 our substantial uplift in product investment over the past two years as we filled obvious gaps and took up sensible opportunities for range extension led to an increase in SKu count of approximately 30% over that period. In the future we will focus on alignment of our range to our retail stores’ footprint and location. our objective is to increase return from each SKu in our range through investment in product growth categories and assortment range planning that will increase revenue and reduce cost to service ratios. after we complete re-organising the now enlarged australian distribution centre later this year we anticipate a period of reduced capital investment in physical infrastructure relative to our spend in the past two years. However this will be offset by our commitment to continuing investment in our stores, both new and existing, and our systems - including online. this investment is to ensure we efficiently support our target australasian store network, and that in the medium and longer term we have capability to grow profitable global sales. Specifically, the launch of our new online platform will support wider sales activity in new markets, and planned investment to come in a new poS and CrM platform will also be critical to wider international expansion. the medium and long term growth opportunities for Kathmandu are numerous, but our immediate objective is to increase earnings in FY2013 above the profit earned this year despite the continuing uncertainty caused by the wider economic environment. Given the level of investment being made in our growth strategies we must be confident that Kathmandu will deliver improved performance in FY2013. our team will be working very hard to maximise the return on the investment being made, not just in the year ahead, but also in the longer term as we continue to grow the Kathmandu brand. Peter Halkett Managing Director and Chief executive officer our team employee numbers as at 31 July 2012 reduced from 1733 last year to 1722. the reason for this change was a decrease in causal employees and an increase in full or part time permanent staff members from 50% to approximately 62% of the total workforce. our annual employee engagement survey again delivered pleasing results for our employees’ support of our brand and their positive view of Kathmandu as an employer. retention within our retail management teams remains a specific objective, and it continues to be challenging, particularly in the australian market. However, we are making pleasing progress, and additionally, the depth and competence of our wider leadership team continues to improve as our business grows. We hope that the worst impacts from the Christchurch earthquakes are behind us. We continue to be very appreciative of the tremendous on-going support and commitment from our sales, distribution and office staff located in our home city. as a result of the impact of the Christchurch earthquakes, and in the interest of growing the brand in the australian market, we have continued to grow our Melbourne based team, focussing on those areas of the business where australian domiciled roles will best support our growth in stores, marketing and direct-to-customer sales activity in the future. outlook In the three years that Kathmandu has been an aSX and nZX listed company, we have achieved solid same store sales and profit growth, and continued to roll out new and profitable stores in australia and new Zealand. although the economic environment is even more uncertain today than it was when we listed, we continue to have confidence that there will be profitable growth for Kathmandu in both markets in the years ahead. In australia we have a substantial store rollout programme to complete, which will underpin achieving market penetration targets closer to those of new Zealand. our expanded and ever improving product range and the continuing growth in Summit Club membership will strengthen our customer loyalty, and grow sales in both countries. Investment in the Kathmandu brand and increasing the scale of our business remains critical to delivering our objectives. each year we will continue to target 15 new stores. We also plan at least 6 relocations or refurbishments of existing stores as we enhance our brand positioning, and take up opportunities to optimise earnings growth. In the year ahead we will open flagship stores in central Sydney and perth. locations such as these along with other flagship stores already opened will help define and lift our brand profile in the medium term. 12 annual report 2012 kathmandu board James stronG ao CHaIrMan peter halkett ManaGInG DIreCtor anD CHIeF eXeCutIVe oFFICer mark todd FInanCe DIreCtor anD CHIeF FInanCIal oFFICer 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, and a member of the australian Grand prix Corporation, nomura australia advisory Board and australian Institute of Company Directors. previous Board roles include Chairman of Insurance australia Group, rip Curl Group and Corrs Chambers Westgarth. Mr Strong was Ceo of australian airlines from 1986- 1989 and Managing Director and Ceo of Qantas airways from 1993-2001. Mr Halkett joined Kathmandu in 2006 and has directed the growth strategy for the business throughout the period of current ownership. Mr todd joined Kathmandu in 1998, following previous financial management experience in both the apparel and retail sectors. 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. Mr todd has been Kathmandu’s senior financial executive throughout his 14 years with the Group, a Director of various Group companies and manager of the new Zealand business from 2004-2006. Mr todd is the Company Secretary. John harVey non-eXeCutIVe DIreCtor John holland non-eXeCutIVe DIreCtor sandra mcphee non-eXeCutIVe DIreCtor Mr Harvey is a professional Director with a background in accounting and professional services, 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 apn news & Media, DnZ property Fund, Heartland Building Society port otago, new Zealand opera and Balance agri-nutrients. Mr Holland is a partner in the national new Zealand law firm Chapman tripp and specialises in general corporate and commercial law. 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 is a member of the Financial Markets authority Capital Markets Disclosure Consideration panel, having previously been a member of the Securities Commission of new Zealand and is an accredited director of the new Zealand Institute of Directors. 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 Ceo 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 nSW. She is also a member of the Jp Morgan advisory Council, MMC advisory Board and St Vincents and Mater Health Sydney Community advisory Council. kathmandu annual report 2012 13 management peter halkett ManaGInG DIreCtor anD CHIeF eXeCutIVe oFFICer refer to page 12. mark todd FInanCe DIreCtor anD CHIeF FInanCIal oFFICer refer to page 12. Grant taylor CHIeF InForMatIon oFFICer michelle adams GM, proDuCt 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. Joined Kathmandu in 2009 following extensive product and brand management experience with pacific Brands and Canterbury. tamalin morton GM, MarKetInG caleB nicolson GM, SupplY CHaIn paul stern GM,BuSIneSS DeVelopMent & SuStaInaBIlItY 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). 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. 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. matthew watts GM, retaIl (auStralIa) Brandon BeVeridGe GM, retaIl (neW ZealanD & unIteD KInGDoM) Joined Kathmandu in 2011, with over 10 years multi site management experience in zone and national roles with Coles and Coles express. Joined Kathmandu in 2007, with an extensive retail management background in multi site, proprietorship and national roles. prior to Kathmandu, he was 15 years with pacific retail Group. kathmandu annual report 2012 15 directors’ report your directors present their report and the financial statements for the year ended 31 July 2012. 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 re-appointed as an executive Director on 18 november 2011 and 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 re-appointed as a non-executive Director, Member of the audit and risk Committee, Chair of the remuneration and nominee Committee on 18 november 2011 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 page 12 of this annual report. retirement of directors In accordance with the Company’s constitution, James Strong and John Harvey will retire as Directors at the annual general meeting and being eligible, offer themselves for re-election. meetinG of directors the number of meetings of the Board of Directors and Committees held during the year ended 31 July 2012 and the numbers of meetings attended by each Director were: 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 8 8 B 8 8 8 8 8 8 A 8 XX XX 8 8 8 B 8 XX XX 8 8 8 A 8 XX XX 8 8 8 B 8 XX XX 8 8 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 $34,852,000 (2011: $39,066,000). 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 likely developments in the operations of the consolidated entity and the expected results of those operations in future financial years are contained on pages 2 to 11 of this annual report. 16 annual report 2012 kathmandu 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 22 november 2012. the Company does not currently have an active 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: 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 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 9 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 25 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. the remuneration framework recognises the varying executive roles, remunerates these accordingly and has an incentive structure that has a reduced and appropriate proportion of total remuneration that is cash based; 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 measureable 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 the 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. remuneration reView 31 July 2012 the Board on the advice of the Committee has discretion to set all executive remuneration. recognising the principles outlined above, the current prevailing market conditions and the reported performance of the Company, the Committee determined the following in relation to the 31 July 2012 review of remuneration: no increase in Board Directors fees; no increase in executive Directors remuneration; no increase in executive base salaries for FY2013 with the exception of one executive member (who was subject to a pre-existing contractual arrangement); no short term incentives payable for FY2012; and no change to the structure and levels of available short term and long term incentives. executiVe rewards the executive remuneration framework (currently applying to 9 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 option and long term incentive plans. kathmandu annual report 2012 17 the combination of these comprises the executives’ total remuneration. other senior management personnel have a remuneration framework incorporating components 1. to 3. 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. 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. the criterion reflects the substantial capital investment expected to be approved and overseen by the Board over the medium term. the spend on this investment programme and the large number of projects in any year, means substantial variability in the depreciation and amortisation expense arising year by year is possible. this may or may not be within executive control given the nature and mix of the Group’s capital assets, including information systems infrastructure, and leases. 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 is 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 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. 18 annual report 2012 kathmandu executive benefits include 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 work 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. Senior management personnel also have an annual short term incentive that is equity based, with rewards delivered by way of nil cost performance rights. the entitlement to the short term equity incentive is also subject to the achievement of Group’s financial performance target for the year (eBItDa). If the target is achieved, vesting of the performance rights granted under this incentive will generally require the staff member to remain employed by the Group for a period of one year after the end of the financial year in which Group financial performance that determines entitlement to the rights is measured. the value of the annual short term equity incentive for senior management personnel is generally up to 10% of base salary. the amount of any short term cash incentive paid in a year For the year ended 31 July 2012: is dependent upon: the Group’s financial performance targets were not the level of over performance achieved against the met, and thus; Group’s financial performance target (eBItDa) for the no short term equity incentives granted to executives 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 2012: the Group’s financial performance targets were not met, and thus; no short term cash incentives were paid. 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. Both senior management personnel and executives will participate in short term equity incentives. executives excluding the executive Directors have 30% of the total value of their annual short term incentive remuneration 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. executive Directors have 40% of the total value of their annual short term incentive equity based and measured on the same basis. 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. (including the executive Directors) and senior management personnel in relation to this period will vest. For the year ended 31 July 2011 the Group’s financial performance targets were met and performance rights granted to senior management personnel for this period vested on 31 July 2012 for eligible employees. 165,940 rights converted to the same number of ordinary shares on 31 July 2012. 4. long term incentive plans 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 have been offered each year since the plan was approved. Vesting of the rights are 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 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. rights were offered in 2010 to all executives. From 2011 onwards, the Committee has granted 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 $a800,000 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. 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 kathmandu annual report 2012 19 report are specified in $nZ, being the reporting currency of the Company. 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. the following fees apply per annum, including sub- committee attendance fees: BAse Fees Chairman Other non-Executive Directors Actual fees paid in year ended 31 July 2012 (converted to reporting currency) Chairman Other non-Executive Directors AUD $ 216,000 113,000 NZD $ 277,534 145,182 B – details of remuneration 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: peter halkett – Chief executive officer mark todd – Chief Financial officer tamalin morton – General Manager, Marketing michelle adams – General Manager, product caleb nicolson – General Manager, Supply Chain paul stern – General Manager, Business Development and Sustainability Grant taylor – Chief Information officer (from 30 august 2010) matthew watts – General Manager, retail australia (from 1 March 2012) Brandon Beveridge – General Manager, retail new Zealand (from 1 March 2012) all of the above persons were employed by the Group and were key management personnel for the entire year ended 31 July 2012 and the year ended 31 July 2011, unless otherwise stated. peter Halkett, Mark todd, Michelle adams, Caleb nicolson, Grant taylor and Brandon Beveridge are employees of Kathmandu limited (new Zealand domiciled), and tamalin Morton, paul Stern and Matthew Watts, are employees of Kathmandu pty limited (australian domiciled). 20 annual report 2012 kathmandu 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 9 of the financial statements. c - serVice aGreements 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. as noted above, the Board do not intend to grant any further options under the existing plan. the number of options previously granted by the Company and thus provided as remuneration to executive Directors and other key management personnel under this plan is set out below.the fair value of the options granted on 18 november 2009 is $0.46 per option. all options granted under this plan 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. Year ended 31 July 2010 Options Grant Date Options Granted During The Year First Vesting Date Last Vesting Date Total Fair Value Of Options At Grant Date $ Options Vested During The Year executive Directors Peter Halkett Peter Halkett Peter Halkett Mark Todd Mark Todd Mark Todd 18 Nov 2009 18 Nov 2009 18 Nov 2009 18 Nov 2009 18 Nov 2009 18 Nov 2009 Other Key Management Personnel Michelle Adams Michelle Adams Michelle Adams Tamalin Morton Tamalin Morton Tamalin Morton Caleb Nicolson Caleb Nicolson Caleb Nicolson Total 18 Nov 2009 18 Nov 2009 18 Nov 2009 18 Nov 2009 18 Nov 2009 18 Nov 2009 18 Nov 2009 18 Nov 2009 18 Nov 2009 186,218 186,218 186,218 53,377 53,377 53,377 26,755 26,755 26,756 36,932 36,932 36,933 15,518 15,518 15,518 956,402 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 11,340 12,774 13,052 15,653 17,634 18,017 6,577 7,409 7,570 442,850 - - - - - - - - - - - - - - - - 1. Bryan Moore was General Manager, Information Services until his resignation on 10 September 2010, consequently 44,949 options granted to him under this plan have lapsed. 2. Matthew Spencer was General Manager, Retail until his resignation on 6 January 2012, consequently 118,624 options granted to him under this plan have now lapsed. kathmandu annual report 2012 21 no options in the Company were granted or vested in the previous year. no grants have been made subsequent to year end. 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 vested on 31 July 2012 for personnel that remained employed by the Company on that date. 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. 2012 Grant Date 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 executive Directors Peter Halkett Peter Halkett Peter Halkett Mark Todd Mark Todd Mark Todd 30 Nov 2011 30 Nov 2011 30 Nov 2011 30 Nov 2011 30 Nov 2011 30 Nov 2011 Other Key Management Personnel Michelle Adams Tamalin Morton Paul Stern Caleb Nicolson Grant Taylor Matthew Watts Brandon Beveridge Total - - - - - - - 46,498 46,497 46,497 27,476 27,476 27,476 - - - - - - - 1 Dec 2013 1 Dec 2014 1 Dec 2015 1 Dec 2013 1 Dec 2014 1 Dec 2015 1 Dec 2015 1 Dec 2015 1 Dec 2015 1 Dec 2015 1 Dec 2015 1 Dec 2015 - - - - - - - - - - - - - - 86,487 84,160 81,137 51,105 49,732 47,945 - - - - - - - 221,920 400,566 - - - - - - - - - - - - - - 22 annual report 2012 kathmandu 2011 Grant Date 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 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 Michelle Adams Michelle Adams 29 Nov 2010 29 Nov 2010 Michelle Adams 29 Nov 2010 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 59,048 59,048 59,048 20,833 20,833 20,833 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 5,357 344,517 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 2014 1 Dec 2014 1 Dec 2014 1 Dec 2014 1 Dec 2014 1 Dec 2014 1 Dec 2014 1 Dec 2014 1 Dec 2014 1 Dec 2014 1 Dec 2014 1 Dec 2014 1 Dec 2014 1 Dec 2014 1 Dec 2014 1 Dec 2014 1 Dec 2014 1 Dec 2014 1 Dec 2014 1 Dec 2014 1 Dec 2014 139,353 132,858 126,363 49,166 46,874 44,583 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 11,464 775,163 - - - - - - - - - - - - - - - - - - - - - - 1. Matthew Spencer was General Manager, Retail until his resignation on 6 January 2012, consequently 29,775 rights granted to him under this plan have now lapsed. 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. e – additional information cash bonuses and performance as noted above, for the current year no cash bonuses that were available to be paid to key management personnel based on achievement of financial performance targets and individual KpI’s were paid as a result of the Company not meeting those performance targets. options and performance testing for the vesting of options granted under the Company employee option plan is 1 october in each year (for one-third of the options granted). From 1 october 2010 onwards in the event that the initial tranche of options do not vest on initial testing because the tSr performance target for the tested period has not been met, the options do not lapse. there is annual retesting against the 15% compound tSr growth target on 1 october each year through to 2013 for each tranche. kathmandu annual report 2012 23 company performance all key management personnel’s short term cash incentive 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 earnings and share performance since its listing on 13 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 FY2011 FY2012 $9.4m NA $39.1m 316.0% $34.9m (10.7%) 0.3 19.5 17.4 NA 65x 0.9x $2.13 $2.05 $2.20 $2.05 $2.20 $1.59 (3.8%) 7.3% (27.7%) $0.07 $0.10 $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 22 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 24 annual report 2012 kathmandu BoArd, MANAgEMENT ANd CorPorATE govErNANCE 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 Securities Commission’s Corporate Governance principles and Guidelines (collectively, the principles). the Board considers that the Company’s corporate governance practices and procedures substantially reflect these 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 Chief Financial officer; 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 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” 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 approving and monitoring the progress of major capital expenditure, capital management and acquisitions and divestitures; control, continuous disclosure, financial and non- financial risk management and compliance and external audit;  monitoring Kathmandu’s compliance with laws and regulations and Kathmandu’s own codes of conduct and ethics; encouraging effective relationships with, and communication between, the Board, Management and Kathmandu’s external auditor; and 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; kathmandu annual report 2012 25 policy which establishes procedures which are aimed at ensuring that Directors and Management are aware of and fulfil their obligations in relation to the timely disclosure of material price-sensitive information. 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, fairly and responsibly remunerates Directors and policies and procedures; 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 risks 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 Company’s operations, and the Company’s commitment to designing and implementing systems and methods appropriate to minimise and control its risk. the audit and risk Committee is responsible for monitoring risk management and establishing procedures which seek to provide assurance that major business risks are identified, consistently assessed and appropriately addressed. continuous disclosure policy the Company is committed to observing its disclosure obligations under the listing rules. the Company has a use Company resources and property properly. diVersity policy Kathmandu aspires to appoint the best people to do the best job. In seeking to achieve this objective, the importance of employee diversity is recognised in our commitment to recruit, develop and promote employees on merit, at all levels across the Group, without any form of discrimination. We respect the unique differences that employees can bring to Kathmandu such as differences in age, gender, ethnicity, cultural background, sexual orientation, religious or political beliefs or activities. the benefits of diversity will continue to be tested and re- affirmed with reference to our team composition. Kathmandu has established a Diversity policy in accordance with aSX CGC Corporate Governance principles and recommendations. a copy of this policy can be obtained from the Company’s website (www.kathmanduholdings.com). We consider our current level of employee gender diversity to be efficacious in meeting our policy objective of maintaining appropriate female employee ratios across the Group. We will continue to be vigilant in the review 26 annual report 2012 kathmandu of measureable diversity objectives in accordance with recommendation 3.3 of the aSX CGC Corporate Governance principles and recommendations, and modify or add to these if required. We will conduct and report a gender audit annually to measure progress from baseline data and identify and review any specific areas of gender inequality. Gender diVersity In accordance with aSX CGC Corporate Governance principles and recommendations, recommendation 3.4; the proportion of females employed by Kathmandu as at 31 July 2012 was as follows: Board: 17% being 1 female of 6 Directors executive Management: 22% being 2 females of 9 executives Senior Management (Wider leadership team): 44% being 18 females of a total of 41 in the Wider leadership team total employees new Zealand: 61% being 412 females of 676 total employees total employees australia: 51% being 505 females of 989 total employees total employees united Kingdom: 25% being 14 females of 57 total employees total Kathmandu Group: 54% being 931 females of 1722 employees Kathmandu considers our current employee gender diversity as a strength. We will continue to encourage gender diversity to support strategies and initiatives that foster a diverse culture through employee turnover. return to work and flexible working arrangements which facilitate gender diversity will be expanded to further encourage team retention. a study of employee pay parity was conducted and audited as part of the Group annual salary review process, to consider whether any employee gender pay disparity existed. Based upon the results there is little evidence of any disparity between male and female employees. a review of gender pay parity will continue to be an on-going focus for the Group. 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, the Company’s website will contain information about the Company, including media releases, key policies and the terms of reference of the Company’s Board Committees. all relevant announcements made to the market and any other relevant information will be posted on the Company’s website as soon as they have been released to the aSX and nZX. kathmandu annual report 2012 27 Auditor’s Independence Declaration As lead auditor for the audit of Kathmandu Holdings Limited for the year ended 31 July 2012, I declare that to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Kathmandu Holdings Limited and the entities it controlled during the period. Robert Harris Partner PricewaterhouseCoopers 20 September 2012 PricewaterhouseCoopers, 5 Sir Gil Simpson Drive, Burnside, PO Box 13244, Christchurch 8053 New Zealand T: +64 3 374 3000, F: +64 3 374 3001, www.pwc.com/nz kAThMANdu annual report 2012 29 financial statements For the year ended 31 July 2012 Directory Directors’ Approval of Financial Statements Statements of Comprehensive Income Statements of Changes in Equity Balance Sheets Statements of Cash Flows Notes to the Financial Statements Auditors’ Report CONTENTS OF NOTES TO FINANCIAL STATEMENTS 1 General information 2 3 4 5 6 7 8 9 Summary of significant accounting policies Standards, interpretations and amendments to published standards Income and expenses Income tax expense Reconciliaton of net profits after taxation with cash inflow from operating activities Cash and cash equivalents Trade and other receivables Related party disclosures 10 Derivative financial instruments 11 Inventories 12 Property, plant and equipment 13 Intangible assets 14 Investment in subsidiaries 15 Deferred taxation 16 Trade and other payables 17 Interest bearing liabilities 18 Contributed equity - ordinary shares 19 Employee share based remuneration 20 Reserves and retained earnings 21 Dividends 22 Remuneration of auditors 23 Contingent liabilities 24 Contingent assets 25 Commitments 26 Financial risk management 27 Segmental information 28 Earnings per Share 29 Earthquake disclosures 30 Events occurring after the balance date 29 30 31 32 33 34 35 72 35 35 41 43 44 45 46 46 47 50 50 51 52 53 54 55 56 57 57 61 62 62 62 63 63 64 69 71 71 71 30 annual report 2012 kAThMANdu directors’ approval of financial statements For the year ended 31 July 2012 Authorisation for Issue the Board of directors authorised the issue of these Financial Statements on 20 September 2012. Approval by Directors the directors are pleased to present the Financial Statements of Kathmandu holdings limited for the year ending 31 July 2012 on pages 31-71. director director date: 20 September 2012 date: 20 September 2012 For and on behalf of the Board of directors kAThMANdu annual report 2012 31 statements of comprehensive income For the year ended 31 July 2012 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 Income tax (expense)/benefit profit after income tax Movement in cash flow hedge reserve Movement in foreign currency translation reserve other comprehensive income for the year, net of tax total comprehensive income for the year attributable to shareholders Basic earnings per share Diluted earnings per share Weighted average basic ordinary shares outstanding (‘000) Weighted average diluted ordinary shares outstanding (‘000) Group pArent note 2012 2011 2012 2011 nZ$’000 nZ$’000 nZ$’000 nZ$’000 347,104 306,143 (127,559) (105,560) 219,545 200,583 - - - - - - 48 (113,774) (48,854) 56,965 144 (5,983) (5,839) - 20,013 20,341 (94,812) (41,751) 64,020 236 (7,039) (6,803) - (1,794) 18,219 - (92) (92) - (1,868) 18,473 49 - 49 51,126 (16,274) 57,217 (18,151) 18,127 154 18,522 (106) 34,852 39,066 18,281 18,416 5,746 3,739 (5,055) 1,409 9,485 (3,646) - - - - - 44,337 35,420 18,281 18,416 17.4cps 17.2cps 200,000 203,121 19.5cps 19.2cps 200,000 203,254 4 4 4 5 20 20 28 28 28 28 32 annual report 2012 kAThMANdu statements of changes in equity For the year ended 31 July 2012 Group Share Capital Cash Flow Hedge reserve Foreign Currency translation reserve Share Based payments reserve retained earnings total equity nZ$’000 nZ$’000 nZ$’000 nZ$’000 nZ$’000 nZ$’000 Balance as at 31 July 2010 Total comprehensive income Dividends paid Movement in employee share option reserve 197,049 - - - (4,000) (5,055) - - 2,480 1,409 - - Balance as at 31 July 2011 197,049 (9,055) 3,889 Total comprehensive income Dividends paid Issue of share capital Share Options / Performance Rights lapsed Movement in employee share option reserve - - 249 - - 5,746 3,739 - - - - - - - - Balance as at 31 July 2012 197,298 (3,309) 7,628 246 - - 379 625 - - - - 114 739 43,352 39,066 239,127 35,420 (20,000) (20,000) - 379 62,418 254,926 34,852 44,337 (20,000) (20,000) - 8 - 249 8 114 77,278 279,634 pArent Share Capital Cash Flow Hedge reserve Foreign Currency translation reserve Share Based payments reserve retained earnings total equity nZ$’000 nZ$’000 nZ$’000 nZ$’000 nZ$’000 nZ$’000 Balance as at 31 July 2010 Total comprehensive income Dividends paid Movement in employee share option reserve 422,137 - - - Balance as at 31 July 2010 422,137 Total comprehensive income Dividends paid Issue of share capital Share Options / Performance Rights lapsed Movement in employee share option reserve - - 249 - - Balance as at 31 July 2012 422,386 - - - - - - - - - - - - - - - - - - - - - - 246 (12,359) 410,024 - - 379 625 - - - - 114 739 18,416 18,416 (20,000) (20,000) - 379 (13,943) 408,819 18,281 18,281 (20,000) (20,000) - 8 - 249 8 114 (15,654) 407,471 balance sheets aS at 31 July 2012 ASSetS Current assets Cash and cash equivalents Trade and other receivables Related party receivable Derivative financial instruments Inventories Current tax assets Total current assets non-current assets Property, plant and equipment Intangible assets Investment in subsidiaries Deferred tax Total non-current assets total assets LIABILItIeS Current liabilities Trade and other payables Derivative financial instruments Current tax liabilities Total current liabilities non-current liabilities Derivative financial instruments Interest bearing liabilities Total non-current liabilities total liabilities net assets eQuItY Contributed equity - ordinary shares Reserves Retained earnings total equity kAThMANdu annual report 2012 33 note Group 2012 nZ$’000 2011 nZ$’000 pArent 2012 nZ$’000 2011 nZ$’000 7 8 9 10 11 12 13 14 15 16 10 10 17 18 20 20 1,811 3,503 - - 73,295 - 78,609 41,911 249,092 - 3,218 294,221 372,830 29,304 3,128 6,276 38,708 751 53,737 54,488 93,196 3,574 2,339 - 2 54,001 - 59,916 32,822 243,685 - 3,467 279,974 339,890 21,012 10,505 6,666 38,183 301 46,480 46,781 84,964 26 261 82,885 - - 3,113 86,285 - - 321,234 - 321,234 407,519 48 - - 48 - - - 48 5 192 84,216 - - 3,214 87,627 - - 321,234 - 321,234 408,861 42 - - 42 - - - 42 279,634 254,926 407,471 408,819 197,298 5,058 77,278 279,634 197,049 (4,541) 62,418 254,926 422,386 739 (15,654) 407,471 422,137 625 (13,943) 408,819 34 annual report 2012 kAThMANdu statements of cash flows For the year ended 31 July 2012 Cash flows from operating activities Cash was provided from: Receipts from customers Dividends received Income tax received Interest received Cash was applied to: Payments to suppliers and employees Income tax paid Interest paid Group pArent note 2012 nZ$’000 2011 nZ$’000 2012 nZ$’000 2011 nZ$’000 345,974 - - 131 346,105 291,626 16,002 5,949 313,577 306,618 - - 179 306,797 246,063 14,175 6,785 267,023 - 20,000 257 - 20,257 1,567 - - 1,567 - 20,000 - - 20,000 1,477 2,875 - 4,352 net cash inflow from operating activities 6 32,528 39,774 18,690 15,648 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 12 13 32 32 17,868 3,985 21,853 - - 11,188 676 11,864 net cash (outflow) from investing activities (21,821) (11,864) - - - - - - - - - - - - Cash flows from financing activities Cash was provided from: Proceeds of loan advances Cash was applied to: Dividends paid Repayment of loan advances 206,226 206,226 20,000 199,040 219,040 240,223 240,223 20,000 248,177 268,177 1,331 1,331 20,000 - 20,000 4,351 4,351 20,000 - 20,000 net cash inflow / (outflow) from financing activities (12,814) (27,954) (18,669) (15,649) net increase / (decrease) in cash held Opening cash and cash equivalents Effect of foreign exchange rates Closing cash (2,107) (44) 3,574 344 1,811 4,736 (1,118) 3,574 21 5 - 26 7 (1) 6 - 5 kAThMANdu annual report 2012 35 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 20 September 2012. 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. 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. 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 13). (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 36 annual report 2012 kAThMANdu 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 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. 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. (ii) Group companies 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: 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. kAThMANdu annual report 2012 37 (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. 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. (iii) Interest income Interest income is recognised on a time-portion basis using the effective interest method. (h) LEASES The Group is the lessee (iv) dividend income dividend income is recognised when the right to receive payment is established. (F) CuRRENT ANd dEFERREd INCOME TAX 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 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 38 annual report 2012 kAThMANdu 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 trade receivables are recognised initially at fair value and subsequently measured at amortised cost, less provision for doubtful debts. the collectability of trade receivables is reviewed on an on-going basis. debts, which are known to be uncollectible, are written off. a provision for doubtful receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. 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. (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 category if acquired principally for the purpose of selling in the short-term. derivatives are also categorised as held for trading unless they are designated as hedges. assets in this category are classified as current assets. Financial assets carried at fair value through profit or loss are initially recognised at fair value, and transaction costs are expensed in the income statement. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. loans and receivables are carried at amortised cost using the effective interest method. 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 or a group of financial assets is impaired. (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). (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. 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 on-going 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. kAThMANdu annual report 2012 39 (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 which the effective interest method is used is amortised to profit and loss over the period of maturity. 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. the carrying value less impairment provision of trade receivables and payables are assumed to approximate their (ii) Cash flow hedge fair values. 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. 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 charged to the income statement during the financial period in (iii) derivatives that do not qualify for which they are incurred. 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. 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 Office, Plant and Equipment Furniture and Fittings Computer Equipment Motor Vehicles 10 – 50 % 10 – 48 % 10 – 48 % 20 – 60% 15 – 30% the assets’ residual value and useful lives are reviewed and adjusted if appropriate at each balance sheet date. 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. 40 annual report 2012 kAThMANdu Gains and losses on disposals are determined by comparing proceeds with carrying amount. these are included in the income statement. (Q) INTANGIBLE ASSETS (i) Goodwill 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. (iii) Software costs Software costs have a finite useful life. Software costs are capitalised and written off over the useful economic life using diminishing value method and rates of 10-60%. 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. (R) TRAdE ANd OThER PAYABLES 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. (S) PROVISIONS a provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. 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 up to the reporting date and are measured at the amounts 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. (ii) Long service leave 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 based payments 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 based payments reserve relating to those options is transferred to retained earnings. (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 based payments 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 based payments reserve relating to those rights are transferred to share capital. When any vested performance rights lapse upon employee termination, the amount in the share based payments reserve relating to those rights is transferred to retained earnings. (W) dIVIdENdS kAThMANdu annual report 2012 41 statements in the period in which the dividends are approved by the Company’s shareholders. (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; 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; operating activities include all transactions and other events that are not investing or financing activities. (Y) ChANGES IN ACCOuNTING POLICIES there were no changes in the accounting policies during the period. 3 STANdARdS, INTERPRETATIONS ANd AMENdMENTS TO PuBLIShEd STANdARdS the following new standards and amendments to standards were applied during the period; NZ IAS 24: Related Parties disclosures (effective for annual reporting periods beginning on or after 1 January 2011): the amendment simplifies and clarifies the definition of a related party. FRS 44: New Zealand Additional disclosures and harmonisation Amendments (effective 1 July 2011): FrS 44 sets out new Zealand specific disclosures for entities that apply nZ IFrSs. these disclosures have been relocated from nZ IFrSs to clarify that these disclosures are additional to those required by IFrSs. the harmonisation amendments amends various nZ IFrSs for the purpose of harmonising with the source IFrSs and australian accounting Standards. the significant amendments include: deletion of the requirement for an independent valuer to conduct the valuation of investment property and property, plant and equipment; inclusion of the option to account for investment property using either cost or fair value model; introduction of the option to use the indirect method of reporting cash flows that is not currently in nZ IaS 7. dividend distribution to the Company shareholders is recognised as a liability in the Company’s and Group’s financial In addition, various disclosure requirements have been deleted. nZ IaS 27 is renamed Separate Financial Statements and is now a standard dealing solely with separate financial statements. application of this standard by the group and parent entity will not affect any of the amounts recognised in the financial statements, but may impact the type of information disclosed in relation to the parent’s investments in the separate parent entity financial statements. NZ IFRS 13 Fair Value Measurement (effective 1 January 2013): nZ IFrS 13 explains how to measure fair value and aims to enhance fair value disclosures. the Group has yet to determine which, if any, of its current measurement techniques will have to change as a result of the new guidance. It is therefore not possible to state the impact, if any, of the new rules on any of the amounts recognised in the financial statements. however, application of the new standard will impact the type of information disclosed in the notes to the financial statements. the Group does not intend to adopt the new standard before its operative date, which means that it would be first applied in the annual reporting period ending 31 July 2014. 42 annual report 2012 kAThMANdu adoption of the new rules has not affected any of the amounts recognised in the financial statements, but has simplified some of the Group’s current disclosures. Standards, interpretations and amendments to published standards that are not yet effective NZ IFRS 9: Financial Instruments (effective for annual reporting periods beginning on or after 1 January 2015): this standard replaces the parts of nZ IaS 39 Financial Instruments: recognition and Measurement that relates to the classification and measurement of financial instruments. all financial assets are required to be classified into two measurement categories: at fair value and at amortised cost. the determination is based on the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the financial asset. For financial liabilities, the standard retains most of the nZ IaS 39 requirements. an additional presentational requirement has been added for liabilities designated at fair value through profit and loss. Where the fair value option is taken, the part of a fair value change due to an entity’s own credit risk is recorded in other comprehensive income. NZ IFRS 10 Consolidated Financial Statements (effective 1 January 2013), revised NZ IAS 27 Separate Financial Statements: nZ IFrS 10 replaces all of the guidance on control and consolidation in nZ IaS 27 Consolidated and Separate Financial Statements, and nZ IFrIC 12 Consolidation – Special purpose entities. the core principle that a consolidated entity presents a parent and its subsidiaries as if they are a single economic entity remains unchanged, as do the mechanics of consolidation. however, the standard introduces a single definition of control that applies to all entities. It focuses on the need to have both power and rights or exposure to variable returns before control is present. power is the current ability to direct the activities that significantly influence returns. returns must vary and can be positive, negative or both. there is also new guidance on participating and protective rights and on agent/principal relationships. While the Group does not expect the new standard to have a significant impact on its composition, it has yet to perform a detailed analysis of the new guidance in the context of its various investees that may or may not be controlled under the new rules. 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 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 Remuneration of auditors is detailed in note 22. Amortisation expenditure is included in administration expenses in the income statement. kAThMANdu annual report 2012 43 Group pArent 2012 nZ$’000 2011 nZ$’000 2012 nZ$’000 2011 nZ$’000 - - - - 4,986 485 2,020 421 20 7,932 1,599 1,599 891 39,595 714 61,795 371 (131) 4,274 1,587 109 5,839 3,902 484 1,555 584 28 6,553 862 862 527 31,918 728 52,286 379 (179) 4,443 2,256 283 6,803 (20,000) (20,000) - - - - - - - - - - - 714 - 371 - - - (92) (92) (341) - - - - - - - - - - 728 - 379 - - - (49) (49) 44 annual report 2012 kAThMANdu 5 INCOME TAX EXPENSE Income statement Current income tax charge Deferred income tax charge (refer note 15) Income tax charge / (credit) reported in income statement reconciliation of effective tax charge Profit before income tax Income tax calculated at 28% (2011: 30%) Adjustments to taxation: Adjustments due to different rate in different jurisdictions Non-taxable income Expenses not deductible for tax purposes Effect of change in corporate tax rate Utilisation of tax losses by group companies Tax expense transferred to foreign currency translation reserve Adjustments in respect of prior years Group pArent 2012 nZ$’000 2011 nZ$’000 2012 nZ$’000 2011 nZ$’000 17,053 17,237 (779) 914 16,274 18,151 (154) - (154) (339) 445 106 51,126 14,315 57,217 17,165 18,127 5,075 18,522 5,557 654 - 946 - - 464 (105) 51 - 967 13 - 202 (247) - - (5,600) (6,000) 31 - - - 340 (154) 189 (5) 365 - - 106 Income tax charge / (credit) reported in income statement 16,274 18,151 unrecognised tax losses the group has estimated tax losses to carry forward from Kathmandu (u.K.) limited of £7,290,184 (nZ$14,350,756) (2011: £5,743,723 (nZ$12,016,157)) which can be carried forward to be offset against future profits generated within the uK. ImputAtIon CreDItS Group pArent 2012 nZ$’000 2011 nZ$’000 2012 nZ$’000 2011 nZ$’000 Imputation credits available for use in subsequent reporting periods 3,554 4,479 (1) - the above amounts represent the balance of the imputation account as at the end of July 2012, adjusted for: Imputation credits that will arise from the payment of the amount of the provision for income tax; Imputation debits that will arise from the payment of dividends recognised as a liability at the reporting date; and Imputation credits that will arise from the receipt of dividends recognised as receivables at the reporting date. the balance of australian franking credits able to be used by the Group as at 31 July 2012 is a$3,369,445 (2011: a$836,783). kAThMANdu annual report 2012 45 6 RECONCILIATION OF NET PROFIT AFTER TAXATION WITh CASh INFLOW FROM OPERATING ACTIVITIES Group pArent 2012 nZ$’000 2011 nZ$’000 2012 nZ$’000 2011 nZ$’000 Profit after taxation 34,852 39,066 18,281 18,416 Movement in working capital: (Increase) / decrease in trade and other receivables (Increase) / decrease in inventories Increase / (decrease) in trade and other payables Increase / (decrease) in tax liability Add non cash items: Depreciation Amortisation of intangibles Revaluation of derivative financial instruments (Increase) / decrease in deferred taxation Employee share based remuneration Loss on sale of property, plant and equipment Items classified as financing activities: Intercompany financing (1,130) 1,564 (18,473) (16,585) 7,887 (558) 4,121 2,369 (12,274) (8,531) 7,932 1,599 (1,131) 288 371 891 6,553 862 913 5 379 527 9,950 9,239 (69) - 6 101 38 - - - - 371 - 371 (11) - (26) (3,213) (3,250) - - - 445 379 - 824 - - - (342) Cash inflow from operating activities 32,528 39,774 18,690 15,648 46 annual report 2012 kAThMANdu 7 CASh ANd CASh EQuIVALENTS Group pArent 2012 nZ$’000 2011 nZ$’000 2012 nZ$’000 2011 nZ$’000 Cash on hand Cash at bank Short term deposits 167 1,455 189 1,811 The carrying amount of the Group’s cash and cash equivalents are denominated in the following currencies: NZD AUD GBP USD EUR 487 211 927 177 9 155 3,419 - 3,574 389 2,499 550 135 1 8 TRAdE ANd OThER RECEIVABLES 1,811 3,574 - 26 - 26 26 - - - - 26 - 5 - 5 5 - - - - 5 Group pArent 2012 nZ$’000 2011 nZ$’000 2012 nZ$’000 2011 nZ$’000 Trade receivables Sundry debtors and prepayments 206 3,297 3,503 92 2,247 2,339 Bad and doubtful trade receivables The Group has recognised a loss of $0 (2011: $0) in respect of bad and doubtful trade receivables during the year ended 31 July 2012. The carrying amount of the Group’s trade and other receivables are denominated in the following currencies: NZD AUD GBP 1,565 1,241 697 3,503 1,129 683 527 2,339 - 261 261 261 - - 261 - 192 192 192 - - 192 kAThMANdu annual report 2012 47 9 RELATEd PARTY dISCLOSuRES Parent and ultimate Controlling Party Kathmandu holdings limited is the immediate parent, ultimate parent and controlling party. during the year, legal fees of $163,683 (2011: $75,730) 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. as at 31 July 2012, there were outstanding legal fees of $20,149 (2011: $0). during the year, operating lease costs of $223,054 (2011: $199,000) were paid to Chalmers properties limited, a subsidiary of port otago limited. John harvey is a director of both of these companies. 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) $82,884,844 (2011: $84,215,544). loans to the parent from subsidiaries $0 (2011: $0). Material transactions between the parent and its subsidiaries were: all subsidiaries within the Group (note 14) are related parties. no amounts owed to related parties have been written off or forgiven during the year. Management fees charged to subsidiaries $0 (2011: $341,000). (a) key Management Personnel Salaries Other short-term employee benefits Employee performance rights Employee share option plans (b) Non-Executive directors Total directors fees directors fees for the parent company were paid to the following: James Strong Sandra Mcphee John harvey John holland Group pArent 2012 nZ$’000 3,193 81 204 67 3,545 2011 nZ$’000 2012 nZ$’000 2011 nZ$’000 2,515 1,355 246 177 4,293 - - 204 67 271 - - 246 177 423 Group pArent 2012 nZ$’000 713 2011 nZ$’000 728 2012 nZ$’000 713 2011 nZ$’000 728 48 annual report 2012 kAThMANdu (c) Remuneration detail (as referred to in the Remuneration Report) 2012 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 proportion of remuneration as equity related performance rights $ $ $ $ $ $ $ % non-executive Directors James Strong John Harvey John Holland Sandra McPhee 277,534 145,182 145,182 145,182 total non-executive Directors executive Directors Peter Halkett Mark Todd 713,080 850,981 499,753 total executive Directors 1,350,734 other Key management personnel Michelle Adams Tamalin Morton Paul Stern Caleb Nicolson Grant Taylor Matthew Watts Brandon Beveridge 260,778 330,283 330,283 242,025 212,392 213,001 164,162 total other Key management personnel total 1,752,924 3,816,738 - - - - - - - - - - - - - - - - - - - - - - 59,483 - - - - - - 3,374 13,465 62,857 13,465 1,346 7,313 - - 3,374 3,374 19,651 19,651 6,897 - 9,791 22,201 696 - 18,581 75,713 81,438 89,178 - - - - - - - - - - - - - - - - - proportion of remuneration as performance related % 0.0% 0.0% 0.0% 0.0% total $ 277,534 145,182 145,182 145,182 0.0% 0.0% 0.0% 0.0% 0.0% 713,080 0.0% - - - - - - - - - - 38,877 11,144 110,363 48,929 14.1% 1,059,704 10.4% 576,665 0.0% 0.0% 50,021 159,292 12.8% 1,636,369 0.0% 5,586 7,710 - 3,240 - - - 7,102 10,146 10,146 6,895 6,205 - 4,127 4.5% 4.9% 2.8% 3.9% 2.8% 0.0% 2.4% 282,125 367,790 360,080 262,431 221,971 244,993 168,985 16,536 66,557 44,621 203,913 3.2% 6.4% 1,908,375 4,257,824 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 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 $ $ $ $ $ $ $ % kAThMANdu annual report 2012 49 total $ 283,235 148,174 148,174 148,174 0.0% 0.0% 0.0% 0.0% 0.0% 727,757 proportion of remuneration as performance related % 0.0% 0.0% 0.0% 0.0% 0.0% 32.4% 28.0% - - - - - - - - - - 91,884 26,337 48,815 62,499 12.3% 1,146,417 14.2% 623,948 118,221 111,314 13.0% 1,770,365 30.9% 19,511 13,202 18,223 - 7,657 - 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 58,593 134,649 7.5% 2,567,674 176,814 245,963 8.3% 5,065,796 29.2% 30.2% 31.2% 30.7% 30.4% 32.7% 30.6% 26.3% 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 627,627 350,149 372,000 175,000 6,091 2,963 total executive Directors - - - - - - 7,000 977,776 547,000 9,054 7,000 other Key management personnel Matt Spencer Michelle Adams Tamalin Morton Paul Stern Caleb Nicolson Grant Taylor 346,083 206,000 277,995 304,150 201,339 173,077 175,393 10,590 19,166 105,000 1,182 4,120 155,105 155,105 - - 19,160 19,839 102,000 2,963 4,027 92,000 - 138 total other Key management personnel 1,508,644 784,603 14,735 66,450 total 3,214,177 1,331,603 23,789 73,450 - - - - - - - - - - - - - - - - 50 annual report 2012 kAThMANdu 10 dERIVATIVE FINANCIAL INSTRuMENTS Asset Interest rate swaps - cash flow hedge Less non-current portion: 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 Current portion Group pArent 2012 nZ$’000 2011 nZ$’000 2012 nZ$’000 2011 nZ$’000 - - - - 990 2,889 3,879 751 3,128 2 2 - 2 340 10,466 10,806 301 10,505 - - - - - - - - - - - - - - - - - - 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 the impact of interest rate volatility 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 $45,940,337 (2011: $40,284,450). the fixed interest rates range between 3.99% and 5.71% (2011: 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$76,750,000, nZ$99,138,128 (2011: uS$63,050,000, nZ$84,184,649). the effectiveness of the contracts is measured by comparing the changes in the present value of the cash flow arising from the hedged forecast purchase at the forward rate, with the changes in fair value of the forward contract. 11 INVENTORIES Trading stock Goods in transit Group pArent 2012 nZ$’000 60,391 12,904 73,295 2011 nZ$’000 47,146 6,855 54,001 2012 nZ$’000 2011 nZ$’000 - - - - - - Inventory has been reviewed for stock selling below cost and no provision (2011: $0) has been made. kAThMANdu annual report 2012 51 12 PROPERTY, PLANT ANd EQuIPMENT Group 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 Year ended 31 July 2012 Opening net book value Additions Disposals Depreciation charge Exchange differences Closing net book value As at 31 July 2012 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 28,373 (10,607) 17,766 17,766 9,134 (137) (3,902) 205 23,066 37,178 (14,112) 23,066 23,066 12,407 (535) (4,986) 394 30,346 49,362 (19,016) 30,346 3,565 (2,007) 1,558 1,558 304 - (484) 27 1,405 3,907 (2,502) 1,405 1,405 517 (7) (485) 19 1,449 4,441 (2,992) 1,449 10,301 (3,877) 6,424 6,424 1,025 (28) (1,555) 96 5,962 11,379 (5,417) 5,962 5,962 4,077 (779) (2,020) 85 7,325 14,070 (6,745) 7,325 6,990 (4,837) 2,153 2,153 725 (7) (584) 12 2,299 7,621 (5,322) 2,299 2,299 859 (19) (421) 14 2,732 8,379 (5,647) 2,732 314 (197) 117 117 - - (28) 1 90 317 (227) 90 90 8 (20) (20) 1 59 252 (193) 59 total $’000 49,543 (21,525) 28,018 28,018 11,188 (172) (6,553) 341 32,822 60,402 (27,580) 32,822 32,822 17,868 (1,360) (7,932) 513 41,911 76,504 (34,593) 41,911 52 annual report 2012 kAThMANdu 13 INTANGIBLE ASSETS Group As at 31 July 2010 Cost or valuation Accumulated amortisation Closing net book value Year ended 31 July 2011 Opening net book value Additions Amortisation Exchange differences Closing net book value As at 31 July 2011 Cost or valuation Accumulated amortisation Closing net book value Year ended 31 July 2012 Opening net book value Additions Disposals Amortisation Exchange differences Closing net book value As at 31 July 2012 Cost or valuation Accumulated amortisation Closing net book value Goodwill nZ$’000 Brand nZ$’000 Software nZ$’000 total nZ$’000 76,677 (1,271) 75,406 165,285 - 165,285 3,065 (1,931) 1,134 245,027 (3,202) 241,825 75,406 165,285 1,134 241,825 - - - 75,406 76,677 (1,271) 75,406 - - 2,023 167,308 167,308 - 167,308 75,406 167,308 - - - - 75,406 76,677 (1,271) 75,406 - - - 3,018 170,326 170,326 - 170,326 676 (862) 23 971 676 (862) 2,046 243,685 3,764 (2,793) 247,749 (4,064) 971 243,685 971 3,985 (9) (1,599) 12 3,360 7,801 (4,441) 3,360 243,685 3,985 (9) (1,599) 3,030 249,092 254,804 (5,712) 249,092 Impairment tests for goodwill and brand the aggregate carrying amounts of goodwill and brand allocated to each unit are as follows: Group GooDWILL BrAnD New Zealand Australia 2012 nZ$’000 28,654 46,752 75,406 2011 nZ$’000 28,654 46,752 75,406 2012 nZ$’000 51,000 119,326 170,326 2011 nZ$’000 51,000 116,308 167,308 kAThMANdu annual report 2012 53 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. 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: the calculations confirmed that there was no impairment of goodwill and brand during the year (2011: 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 support the assumption that the brand has an indefinite life. 2012 2011 Terminal growth rate 2.5% 2.5% New Zealand CGU pre-tax discount rate Australia CGU pre-tax discount rate 15.2% 14.9% 15.7% 15.4% Consolidated pre-tax discount rate 15.1% 15.6% INVESTMENT IN SuBSIdIARIES 14 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 2012 100% 100% 100% 100% 2011 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: 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 Country of registration principal Activity New Zealand New Zealand Australia United Kingdom 2012 nZ$ Holding company Outdoor retailer Outdoor retailer Outdoor retailer 2011 nZ$ 321,233,808 321,233,808 - - - - - - 321,233,808 321,233,808 54 annual report 2012 kAThMANdu 15 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. tax depreciation nZ$’000 employee obligations nZ$’000 9 59 - 68 19 - 87 695 235 1 931 (94) - 837 Group Losses nZ$’000 366 (365) - 1 - - 1 other timing differences nZ$’000 reserves total nZ$’000 nZ$’000 1,657 (843) 39 853 854 44 1,751 745 - 869 1,614 - (1,072) 542 3,472 (914) 909 3,467 779 (1,028) 3,218 As at 31 July 2010 Charge to the income statement Charge to other comprehensive income As at 31 July 2011 Charge to the income statement Charge to other comprehensive income As at 31 July 2012 pArent tax depreciation nZ$’000 employee obligations nZ$’000 - - - - - 69 (69) - - - Losses nZ$’000 365 (365) - - - other timing differences nZ$’000 reserves total nZ$’000 nZ$’000 11 (11) - - - - - - - - 445 (445) - - - As at 31 July 2010 Charge to the income statement As at 31 July 2011 Charge to the income statement As at 31 July 2012 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 2012 nZ$’000 2011 nZ$’000 2012 nZ$’000 2011 nZ$’000 1,461 1,779 (1) (21) 3,218 1,445 3,057 - (1,035) 3,467 - - - - - - - - - - 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% 16 TRAdE ANd OThER PAYABLES kAThMANdu annual report 2012 55 Group pArent 2012 nZ$’000 2011 nZ$’000 2012 nZ$’000 2011 nZ$’000 3,467 779 (1,028) 3,218 3,472 (914) 909 3,467 - - - - 445 (445) - - Group pArent 2012 nZ$’000 2011 nZ$’000 2012 nZ$’000 2011 nZ$’000 - - (13) (13) - - 5 5 Group pArent 2012 nZ$’000 2011 nZ$’000 2012 nZ$’000 2011 nZ$’000 Trade payables Employee entitlements Sundry creditors and accruals 10,084 3,868 15,352 29,304 6,685 4,979 9,348 21,012 the carrying amount of the Group’s trade and other payables are denominated in the following currencies: NZD AUD GBP USD 5,943 20,064 1,768 1,529 29,304 5,624 8,722 810 5,856 21,012 10 - 38 48 53 (5) - - 48 - - 42 42 24 18 - - 42 56 annual report 2012 kAThMANdu 17 INTEREST BEARING LIABILITIES Non-current portion Total term loans the bank loan is part of a multi option facility agreement with Commonwealth Bank of australia and aSB Bank limited and a facility agreement with Bank of new Zealand and national Bank of australia, both dated 19 december 2011. the loans are repayable in full on final maturity date of the facilities being 21 december 2014. Interest is payable based on the BKBM rate ($nZ borrowings), the BBSy rate ($a borrowings), or the applicable short term rate for interest periods less than 30 days, plus a margin of up to 1.15%. the bank loans are secured against the assets of the company and its subsidiaries. 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 2012 nZ$’000 53,737 53,737 2011 nZ$’000 46,480 46,480 2012 nZ$’000 2011 nZ$’000 - - - - the covenants entered into by the Group require specified calculations of Group earnings before interest, tax, depreciation and amortisation (eBItda) plus lease rental costs to exceed total fixed charges (net interest expense and lease rental costs) at the end of each half during the financial year. Similarly eBItda must be no less than a specified proportion of total net debt at the end of each half. the calculations of these covenants are specified in the bank facility agreements of 19 december 2011 and have been complied with at 31 July 2012. the current interest rates, prior to hedging, on the term loans ranged between 3.59% - 4.47% (2011: 3.65% - 5.99%). Group pArent 2012 nZ$’000 2011 nZ$’000 2012 nZ$’000 2011 nZ$’000 - - 53,737 - - 46,480 - - 53,737 46,480 - - - - - - - - - - 18 CONTRIBuTEd EQuITY - ORdINARY ShARES Ordinary shares fully paid ($) Balance at beginning of year Issue of shares under Executive and Senior Management Long Term Incentive Plan kAThMANdu annual report 2012 57 Group pArent 2012 nZ$’000 197,298 2011 nZ$’000 197,049 2012 nZ$’000 422,386 2011 nZ$’000 422,137 197,049 197,049 422,137 422,137 249 - 249 - Balance at end of year 197,298 197,049 422,386 422,137 numBer oF AutHorISeD SHAreS Group 2012 ’000 2011 ’000 pArent 2012 ’000 2011 ’000 Ordinary shares on hand at beginning of the year 200,000 200,000 200,000 200,000 Shares issued under Executive and Senior Management Long Term Incentive Plan 166 - 166 - Ordinary shares on hand at end of the year 200,166 200,000 200,166 200,000 Ordinary shares as at 31 July 2012 there were 200,165,940 ordinary issued shares in Kathmandu holdings limited and these are classified as equity. 165,940 shares were issued under the “executive and Senior Management long term Incentive plan 24 november 2010” during the year ending 31 July 2012 (2011: nil). all ordinary shares carry equal rights in respect of voting and the receipt of dividends. ordinary shares do not have a par value. 19 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 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 (2011: nil) to executive directors and senior executives. the fair value of options issued during the financial year is $0 (2011: $0). 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 was 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 $21,911 (2011: $168,587) which represents this amortisation. 58 annual report 2012 kAThMANdu 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 2012 2011 Average exercise price $ per share 2.1333 - 2.1333 2.1333 options ‘000 1,074 - (118) 956 Average exercise price $ per share 2.1333 - 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 2012 ‘000 319 319 318 956 options ‘000 1,120 - (46) 1,074 2011 ‘000 358 358 358 1,074 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 executive directors as compared with the Key Management personnel and Senior Management. Executive directors and key Management Personnel performance rights granted to executive directors and six Key Management personnel are summarised below: Grant Date 30 Nov 2011* 29 Nov 2010 Balance at start of year number Granted during the year number Vested during the year number Lapsed during the year number Balance at the end of year number - 221,920 374,292 374,292 - 221,920 - - - - (29,775) (29,775) 221,920 344,517 566,437 * Performance Rights in 2011 only granted to Executive Directors. the performance rights will vest in three equal tranches. 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 in new Zealand and australia listed on either the aSX or nZX, and with market capitalisation indicatively in a range between 300% and 45% of Kathmandu holdings limited market capitalisation. 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 2012 59 the tSr performance is calculated for the following performance periods: tranche Tranche 1 Tranche 2 Tranche 3 2012 24 months to 1 December 2013 24 months to 1 December 2014 24 months to 1 December 2015 2011 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 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 fair value of tSr rights, along with the assumptions used to simulate the future share prices using a random-walk process are shown below: 2012 2011 Fair value of TSR rights $165,331 $173,422 Current price at issue date Risk free interest rate Expected life (years) Expected share volatility $2.48 3.54% 2-4 36% $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 $54,101 (2011: $41,948) 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 2012 performance period FY13 EPS relative to FY11 EPS FY14 EPS relative to FY11 EPS FY15 EPS relative to FY11 EPS 2011 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 prior to 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 $78,923 (2011: $61,194) which represents this amortisation. 60 annual report 2012 kAThMANdu key Management Personnel performance rights granted to Key Management personnel under the shareholder approved employee long term Incentive plan are summarised below: Grant Date 30 Nov 2011 29 Nov 2010 Balance at start of year number Granted during the year number Vested during the year number Lapsed during the year number Balance at the end of year number - - - 291,918 - 291,918 - - - (291,918) - (291,918) - - - performance rights granted to each employee vest upon the Company achieving performance hurdles and the employee remaining in employment with the Company until the vesting date. the performance period and vesting dates are summarised below: Grant Date Performance period (year ending) Vesting Date 2012 30 Nov 2011 31 Jul 2012 31 Jul 2014 2011 N/A 31 Jul 2011 N/A 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 vesting date. the fair value of each right has been calculated to be nZ$2.23 per right (2011: n/a). the performance hurdles set for the year ending 31 July 2012 were not met and accordingly no expense has been recorded in the income statement. Senior Management performance rights granted to Key Management personnel under the shareholder approved employee long term Incentive plan are summarised below: Grant Date 30 Nov 2011 29 Nov 2010 Balance at start of year number Granted during the year number Vested during the year number Lapsed during the year number Balance at the end of year number - 192,670 177,977 177,977 - 192,670 - (165,940) (165,940) (192,670) (12,037) (204,707) - - - performance rights granted to each employee vest upon the Company achieving specified performance hurdles and the employee remaining in employment with the Company until the vesting date. the performance hurdles and vesting dates are summarised below: Grant Date Performance period (year ending) Vesting Date 2012 2011 30 Nov 2011 29 Nov 2010 31 Jul 2012 31 Jul 2013 31 Jul 2011 31 Jul 2012 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 vesting date. the fair value of each right has been calculated to be nZ$2.35 per right (2011: $1.50). the performance hurdles set for rights issued during 2011 were not met for the year ending 31 July 2012 and accordingly no expense has been recorded in the income statement. Expenses arising from share based payments: Share Option Plan 2009 Executive Directors and Key Management Personnel Senior Management 20 RESERVES ANd RETAINEd EARNINGS (A) reSerVeS (i) Cash flow hedging reserve Opening balance Revaluation - gross Deferred tax Transfer to net profit - gross Closing balance (ii) Foreign currency translation reserve Opening balance Currency translation differences Closing balance (iii) Share based payments reserve Opening balance Current year amortisation Transfer to Share Capital on vesting of shares to Employees Share Options / Performance Rights lapsed Closing balance Total Reserves Nature and purpose of reserves (i) Cash flow hedging reserve the hedging reserve is used to record gains or losses on a hedging instrument in a cash flow hedge that are recognised directly in equity, as described in policy 2 (n) (ii). the amounts are recognised in profit and loss when the associated hedged transaction affects profit and loss. (ii) Foreign currency translation reserve the foreign currency translation reserve is used to record gains or losses on investments in foreign operations. the amounts kAThMANdu annual report 2012 61 Group pArent 2012 nZ$’000 2011 nZ$’000 2012 nZ$’000 2011 nZ$’000 22 200 149 371 169 103 107 379 22 200 149 371 169 103 107 379 Group pArent 2012 nZ$’000 2011 nZ$’000 2012 nZ$’000 2011 nZ$’000 (9,055) 6,967 (1,072) (149) (3,309) 3,889 3,739 7,628 625 371 (249) (8) 739 (4,000) (6,161) 869 237 (9,055) 2,480 1,409 3,889 246 379 - - 625 - - - - - - - - 625 371 (249) (8) 739 5,058 (4,541) 739 - - - - - - - - 246 379 - - 625 625 are accumulated in equity and recognised in profit and loss when the foreign operation is partially disposed of or sold. (iii) Share based payments reserved the share based payments reserve is used to recognise the fair value of share options and performance rights granted but not exercised or lapsed. amounts are transferred to share capital when vested options are exercised by the employee or performance rights are granted. 62 annual report 2012 kAThMANdu (B) retAIneD eArnInGS Group pArent Opening retained earnings Profit for the year Share Options/Performance Rights lapsed Less dividends paid Balance at 31 July 21 dIVIdENdS Prior year final dividend paid Current year interim dividend paid Dividends paid ($0.10 per share (2011; $0.10)) 2012 nZ$’000 62,418 34,852 8 (20,000) 77,278 2011 nZ$’000 43,352 39,066 - (20,000) 62,418 2012 nZ$’000 (13,943) 18,281 8 (20,000) (15,654) Group pArent 2012 nZ$’000 14,000 6,000 20,000 2011 nZ$’000 14,000 6,000 20,000 2012 nZ$’000 14,000 6,000 20,000 2011 nZ$’000 (12,359) 18,416 - (20,000) (13,943) 2011 nZ$’000 14,000 6,000 20,000 22 REMuNERATION OF AudITORS during the year the following fees were paid or payable for services provided by the auditor of the parent entity, its related practices and other network audit firms: Audit services - pricewaterhouseCoopers Statutory audit Half year review Other assurance services Total remuneration for audit services 23 CONTINGENT LIABILITIES Liabilities outstanding under letters of credit Rent guarantees Financial guarantees Group pArent 2012 nZ$’000 2011 nZ$’000 2012 nZ$’000 2011 nZ$’000 122 28 5 155 106 25 7 138 59 28 - 87 57 25 - 82 Group pArent 2012 nZ$’000 1,542 2011 nZ$’000 2,497 9,848 1,713 8,530 1,188 2012 nZ$’000 2011 nZ$’000 - - - - - - Financial guarantees cover internal overdrafts and credit card limits between banks across the Group. 24 CONTINGENT ASSETS there are no contingent assets in 2012 (2011: nil). 25 COMMITMENTS (a) Capital commitments Capital commitments contracted for at balance date are: Property, plant and equipment Intangible assets kAThMANdu annual report 2012 63 Group pArent 2012 nZ$’000 2011 nZ$’000 2012 nZ$’000 2011 nZ$’000 1,680 1,183 2,863 131 159 290 - - - - - - (b) Operating lease commitments Group company as lessee: rent expenses reported in these financial statements relate to non-cancellable operating leases. the future commitments on these leases are as follows: Due within 1 year Due within 1-2 years Due within 2-5 years Due after 5 years Group pArent 2012 nZ$’000 2011 nZ$’000 2012 nZ$’000 2011 nZ$’000 39,193 34,446 73,580 20,048 31,708 28,885 62,889 23,785 167,267 147,267 - - - - - - - - - - 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. 64 annual report 2012 kAThMANdu 26 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 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 10. Interest on borrowings is denominated in either new Zealand dollars or australian dollars, and is paid for out of surplus operating cashflows generated in new Zealand or australia. refer to note 10 which shows the forward foreign exchange contracts 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 10 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 17 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 2012 nZ$’000 2011 nZ$’000 2012 nZ$’000 2011 nZ$’000 53,737 (45,940) 7,797 46,480 (40,284) 6,196 - - - - - - Interest rates on loans currently range from 3.59% – 4.47% (2011: 3.65% – 5.99%). the Group 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 $986,157 (2011: $338,244). kAThMANdu annual report 2012 65 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 -10% / +10% (2011: -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 -10% / +10% (2011: -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% (2011: 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 2012 Derivative financial instruments (asset) / liability Financial assets Cash Trade receivables and sundry debtors 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 3,879 (459) 209 459 (216) - (9,246) - 7,565 1,811 1,422 29,304 53,737 (13) - (13) - 537 537 - - - - - - 13 - 13 - (537) (537) - - - - - - 106 (79) 27 (1,869) - (1,869) - - - - (2,179) (2,179) (87) 65 (22) 1,529 - 1,529 - - - - 1,783 1,783 total increase / (decrease) 65 209 (65) (216) (1,842) (11,425) 1,507 9,348 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 $’000 10,804 (403) 323 403 (331) - (12,930) - 3,489 3,574 (26) 21,012 46,480 - 465 465 - - - - 26 - (465) (465) - - - - 405 (1,955) - (1,955) - - (2,539) (2,539) (109) 528 - 528 - - 685 685 total increase / (decrease) 36 323 (36) (331) (1,550) (15,469) 419 4,174 the parent is not sensitive to either interest rate or foreign exchange risk. 66 annual report 2012 kAThMANdu (b) Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. this would arise principally from the Group’s receivables from customers. the nature of the customer base is such that there is no individual customer concentration of credit risk. other financial instruments which potentially subject the Group to credit risks principally consist of bank balances, loans, advances and refund of taxes. Trade and other receivables the nature of the customer base is such that there is no individual customer concentration of credit risk. the Group does not carry out credit evaluations for all new customers requiring credit. Credit is generally only given to government or local council backed institutions. Exposure to credit risk the below balances are recorded at their carrying amount after any provision for loss on these financial instruments. the maximum exposure to credit risk at reporting date was: CArrYInG Amount Group pArent Cash and cash equivalents Trade receivables Sundry debtors 2012 nZ$’000 2011 nZ$’000 2012 nZ$’000 2011 nZ$’000 1,811 206 1,216 3,233 3,574 92 407 4,073 26 - - 26 5 - - 5 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 $142,671,855 (2011: $126,311,631) and operates well within this facility. this includes short term bank overdraft requirements, and at balance date no bank accounts were in overdraft. the table below analyses the Group’s financial liabilities and net-settled derivative financial liabilities into relevant maturity groupings based on the remaining period at the balance date to the contractual maturity date. the amounts disclosed in the table are the contractual undiscounted cash flows. Group 2012 Trade and other payables Guarantees Borrowings Group 2011 Trade and other payables Guarantees Borrowings Less than 1 year nZ$’000 Between 1 and 2 years nZ$’000 Between 2 and 5 years nZ$’000 over 5 years nZ$’000 29,304 13,103 3,128 45,535 21,012 12,215 2,163 35,390 - - 3,128 3,128 - - 47,274 47,274 - - 54,932 54,932 - - - - - - - - - - - - the Group enters into forward exchange contracts to manage the risks associated with the purchase of foreign currency denominated products. the table below analyses the Group’s derivative financial instruments that will be settled on a gross basis into relevant At 31 July 2012 Forward foreign exchange contracts - - Inflow Outflow Net Inflow / (Outflow) Net settled derivatives – interest rate swaps Net Inflow / (Outflow) At 31 July 2011 Forward foreign exchange contracts - - Inflow Outflow Net Inflow / (Outflow) Net settled derivatives – interest rate swaps Net Inflow / (Outflow) kAThMANdu annual report 2012 67 maturity groupings based on the remaining period at the balance date to the contractual maturity date. the amounts disclosed in the table are the contractual undiscounted cash flows. they are expected to occur and affect the profit or loss at various dates between balance date and the following five years. Less than 1 year nZ$’000 Between 1 and 2 years nZ$’000 Between 2 and 5 years nZ$’000 96,243 (99,138) (2,895) - - - - - - (606) (300) (83) 73,719 (84,185) (10,466) - - - (254) (84) - - - - 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 23. all guarantees are repayable on demand. 68 annual report 2012 kAThMANdu 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 2012 Cash and cash equivalents Trade and other receivables Total financial assets Trade and other payables Interest bearing liabilities Derivative financial instrument liabilities Total financial liabilities 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 parent At 31 July 2012 Cash and cash equivalents Related party receivable Total financial assets Trade and other payables Total financial liabilities At 31 July 2011 Cash and cash equivalents Related party receivable Total financial assets Trade and other payables Total financial liabilities 1,811 1,422 3,233 - - - - 3,574 499 - 4,073 - - - - 26 82,885 82,911 - - 5 84,216 84,221 - - - - - - - 3,879 3,879 - - 2 2 - - 10,806 10,806 - - - - - - - - - - - - - 26,521 53,737 - 80,258 - - - - 18,342 46,480 - 64,822 - - - 48 48 - - - 42 42 1,811 1,422 3,233 26,521 53,737 3,879 84,137 3,574 499 2 4,075 18,342 46,480 10,806 75,628 26 82,885 82,911 48 48 5 84,216 84,221 42 42 kAThMANdu annual report 2012 69 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. 27 SEGMENTAL INFORMATION the Group operates in three geographical areas: new Zealand, australia and the united Kingdom. 31 July 2012 Australia nZ$’000 new Zealand nZ$’000 united Kingdom nZ$’000 elimination total nZ$’000 nZ$’000 Segment profit / (loss) before income tax 29,240 26,977 (3,435) (1,656) 51,126 Income tax expense Profit / (loss) after tax (8,746) (7,528) - - (16,274) 34,852 Segment profit / (loss) before income tax includes the following specific income and (expenses): Sales to external customers Sales to Group entities Cost of sales Interest income Interest expense Other finance costs Intercompany net finance income/(expense) Intercompany recharges income/(expense) Depreciation and software amortisation Exchange gain/(loss) on foreign currency borrowing 213,974 896 (70,839) 48 (2,420) (882) (3,867) (8,135) (5,882) 1,583 126,127 1,357 (53,489) 83 (1,850) (705) 3,867 8,135 (3,321) (123) 7,003 297 (3,231) - (4) - - - (328) 87 - 347,104 (2,550) - - - - - - - - (1,656) (127,559) 131 (4,274) (1,587) - - (9,531) (109) Additions of non-current assets 13,817 7,831 205 - 21,853 Total current assets Total non-current assets Total assets Total current liabilities Total non-current liabilities Total liabilities 42,676 150,085 192,761 (97,826) (27,739) (125,565) 407,330 338,718 746,048 (9,928) (26,749) (36,677) 3,954 246 4,200 (375,351) (194,828) (570,179) (7,510) 76,556 - - (7,510) 76,556 78,609 294,221 372,830 (38,708) (54,488) (93,196) 70 annual report 2012 kAThMANdu 31 July 2011 Australia $’000 new Zealand $’000 united Kingdom $’000 elimination total $’000 $’000 Segment profit / (loss) before income tax 33,149 27,311 (2,568) (675) 57,217 (9,723) (8,428) - - (18,151) Income tax expense Profit / (loss) after tax Segment profit / (loss) before income tax includes the following specific income and (expenses): Sales to external customers Sales to Group entities Cost of sales Interest income Interest expense Other finance costs Intercompany net finance income/(expense) Intercompany recharges income/(expense) Exchange gain/(loss) on foreign currency borrowing Depreciation and software amortisation 187,565 216 (58,578) 141 (2,530) (1,158) (3,556) (6,872) 741 (4,628) 110,335 1,082 (43,469) 38 (1,913) (1,098) 3,556 6,872 56 (2,371) 8,243 62 (3,513) - - - - - (340) (416) Additions of non-current assets 7,551 4,244 69 Total current assets Total non-current assets Total assets Total current liabilities Total non-current liabilities Total liabilities 32,381 138,507 170,888 (88,755) (20,057) (108,812) 388,794 335,600 724,394 (11,270) (26,724) (37,994) 3,103 695 3,798 (364,362) (194,828) (559,190) (3,721) 65,563 - - (3,721) 65,563 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. deferred tax assets have been included within non-current assets as they form part of the amounts provided to the Chief operating decision Maker, and the comparative information has been updated to reflect this. 39,066 - 306,143 (1,360) - - - - - - - (740) - - (105,560) 179 (4,443) (2,256) - - (283) (7,415) 11,864 59,916 279,974 339,890 (38,183) (46,781) (84,964) kAThMANdu annual report 2012 71 28 EARNINGS PER ShARE Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year. diluted earnings per share is calculated by adjusting the weighted average number of shares outstanding to assume conversion of all dilutive potential ordinary shares. the Group’s dilutive potential ordinary shares are in the form of share options / performance rights. 2012 ’000 2011 ’000 Weighted average number of shares in issue 200,000 200,000 Adjustment for: - Share options / performance rights Total potential diluted ordinary shares 3,121 203,121 3,254 203,254 29 EARThQuAkE dISCLOSuRES the Christchurch earthquake that occurred on 22 February 2011 has not had a significant impact on trading. Kathmandu has business interruption insurance that provides cover for this event. as at the date of this report one store (Cashel Street) remains closed and will be for the foreseeable future. a business interruption claim following the 22 February 2011 event has been lodged and remains 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. 30 EVENTS OCCuRRING AFTER ThE BALANCE dATE there are no events occurring after balance date that materially affect the information within the financial statements. 72 annual report 2012 kAThMANdu Independent Auditors’ Report to the shareholders of Kathmandu Holdings Limited Report on the Financial Statements We have audited the financial statements of Kathmandu Holdings Limited on pages 31 to 71, which comprise the balance sheets as at 31 July 2012, the statements of comprehensive income, statements of changes in equity and statements of cash flows for the year then ended, and the notes to the financial statements that include a summary of significant accounting policies and other explanatory information for both the Company and the Group. The Group comprises the Company and the entities it controlled at 31 July 2012 or from time to time during the financial year. Directors’ Responsibility for the Financial Statements The Directors are responsible for the preparation of these financial statements in accordance with generally accepted accounting practice in New Zealand and that give a true and fair view of the matters to which they relate and for such internal controls as the Directors determine are necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing (New Zealand) and International Standards on Auditing. These standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider the internal controls relevant to the Company and the Group’s preparation of financial statements that give a true and fair view of the matters to which they relate, in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company and the Group’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. We have no relationship with, or interests in, Kathmandu Holdings Limited or any of its subsidiaries other than in our capacities as auditors and providing other assurance services. These services have not impaired our independence as auditors of the Company and the Group. kAThMANdu annual report 2012 73 Independent Auditors’ Report Kathmandu Holdings Limited Opinion In our opinion, the financial statements on pages 31 to 71: (i) (ii) (iii) comply with generally accepted accounting practice in New Zealand; and comply with International Financial Reporting Standards; and give a true and fair view of the financial position of the Company and the Group as at 31 July 2012, and their financial performance and cash flows for the year then ended. Report on Other Legal and Regulatory Requirements We also report in accordance with Sections 16(1)(d) and 16(1)(e) of the Financial Reporting Act 1993. In relation to our audit of the financial statements for the year ended 31 July 2012: (i) (ii) we have obtained all the information and explanations that we have required; and in our opinion, proper accounting records have been kept by the Company as far as appears from an examination of those records. Restriction on Distribution or Use This report is made solely to the Company’s shareholders, as a body, in accordance with Section 205(1) of the Companies Act 1993. Our audit work has been undertaken so that we might state to the Company’s shareholders those matters which we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s shareholders, as a body, for our audit work, for this report or for the opinions we have formed. Chartered Accountants 20 September 2012 Christchurch 74 annual report 2012 kAThMANdu 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, 50% 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 $ 100,000 110,001 120,001 130,001 140,001 150,001 160,001 170,001 180,001 200,001 220,001 240,001 250,001 260,001 280,001 360,001 570,001 1,050,001 $ 110,000 120,000 130,000 140,000 150,000 160,000 170,000 180,000 190,000 210,000 230,000 250,000 260,000 270,000 290,000 370,000 580,000 1,060,000 - - - - - - - - - - - - - - - - - - 5 6 5 3 3 2 1 2 2 2 1 1 1 1 1 2 1 1 dISTRIBuTION OF ShAREhOLdERS ANd hOLdINGS 1 to 999 1,000 to 4,999 5,000 to 9,999 10,000 to 99,999 100,000 and over Total % number of Holders 413 1,007 460 430 50 18% 43% 19% 18% 2% 2,360 100% number of ordinary Shares 244,310 2,599,489 3,324,653 10,296,080 183,701,408 200,165,940 % 0% 1% 2% 5% 92% 100% the details set out above were as at 7 September 2012. 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 84 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 7 September 2012. there are no restricted securities or securities subject to voluntary escrow on issue. kAThMANdu annual report 2012 75 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 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. 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. c. 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 7 September 2012, were as follows: Commonwealth Bank of Australia (7 September 2012) Accident Compensation Corporation (7 September 2012) AMP (2 April 2012) Eley Griffiths (05 September 2012) AusBil Dexia (25 November 2009) ordinary shares 20,980,315 18,387,591 14,872,888 12,066,312 10,512,000 % 10.5% 9.2% 7.4% 6.0% 5.3% as at 7 September 2012, the Company had 200,165,940 ordinary shares on issue. 76 annual report 2012 kAThMANdu PRINCIPAL ShAREhOLdERS the names and holdings of the twenty largest shareholders as at 7 September 2012 were: name ordinary Shares 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 NEW ZEALAND CENTRAL SECURITIES DEPOSITORY LIMITED NATIONAL NOMINEES LIMITED J P MORGAN NOMINEES AUSTRALIA LIMITED CITICORP NOMINEES PTY LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED BNP PARIBAS NOMS PTY LTD CITICORP NOMINEES PTY LIMITED BNP PARIBAS NOMS (NZ) LTD PETER HALKETT J P MORGAN NOMINEES AUSTRALIA LIMITED AMP LIFE LIMITED NEW ZEALAND DEPOSITORY NOMINEE LIMITED RBC INVESTOR SERVICES – AUSTRALIA NOMINEES PTY LIMITED RBC INVESTOR SERVICES – AUSTRALIA NOMINEES PTY LIMITED BNP PARIBAS NOMS PTY LTD FRANED PTY LIMITED TUATARA TOURS NZ LIMITED QUADRANT PRIVATE EQUITY MANAGEMENT PTY LIMITED QUADRANT PRIVATE EQUITY SERVICES PTY LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED dIRECTORS’ ShAREhOLdINGS directors held interests in the following shares of the Company at 31 July 2012: James Strong Peter Halkett Mark Todd Mark Todd John Harvey John Holland Sandra McPhee beneficially owned beneficially owned beneficially owned not beneficially owned beneficially owned beneficially owned beneficially owned 47,050,170 41,180,964 36,436,374 20,725,399 10,354,057 4,914,441 4,176,140 3,503,279 1,459,832 1,365,743 1,235,310 1,108,977 950,936 773,977 719,211 717,600 502,432 441,176 441,176 392,966 336,898 1,429,832 361,418 43,437 51,563 82,033 58,823 % 23.51% 20.57% 18.20% 10.35% 5.17% 2.46% 2.09% 1.75% 0.73% 0.68% 0.62% 0.55% 0.48% 0.39% 0.36% 0.36% 0.25% 0.22% 0.22% 0.20% kAThMANdu annual report 2012 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 2011 and 31 July 2012, the details of those dealings were entered in the Company’s interests register. the particulars of such disclosures are: Director Peter Halkett James Strong nature of Interest Beneficial Beneficial Shares Acquired 30,000 160,428 Consideration NZD 1.64 AUD 1.70 Date 22/12/2011 23/11/2011 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 2012. 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 2012, 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 2012, 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, paul Stern (Matthew Spencer ceased to hold office in the year ending 31 July 2012) kathmandu (u.k.) Limited peter halkett, Mark todd 78 annual report 2012 kAThMANdu 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 2012 are as follows: John harvey A director of: dnZ property Fund limited port otago limited new Zealand opera limited heartland Building Society limited apn news & Media limited Balance agri-nutrients limited (appointed 1 Jan 2011) An advisor to the board of: resource Coordination partnership limited John holland A partner of: Chapman tripp A member of: Financial Markets authority Capital Markets disclosure Consideration panel (appointed 1 Feb 2012) James Strong Chairman of: Woolworths limited australian Council for the arts local organising Committee for the ICC Cricket World Cup 2015 A director of: Qantas airways limited A member of: nomura australia limited advisory Board australian Institute of Company directors australian Grand prix Corporation Sandra Mcphee A director of: aGl energy limited tourism australia Fairfax Media limited Westfield retail trust 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 2012 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 annual report 2012 kAThMANdu 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 AUSTRALIA VIC Ballarat Bendigo Blackburn Melbourne (Bourke St) Camberwell Camberwell Outlet Store Chadstone Chapel St Doncaster Fitzroy Frankston Geelong Hampton East Highpoint Knox Moonee Ponds Moorabbin Richmond Smith Street Outlet Store South Wharf DFO Outlet Store Southland Spencer Street Fashion Station Warrnambool NSW Albury Birkenhead Point Outlet Store Bondi Junction Castle Towers NEW ZEALAND NORTH ISLAND Albany Botany Broadway Coastlands Gisborne Hamilton Hastings Lyall Bay Manukau Masterton Napier New Plymouth Newmarket Outlet Onehunga Outlet Otaki Palmerston North Petone Queen Street (Auckland) Rotorua Sylvia Park Takapuna Taupo Tauranga Chatswood Outlet Store Chatswood Westfield Cronulla Erina Fair Hornsby Macarthur Macquarie Newcastle Orange Parramatta Redyard (Auburn) Rouse Hill Shellharbour Kent Street Tamworth The Rocks Wagga Wagga Warringah Wollongong SA Adelaide Harbour Town Outlet Store Marion Shopping Centre Tea Tree Adelaide (Rundle Street) ACT Belconnen Canberra Centre Canberra Outlet Store Woden QLD Brisbane City Cairns Carindale Chermside Fortitude Valley Kawana Logan Pacific Fair (Broadbeach) Southport Toowoomba Townsville TAS Devonport Hobart Launceston WA Cottesloe Carousel (Cannington) Fremantle Innaloo Perth Harbourtown Outlet Store Whitford UNITED KINGDOM Tauranga CBD Te Rapa Victoria Street (Auckland) Waitakere Wanganui Wellington Whakatane Whangarei Willis St Outlet SOUTH ISLAND Ashburton Blenheim Cashel St (Christchurch) Dunedin Invercargill Nelson Papanui Queenstown Riccarton The Palms Timaru Tower Junction (Christchurch) MIX WHITE BG GREEN TYPE V.pdf 25/10/10 10:41:55 AM 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 KATHMANDU HOLDINGS LIMITED ANNUAL REPORT 2012 

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