Kathmandu Holdings Ltd
Annual Report 2014

Plain-text annual report

ANNUAL REPORT 2014 KATHMANDU ANNUAL REPORT 2014 01 CONTENTS 02 Chairman’s Report 04 Highlights for the Year 06 Chief Operating Officer's Report 12 The Board 13 Management Team 14 Directors' Report 25 Corporate Governance 29 Financial Statements 75 Statutory Information 80 Directory NOTICE OF ANNUAL GENERAL MEETING 11:00am Friday 21 November 2014 Crown Promenade Melbourne 8 Whiteman Street Southbank Victoria Australia 02 ANNUAL REPORT 2014 KATHMANDU 02 ANNUAL REPORT 2014 KATHMANDU CHAIRMAN’S REPORT David Kirk Chairman I am pleased to present my first report as Chairman of Kathmandu. In the 2014 financial year, Kathmandu again achieved record sales and earnings before interest and tax. Kathmandu continues to maintain its leadership of the outdoor, travel and adventure categories in Australasia. In FY2014 Kathmandu achieved strong same store sales growth in both Australia and the UK. Additional growth in sales came from 15 new permanent stores opened during the year. The company also achieved a satisfactory trading result in a competitive New Zealand market, despite a very warm start to winter and a consequent slow start to our Winter Sale. FINANCIAL RESULTS The financial results for FY2014 were good, especially compared to other retailers in Australia and New Zealand. Here are the highlights: Sales growth of 2.3% to $392.9m; Gross margin of 63.1% (FY2013:63.0%); Increase in earnings before interest and tax of 1.4% from NZ$63.4m to NZ$64.3m; Earnings per share of 21.0 cents per share, down 1.1c. The result was primarily attributable to continued growth in Australia, where same store sales growth of 6.9% and unchanged gross margins resulted in EBITDA growth of A$4.8m or 13.3%. Group gross margin improved slightly compared to last year. Operating costs increased modestly as a % of sales and overall EBITDA and EBIT margins reduced slightly. PEOPLE These strong results, which continue Kathmandu's success since listing on the New Zealand and Australian stock exchanges, have been achieved by a very capable and dedicated management team. The leader of that team, Chief Executive Peter Halkett, announced his resignation in August after eight years leading the company. Peter joined Kathmandu at the end of 2006 and since then he has steered the company through a period of strong growth under private equity ownership, a successful listing on the ASX and NZX, and continued strong growth as a public company. Since listing, Peter has led a re-launch of the Kathmandu brand, extensive re-design of product ranges, a doubling of store numbers in Australia, and a 50% increase in sales and net profit. This growth has seen Kathmandu gain entry to both the ASX200 and NZX50 indices. The Board is very grateful to Peter for his achievements and leadership of the company over eight years and we wish him well in the next stage of his career. Peter leaves the company having developed and begun the implementation of a set of strategies that we are confident will continue to deliver growth for the company in the years to come. He also leaves a strong and experienced management team who will continue to manage the business and support the new CEO as he/she learns the Kathmandu business. Our search for a new CEO has begun, and while that continues Mark Todd will become acting CEO. Mark has been with the company for over 16 years; he understands Kathmandu well and has contributed widely to the company’s success as both CFO and COO. We are fortunate to have KATHMANDU ANNUAL REPORT 2014 03 infrastructure, and add to our international management team as we begin to take Kathmandu to the world. We will initially focus on the United Kingdom, where we have four stores already, and other European markets. In the short term we will not be opening more physical stores but spending our money on marketing to develop our brand, build up our Summit Club membership and acquire customers online. We will make our brand and products widely available on online marketplaces in the United Kingdom and Europe. Our online offer will continue to be available to customers in over 40 countries around the world. Our growth strategies are supported by our commitment to sustainability, which is an important part of everything we do. Our new head office in Christchurch will be a 5 Star Green Star rated building. We continue to work with our suppliers to proactively monitor the environmental and social impact of our products, with a focus on sustainable designs and achieving full visibility of the manufacturing process. Kathmandu’s annual Sustainability Report details our progress and plans in this area in more detail. DIVIDEND The Directors have declared an unchanged final dividend of 9 cents per share, which with the 3 cents interim dividend, makes a total payout for the year of 12 cents per share, consistent with last year. The final dividend will be fully imputed for New Zealand shareholders, and fully franked for Australian shareholders. This dividend represents a payout ratio of over 57%. Finally, I would like to thank my Board colleagues for their continuing commitment to making Kathmandu successful. In particular I thank John Harvey, who served as Chairman of the Board for 11 months after the unexpected death of James Strong. John led the Board very effectively and during his tenure made an important contribution to the continued success of Kathmandu. Thank you for your investment in Kathmandu. We appreciate that you expect to see growth in the value of your investment over time and that is what we are focused on delivering. David Kirk Chairman an executive of Mark’s experience and talent to lead the company for this interim period. 2014 has been a very busy year for the whole Kathmandu management team. The Board joins me in thanking them all for the energy, enthusiasm and capability they have shown in delivering another record result. Once again this talented team have delivered an improved trading performance and, at the same time, instituted a wide range of business improvement initiatives designed to set the company up for longer-term growth. GROWTH STRATEGIES AND INVESTMENT Kathmandu has a clear and consistent set of growth strategies and they are working. We will continue to implement them in FY2015: Roll-out more new stores in Australia and New Zealand; Grow our Summit Club loyalty programme; Develop an even stronger product offering; Grow online sales in Australasia and from international markets; and Optimise the ranges, merchandising, service and fit-out of our existing store network. These growth strategies are underpinned by a substantial capital investment programme, and we will continue with that as well. Apart from new store fit-outs and refurbishments of current stores, most of our capital expenditure is in information technology systems. We are now implementing a fully integrated information technology platform from point-of- sale in store through to warehouse management. The system takes in online sales and their fulfillment and connects to our financial systems. The Board and management are convinced that this investment is essential to move the company fully into the world of omni-channel retailing. We are well into the implementation of the new system and expect to be finished early in 2015. INTERNATIONAL GROWTH We are preparing now for the time – perhaps 3 years hence – when the bulk of our new store rollout in Australia and New Zealand will be completed. We now have 145 stores in Australasia and we think the total we will open is around 180. We expect to continue to drive strong same store sales growth from our Australian stores for many years after we have established our full store footprint, but we need to begin the process of expanding outside Australia and New Zealand while we still have strong growth in our home markets. Our long-term objective is to become a leading global brand in the outdoor travel and adventure market. FY2015 will see us take a confident next step in that direction. In FY2015 we will spend an incremental $5 million to grow brand awareness, establish the online and related 04 ANNUAL REPORT 2014 KATHMANDU KEY HIGHLIGHTS 2014 RECORD SALES $ 392.9m RECORD EBIT $ 64.3m SAME STORE SALES GROWTH 4.2% STORES OPEN 150 SALES (NZ$m) $384.0 $392.9 $306.1 $347.1 $245.8 FY2010 FY2011 FY2012 FY2013 FY2014 EBIT (NZ$m)* $48.5 $64.0 $57.0 $63.4 $64.3 FY2010 FY2011 FY2012 FY2013 FY2014 NPAT(NZ$m)* $25.2 $39.1 $34.9 $44.2 $42.2 FY2010 FY2011 FY2012 FY2013 FY2014 * FY2010 excludes the impact of IPO listing costs, and $0.6m of net exchange losses on foreign currency borrowings. 06 ANNUAL REPORT 2014 KATHMANDU CHIEF OPERATING OFFICER'S REPORT Mark Todd Finance Director and Chief Operating Officer KEY HIGHLIGHTS Sales increased by 2.3% to $392.9m. Same store sales growth of 4.2% at constant exchange rates. Gross margins improved 10bps. Online sales up 35% and now over 5% of Group sales. Summit Club member numbers grew 29.5%, 1 in 10 New Zealanders are active members. Strong UK same store sales growth, 12.7%. New Zealand distribution centre floor space extended by 50%. Commitment to new purpose built office for Christchurch team to open in CBD FY2016. 15 permanent new stores opened. Group now has 150 stores. Improved earnings result on constant currency basis. RESULT OVERVIEW Kathmandu’s FY2014 result was a satisfactory outcome from a challenging year, underpinned by Australian same store sales growth of over 6% for the fourth consecutive year in our biggest market. This growth and an increase in overall gross margin helped to offset the weather influenced reduction in New Zealand same store sales in the second half of FY2014. UK same store sales growth of 12.7% was a positive outcome from the first period of trading under a re-aligned business model. Gross profit and operating costs both increased by a similar amount, and although actual NZD earnings for the Group were similar to the result in FY2013, on a constant currency basis earnings before interest and tax (EBIT) increased by $6.6m (10.4%). There was variation in the FY2014 sales performance across the 3 countries where Kathmandu has a retail store presence: New Zealand sales throughout the year were generally ahead of FY2013, apart from our key winter trading period. There was a double digit % reduction in sales in June, a month that was the warmest on record, and this shortfall could not be recovered in July. Australia also experienced a challenging June, but sales results overall for the winter season were close to expectations. This capped off good same store sales performance across the whole year. In this market, the key growth engine of our business, we continued to improve penetration and brand awareness. UK same store sales growth was strong in both stores and online channels. Kathmandu’s sales grew 14.8% in Australia and 2.9% in New Zealand, whilst the UK sales reduction of 22.6% reflected store closures in the previous year. Long term target gross margins continued to be maintained in the 62 to 64 per cent range and there was a relatively consistent balance year-on-year of sales derived inside and outside of key promotional periods. The shortfall in New Zealand sales performance was in part offset by gross margin improvement. 15 permanent new stores were opened in FY2014, the majority outlet and regional stores. Our FY2014 sales and earnings contribution from new stores was below last year, primarily because they opened later in the period, and are in locations that, because of demographics, have lower sales potential than the stores opened in FY2013. Online sales grew by 35% at comparable exchange rates, mainly in the Australian and UK markets. Operating expenses increased by c.70bps as a % of sales, reflecting a combination of sales performance slightly below expectation, increased advertising expenditure, brand building in the UK, and boosting internal team capability in online and systems development. KATHMANDU ANNUAL REPORT 2014 07 Our team continues to focus on delivering the growth strategies that we have regularly communicated to shareholders since our IPO in 2009. We have grown our Australian and New Zealand businesses through new store rollout, increasing brand awareness and building our Summit Club customer loyalty programme. These strategies will continue to build Australasian sales and earnings, and provide the platform to commit more investment to grow the Kathmandu brand and customer base globally, focused initially on the UK and Europe markets. FINANCIAL PERFORMANCE DETAIL Group sales of $392.9m increased by 2.3% over last year. The increase in same store sales was 4.2% measured at constant exchange rates, however due to depreciation of the AUD against the NZD, actual NZD same store sales for the Group decreased by 2.7%. The country specific change in same store sales was as follows: Australia +6.9% New Zealand -0.1% UK +12.7%. Total gross profit increased by $6.1m (2.5%). Gross margin of 63.1% was 10bps higher than last year. Gross margins were unchanged in Australia and up 50bps in New Zealand. The influences that drive gross margin variability, such as weather (particularly in winter), product mix, and inventory levels, have been effectively managed through a well-structured and flexible promotional programme. Other than warm weather conditions during the first part of our winter sale campaign, key trading periods were not significantly affected by adverse weather in FY2014. Hedging rates on USD purchasing in FY2014 were marginally worse overall than last year. Expenses excluding depreciation, amortisation and financing costs increased by $6.7m (4.0%). This was an increase as a percentage of sales from 43.8% to 44.5%, partly attributable to the lower than targeted increase in sales. Across the year the key changes were: Property rent increased by $0.7m, and reduced slightly as a % of sales, as we benefited from a portfolio of new Australian stores at generally lower rental levels in tandem with the strong same store sales growth in that market. We substantially increased our capital expenditure year on year, by $6.8m (39.1%). This related primarily to investment in new core systems based on the Microsoft Dynamics AX platform. The investment made in “bricks and mortar” retail, in both new stores opened and existing stores relocated or refurbished, increased by $2.1m (16.5%). Two fewer permanent stores were opened in FY2014 than in FY2013, but our relocation and refurbishment programme involved more substantial projects than last year. Depreciation and amortisation expense declined year on year by $0.4m (3.8%), but will increase next year as new systems infrastructure becomes operational. Capital expenditure in FY2015 and FY2016 is expected to be at least $20m per annum as we move through the Australasian store rollout and deliver supporting physical and systems infrastructure projects. Finance costs rose slightly during the year as debt levels increased to fund both inventory build and an increase in capital projects spend. We ended the year with higher than optimal levels of inventory, but a significant portion of this overstocking has already been addressed since balance date. Early next year we expect to go to market to renegotiate group bank facilities that expire in December 2015. Whilst EBITDA and EBIT both increased slightly on last year, net profit after tax decreased by $2m as a result of the effective group tax rate rising from c.25% to 29%. The increase in total tax expense of $2.7m to $17.5m reflected an increased tax charge in the Australian trading company (Kathmandu Pty Ltd) arising from the annual revaluation of its NZD denominated loan from Kathmandu Ltd. This loan primarily arises from the amount due by our Australian subsidiary for the purchase of the IP and rights to use the Kathmandu brand in Australia, based on the valuation determined at the time of the IPO in 2009. Because it is NZD denominated, exchange rate conversion gains or losses (in this year a gain) on the value of the loan at each balance date are taxable in the Australian company. Whilst this loan remains outstanding, this one-off tax charge in FY2014 (a tax benefit in FY2013) could reverse in a future year when the NZD/AUD exchange rate weakens. Salaries and wages cost increased by $3.15m, and by BUSINESS OVERVIEW 40bps as a % of sales, with most of this increase arising from the growth in team members to support online and systems development programmes. Advertising spend increased by $1.7m and by 30bps as a % of sales. Winter sale promotional spending after the difficult trading period in June, and the initial investment made in UK brand advertising accounted for most of the incremental $ spend. Most other operating expenses were unchanged or reduced as a % of sales. KATHMANDU’S MARKET POSITION We continue to focus on the effectiveness of the Kathmandu business model, first and foremost as a brand, and then a retailer. In the Australasian market, retailers dependent on discretionary consumer spending face mounting competition from larger and arguably more sophisticated offshore competitors, selling to local customers both online, and through an increasing number of their own stores. These stores have generally been opened in higher end retail precincts, both malls and CBD’s, in the major Australasian 08 ANNUAL REPORT 2014 KATHMANDU cities. Kathmandu has taken a similar approach to building brand awareness and reputation in Australasia, in the last three years opening new high quality stores in prime retail and tourist precincts such as The Rocks and Pitt Street Mall in Sydney, the Emporium in Melbourne and Broadway in Auckland. These stores sit successfully amongst major global brands and are trading profitably. As competition from offshore brands and retailers increases, and there is more crossover into the product categories that Kathmandu offers, the importance of our brand positioning will only increase. To continue to grow our market share and maintain margins, it is imperative that we maintain customer loyalty, and a quality product offer. Our ability to trade successfully in a wide cross section of retail precincts highlights the broad appeal the Kathmandu brand has to an increasingly diverse customer base. We will continuously focus on keeping this market leading position. The level of investment we undertake is focused not just on maintaining our market leadership in Australasia, but also on enabling Kathmandu to grow in the global marketplace. As a vertical retailer Kathmandu branded product can still only be purchased through Australasia in our wholly owned store network and our websites. The majority of our customers are Summit Club members rather than off the street customers. We have developed sound core physical and systems infrastructure and wider team capability. This is a sound basis to support taking the Kathmandu brand to other markets. Since our listing in 2009, one area of substantial change has been growth of the online sales channel. We expect the online proportion of business will continue to rise from 5% to 10% over the next three to five years. Kathmandu now has an effective online sales platform, coupled with a social network presence. This enables customers in over 40 countries worldwide to access the complete Kathmandu range online, and have it delivered directly to their home. Again the power of our vertically integrated brand is a competitive advantage to Kathmandu, as potential customers come directly to us in response to our own brand and promotional marketing. By comparison, non-vertical online retailers seek to maximise their own return through leveraging multiple competing brands offering similar products. Continued growth in Kathmandu brand awareness in Australia has driven the increase in store rollout targets, and delivered real growth in same store sales. We expect to have at least 180 stores in the New Zealand and Australian network, compared to the 150 stores forecast in 2009. Growing brand awareness will also drive same store sales growth in Australia beyond store rollout. Sales per person in Australia are now nearly A$10 compared to A$4.64 in FY2009. This is only 33% of the New Zealand performance, but up from 25% five years ago on a constant currency basis. There is substantial growth to come before we meet our own long term penetration targets and match the performance of other mature trans-Tasman discretionary retailers. We are confident our business model will continue to deliver real growth in Australia, over and above the earnings derived from the store rollout programme. PRODUCT RANGE AND INVENTORY: Product will always be fundamental to our success. We are committed to bringing to market high quality solutions that are innovative, well designed and priced competitively to meet our customers’ needs. The product team has a passion for exploration and active participation and our diverse group represents 15 nationalities that have collectively travelled to more than 100 countries. At the pinnacle of Kathmandu’s product range is the XT Series®. We partner with our Best in Field Gear Testers to create the best possible products for serious athletes in the most extreme environments. New additions to the wider range include driFILL® and driCOTTON® (water repellent down and cotton) used in a variety of clothing styles and sleeping bags. We are committed to increasing the return from each item in our product range. In core categories such as insulation and rainwear, where we lead the market, we deliver comprehensive updated offerings, incorporating significant technical advancements and introducing lifestyle and low profile silhouettes. New styles reinforce Kathmandu’s authority as market leader within these and other key technical product groups. We also continue to invest in emerging categories such as outdoor lifestyle and active wear. As previously noted, inventory levels were higher than we had targeted at 31 July. The total value of inventory, $103.8m, was nearly 30% up on last year. We planned to lift inventory levels to support operating stocks for the growing store network, and anticipating higher sales, we invested in stock primarily for the winter season in Australia across higher price point categories such as down jackets and Gore-Tex® rainwear. This didn’t eventuate, and inventory growth was the primary reason for the $18.7m increase on last year in current assets in Australia. New Zealand and UK inventory levels also grew, but at much lower rates. Although we carried above optimal units and $ value of stock into the new financial year, the most critical portion of this overstocking was immediately addressed through a compelling winter clearance campaign. It was necessary to write down a small amount ($0.35m) of clearance stock held at balance date which is being sold below cost, and by the end of the August clearance stock levels across the Group were satisfactory. At balance date, stock per store had increased year on year by 18.5%. By the end of August 2014, the year on year increase in stock per store was 11.8%. Importantly, the introduction of the first phase of our new forecasting KATHMANDU ANNUAL REPORT 2014 09 and planning system means the inbound order quantities in FY2015 for current styles are substantially reduced. SYSTEMS A key enabler to our medium and long term growth objectives will be investment in information systems. We will soon be operating software modules provided by Microsoft Dynamics AX for Retail and partner vendors in key areas such as demand planning, warehouse management and financials. This enhanced business capability will lead to our next stage of development in FY2015 on product lifecycle management, enhanced customer relationship management and integrated omni-channel retail functionality. STORE NETWORK The sourcing of new store sites was challenging for Kathmandu in the past year, with stores generally opening later than the prior year. Seven of the fifteeen new stores were not opened until the last seven weeks of the financial year. Permanent store numbers totalled 149 at 31 July: New Zealand 45, Australia 100 and UK 4. We continue to trade successfully in a temporary site in the Christchurch Re-start precinct. The permanent new stores opened during the year were: Australia: Chadstone, Emporium, Northland and Uni Hill (Melbourne), West Lakes (Adelaide), Belmont (Perth), Indooroopilly and Jindalee (Brisbane), Rockhampton and Hervey Bay (QLD), Charlestown (NSW), Shepparton and Traralgon (VIC), Bunbury (WA). New Zealand: St Lukes (Auckland). In the first half of FY2014 we closed an outlet store in Chatswood Sydney, and our White City Westfield store in London. There was a reduction in the earnings contribution from the new stores opened in FY2014 compared to the group opened in FY2013. In the coming year, we have leases for eight new stores already confirmed, and most of these stores are expected to open by Christmas this year. We expect to open around 15 new stores in FY2015. In the past two years there has been a substantial shift in the balance of capital expenditure spent on re-investment in existing stores, a core aspect of maintaining brand positioning and ensuring our retail network remains aligned with the quality of our product offering. In FY2014, we completed major refurbishments on three stores; Queen Street and Petone in New Zealand, and our Brisbane CBD store. Four stores in New Zealand and two in Australia were relocated. The refurbishment work on the UK store portfolio was completed, which undoubtedly assisted in the improved same store sales outcome in that market. UK BUSINESS AND INTERNATIONAL MARKETS Same store sales growth of 12.7% was a satisfactory outcome from our first period of trading under a new business model in the UK. Refurbished stores delivered improved sales performance in a market that remains challenging. These stores are now focused on showcasing the Kathmandu brand. Successfully growing active Summit Club members through connection with the brand in store or online will be one key performance indicator of UK growth prospects. A slightly higher loss in the full year result reflected planned uplifted spend on brand advertising. Online sales through our UK website grew by over 50% in the year. Sales through our website were supplemented by good initial sales in the Amazon and NEXT marketplace sites. As we continue to build brand awareness, we expect Kathmandu’s UK website and marketplace sites to experience strong on-going sales growth. This growth will extend into European markets in the year ahead, as we have 10 ANNUAL REPORT 2014 KATHMANDU commitments to move into further marketplace sites, and will invest in online brand building and customer acquisition activity to support this programme. Kathmandu’s online sales from its Australasian websites now include a small portion shipped to international markets, and we will closely monitor progress in this area. Our initial focus in introducing global customers to Kathmandu will be through our one million plus Australasian Summit Club members, facilitating sales opportunities such as gift giving and free shipping, and incentivising global customers to become Summit Club members. INFRASTRUCTURE We extended the footprint of our New Zealand distribution centre in FY2014, increasing floor size by 50%. The new layout will facilitate the effective operation of our rapidly growing online distribution activity, and was a key business driver for this investment. In Australia we have initiated a review of our distribution network requirements, and anticipate relocating to expanded premises in FY2016. We have recently announced our commitment to relocate to a new purpose built office in the Christchurch CBD. The Christchurch based support office will house over 160 staff, including almost all of our key product development and sourcing group, and the majority of the Kathmandu Executive. Our current office in the outer suburbs would otherwise have required earthquake repairs and an extension to cater for our growing staff numbers. We expect to move into our new premises early in 2016. SUSTAINABILITY As a Kathmandu core value, sustainability is an integral part of our business strategy. Our on-going objective is to deliver value to our stakeholders and to continually position Kathmandu as an industry leader in this area. In 2014, Kathmandu joined the Fair Labour Association in an effort to further enhance our well-developed social compliance program. We will be working closely with the Association toward full accreditation, and are pleased to be joining global industry leaders in promoting and protecting workers’ rights. This year we have also made significant strides in limiting the environmental impact of our business operations. We collaborated with the Green Building Council of Australia in developing Australia’s first sustainable design standard for retail and committed to a 5-star Green Star rating design and build for the new Christchurch office. Full details of our progress can be found in our 2014 Sustainability Report, prepared in accordance with the Global Reporting Initiative (GRI). OUR TEAM Employee numbers as at 31 July 2014 increased from 1,920 last year to 2,074 this year, with permanent employees making up 70% of the total workforce. Our bi-annual employment engagement survey, in which over 60% of employees participated, gave Kathmandu a high rating in employee alignment and engagement, and placed KATHMANDU ANNUAL REPORT 2014 11 us comfortably in the top 50% of a cohort of over 200 companies across Australia, New Zealand and the UK. Our team viewed individual engagement, standard setting, accountability and team leadership as particular strengths of Kathmandu. After balance date, Peter Halkett, our Chief Executive since October 2006, announced his resignation. Peter has led Kathmandu through eight years of substantial and successful growth. This included critical points in our growth path such as Kathmandu’s listing on the ASX and NZX in 2009, and the implementation of the new Kathmandu branding from 2010 onwards. Peter leaves Kathmandu exceptionally well placed to continue growth in Australasia and take the next steps in growing the brand internationally. On a personal note, I want to thank Peter for the great working environment he delivered for me and the Kathmandu team to develop and grow with the business. Kathmandu’s positioning today reflects a strong and effective leadership team, capable of continuing to take this business forward in 2015 with a new Chief Executive. MARKET OVERVIEW AND FUTURE OUTLOOK The outdoor and travel category is not immune from the challenging environment for discretionary retailers in Australasia. In FY2014 a major Australian retailer in our category closed down, and another is in the process of shutting its New Zealand stores. Competition from big box local retailers, and growing online accessibility of international outdoor and travel brands are major drivers of this shift in competitor mix. Australasian retailers in our category continue to move, in whole or in part, to operating the same vertical business model as Kathmandu. The gross margins achievable in comparison to other discretionary retail product categories will continue to attract investment by local and global discount retailers. Our vertical business model, provided it remains supported by continual reinvestment in our brand, will remain resilient in our current markets. The model also aligns effectively with growth in online sales channels. Given the apparent available returns on investment relative to other retail categories, we expect continued local and global merger and acquisition opportunity for good outdoor businesses and brands. As long as there are no major adverse economic or geopolitical events, we continue to have a positive outlook for further growth in the outdoor and adventure product categories. GROWTH STRATEGY Kathmandu’s growth opportunities over the next three years will be focused on two separate geographic areas. In Australasia we will deliver our 180 store network plan and keep building our brand positioning and awareness. We expect that our on-going optimisation of existing stores and product range will maintain same store sales growth in Australasia for a number of years. Emporium, Melbourne In the next three years we will also undertake an extensive investment programme, most of it operating expenditure, to build Kathmandu brand awareness, initially in the UK and European markets. This investment will initially in FY2015 be in the range of $5 million. The effectiveness of this programme will be reviewed to determine the ongoing level of investment for the following two years. We will continue to support growth with enabling activity including: investment in people capability; further enhancement of our Summit Club programme; and systems and process improvements in tandem with the rollout of Microsoft Dynamics AX for Retail across the business. Kathmandu has real potential to be a leading brand in the outdoor and travel category on a geographically wider basis than just Australia and New Zealand, and we are now committed to fully testing this potential. At the same time we view our Australasian growth opportunities positively. Kathmandu’s competitive advantage, with our market leadership delivering a very profitable core business, will enable us to grow our market reach. The future prospects for our brand are exciting. Mark Todd Finance Director and Chief Operating Officer 12 ANNUAL REPORT 2014 KATHMANDU THE BOARD L to R - John Holland, Christine Cross, Peter Halkett, David Kirk, John Harvey, Sandra McPhee, Mark Todd DAVID KIRK Chairman Mr Kirk is the Chairman of Trade Me Group Ltd, Chairman of Hoyts Group Ltd, the co-founder and Managing Partner of Bailador Investment Management, and sits on the Board of Bailador portfolio companies. Mr Kirk’s Executive Management career has seen him hold Chief Executive Officer roles at Fairfax Media and PMP Limited and the Regional President (Australasia) for Norske Skog. MARK TODD Finance Director and Chief Operating Officer Mr Todd has been Kathmandu’s senior financial executive since joining the Group in 1998, following previous financial management experience in apparel and retail. Appointed Chief Operating Officer in May 2014, Mr Todd has been a Director of various Group companies and manager of the New Zealand business from 2004-2006. PETER HALKETT Managing Director and Chief Executive Officer Mr Halkett has directed the growth strategy for the business since joining Kathmandu in 2006. Mr Halkett has extensive retail experience including CEO roles in New Zealand and the United Kingdom. Among the companies he has led, two were publicly listed, including Pacific Retail Group. Mr Halkett has announced his resignation effective 25 November 2014. JOHN HARVEY 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 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. JOHN HOLLAND Non-Executive Director Mr Holland is a partner in the national New Zealand law firm Chapman Tripp and specialises in general corporate and commercial law. Mr Holland’s securities law experience includes acting on initial public offerings, advising on employee share schemes and in the private equity area. SANDRA McPHEE AM Non-Executive Director Ms McPhee is an experienced executive and non-Executive Director in consumer facing sectors including aviation, retail, energy and media. She held a range of senior international executive roles in the aviation industry, most recently with Qantas Airways Limited. CHRISTINE CROSS Non-Executive Director Ms Cross has extensive experience in international retail and consumer goods including 14 years as a Director on the operating board of Tesco Plc. Ms Cross currently runs a retail advisory consultancy focusing on international best practice in customer led business planning and value chain management. KATHMANDU ANNUAL REPORT 2014 13 MANAGEMENT TEAM PETER HALKETT Managing Director and Chief Executive Officer MARK TODD Finance Director and Chief Operating Officer TAMALIN MORTON GM, Sales and Marketing MICHELLE ADAMS GM, Product CALEB NICOLSON GM, Supply Chain PAUL STERN GM, Business Development & Sustainability GRANT TAYLOR Chief Information Officer REBECCA EDWARDS GM, Human Resources REUBEN CASEY GM, Finance 14 ANNUAL REPORT 2014 KATHMANDU DIRECTORS’ REPORT YOUR DIRECTORS PRESENT THEIR REPORT AND THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2014. DIRECTORS The following persons were Directors of Kathmandu Holdings Limited during the financial year: DAVID KIRK Was appointed non-Executive Director, Member of the Audit and Risk Committee, Member of the Remuneration and Nomination Committee on 21 November 2013 and was appointed Chairman on 5 February 2014, 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 has resigned effective 25 November 2014. MARK TODD Was re-appointed as an Executive Director on 18 November 2011 and appointed as Finance Director, Chief Financial Officer on 9 October 2009, and continues in these offices at the date of this report. Was appointed Chief Operating Officer on 28 May 2014 and will be acting Chief Executive Officer following the resignation of Peter Halkett. JOHN HARVEY Was re-appointed as a non-Executive Director, Chair of the Audit and Risk Committee, Member of the Remuneration and Nomination Committee on 16 November 2012, appointed as Interim Chairman and retired as Chair of the Audit and Risk Committee on 25 March 2013. Retired as Interim Chairman and reappointed as Chair of the Audit and Risk Committee on 5 February 2014. He 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 Nomination Committee on 20 November 2013, 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 Nomination Committee on 20 November 2013, and continues in these offices at the date of this report. CHRISTINE CROSS Was re-appointed as a non-Executive Director, Member of the Remuneration and Nominee Committee, Member of the Audit and Risk Committee on 20 November 2013, and continues in these offices at the date of this report. Details of the experience and expertise of the Directors are outlined on page 12 of this Annual Report. RETIREMENT OF DIRECTORS In accordance with the Company’s constitution, David Kirk, John Harvey and Mark Todd 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 2014 and the numbers of meetings attended by each Director were: Director Meetings Audit and Risk Committee Meetings Remuneration And Nominee Committee Meetings Director David Kirk Peter Halkett Mark Todd John Harvey John Holland Sandra McPhee Christine Cross A 6 9 9 9 9 9 9 B 6 9 9 9 9 9 9 A 3 XX XX 6 6 5 4 B 3 XX XX 6 6 6 6 A 3 XX XX 6 6 6 6 B 3 XX XX 6 6 6 6 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 $42,152,000 (2013: $44,174,000). 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 outdoor, travel and adventure. It operates through wholly owned subsidiaries in New Zealand, Australia and the United Kingdom. MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR As announced on 25 August 2014, Chief Executive Officer Peter Halkett tendered his resignation with effect from 25 November 2014. No other 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. KATHMANDU ANNUAL REPORT 2014 15 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. 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 ENVIRONMENTAL REGULATION D – DETAILS OF SHARE-BASED COMPENSATION 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 9.0 cents per share. Dividends will carry full New Zealand imputation credits and full Australian franking credits. The dividend will be paid on 21 November 2014. The Company does not currently have a dividend re- investment plan. INSURANCE OF OFFICERS The Company has entered into deeds of indemnity, insurance and access with each Director which confirms each person’s right of access to certain books and records of the Company for a period of seven years after the Director ceases to hold office. This seven year period can be extended where certain proceedings or investigations commence before the seven years expires. The deed also requires the Company to provide an indemnity for liability incurred as an officer of the Company, to the maximum extent permitted by law. Indemnification: Pursuant to the Constitution, the Company is required to indemnify all Directors and employees, past and present against all liabilities allowed under law. The Company has entered into an agreement with each Director to indemnify those parties against all liabilities to another person that may arise from their position as Director or other officer of the Company or its controlled entities to the extent permitted by law. The deed stipulates that the Company will meet the full amount of any such liabilities, including reasonable legal costs and expenses. Insurance: Pursuant to the Constitution, the Company may arrange and maintain Directors’ and officers’ insurance during each Director’s period of office, and for a period of seven years after a Director ceases to hold office. This seven year period can be extended where certain proceedings or investigations commence before the seven years expires. E – ADDITIONAL INFORMATION, PERFORMANCE RIGHTS VESTING 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 provided generally follows the same principles 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 Company’s Remuneration and Nomination Committee is the primary body that determines the quantum and framework of Directors and Executive remuneration. The composition, role and responsibility of the Committee is outlined in the Corporate Governance Statement on page 25 of this annual report. The Committee adopts a series of principles in determining remuneration related decisions. The principles used are: Remuneration [quantum and/or structures] whether measured at base or total level, should be market competitive, and generally account for key internal and external factors such as employee level of responsibility and place of domicile, Company commercial circumstances, and market practice; Those employees with the 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 achievement against those objectives and plans. Key management personnel includes all Executives, which are personnel who are reporting directly to the Chief Executive Officer or Chief Operating Officer, designated as an Executive by the CEO and with responsibility and authority for management of a significant profit or cost centre; 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 16 ANNUAL REPORT 2014 KATHMANDU 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; Executives 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 Operating Officer) should, relative to other Executives have • a greater proportion of total remuneration (at least 45%) that is “at risk”, i.e. contingent upon the achievement of performance hurdles, and • generally 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 key and 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; The Board uses discretion when setting remuneration levels, taking into account the current market environment. REMUNERATION REVIEW 31 JULY 2014 The Board, on the advice of the Committee, has accountability to set all Executive remuneration. Recognising the principles above, the current prevailing market conditions and the reported performance of the Company, the committee determined the following in relation to the 31 July 2014 review of base remuneration: Board Directors, 0% increase (2013: 3%); Executive Directors, no increase in base salary for Chief Executive Officer (who has resigned since 31 July 2014). Chief Operating Officer due to increased accountability 14.9% increase (2013: 0%); and Executives, following individual performance evaluations and a review of market remuneration levels, base salary increase 13% (2013: 2%) in New Zealand, 10% (2013: 2.5%)in Australia. The structure and levels of available short and long term incentives for FY2015 have been reviewed. In considering the total remuneration opportunity made available, the Board on the advice of the Committee has determined it is appropriate to increase the quantum of incentive based earnings available for Executives and Executive Directors. This will enable higher total remuneration to be earned, but only in conjunction with the Group achieving appropriate financial performance targets for the relevant future period of performance management. EXECUTIVE REWARDS 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. The Executive remuneration framework (currently applying to 11 Executives including Executive Directors) has four components: 1. Base salary and benefits; 2. Short term cash incentives; 3. Short term equity incentives with associated requirements relating to continuing employment with the Company; and 4. Long term incentives via participation in the Company’s Option and Long Term Incentive plans. The combination of these comprises the Executives’ total remuneration. Some Executives along with other senior management personnel have a remuneration framework incorporating only components 1. to 3. 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. KATHMANDU ANNUAL REPORT 2014 17 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 contract, except as specifically stated in this report. An Executive’s remuneration is also reviewed on promotion. Executive benefits made available are superannuation contributions made in accordance with the legislation specific to each country in which the employee is resident, and for some Executives leasing and/or reimbursement of vehicle running costs, and medical insurance. Key management and senior management personnel who relocate their place of working between countries may be assisted in the cost of such relocation. 2. Short term cash incentives Executives including the Executive Directors (for FY2015 the Chief Operating Officer only following the impending resignation of the Chief Executive Officer) 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. 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. This criterion excludes depreciation and amortisation expenses arising from the substantial capital investment programme approved and overseen by the Board over the medium term. The programme dollar spend and number of projects, means substantial variability in the depreciation and amortisation expense arising year by year is possible. This could be both within and beyond Executive control given the nature and mix of the Group’s capital assets and leases, and the structure of the Group Executive whereby the bulk of the capital investment programme is determined and approved by the Board including the Executive Directors with reference to wider long term growth strategies. The amount of any short term cash incentive paid in a year is dependent upon: the level of performance achieved against the Group’s financial performance target (EBITDA) for the year; and the achievement of individual KPI’s, provided a minimum level of performance is achieved against the Group’s financial performance target (EBITDA) for the year. For the years ended 31 July 2014 and 31 July 2013 the Group’s financial performance targets were not met and the annual short term cash incentive was not paid. A smaller discretionary cash bonus was paid to key and senior management personnel including Executives in recognition of the EBITDA result for the year being very close to the annual performance target once the adverse impact of non- controllable exchange rate (AUD to NZD) translation was adjusted for. 3. Short term equity incentives with associated requirements relating to continuing employment with the Company The shareholder approved long term incentive plan enables the Board to offer equity incentives as part of short and long term remuneration. Key and senior management personnel including Executives participate in short term equity incentives. Executives have a target of at least 45% of the total value of their annual short term incentive being equity based, with equity 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 as for the short term cash incentive. Senior management personnel also have an annual short term incentive that is equity based, generally up to 12% of base salary, with rewards delivered by way of nil cost performance rights. The entitlement to the short term equity incentive is also subject to the measurement of achievement of Group’s financial performance target for the year (EBITDA). Where the Group financial performance targets are achieved, vesting of the performance rights granted under this incentive will generally require the staff member (Executive or senior management personnel) 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. In FY2015 this condition also applies to a portion of the short term cash incentive available to the Executive Director (Chief Operating Officer), who does not typically participate in short term equity incentives. For the years ended 31 July 2014 and 31 July 2013 the Group’s financial performance targets (EBITDA) were not met and consequently no short term equity incentives were granted to Executives (including the Executive Directors) or senior management personnel in relation to this period will vest. 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 (5 of these Executives are still employed as at 31 July 2014). Vesting of the options was 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 18 ANNUAL REPORT 2014 KATHMANDU 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 vested progressively in 3 equal tranches on the test dates of 1 October 2010, 2011 and 2012. If the TSR performance condition had not been achieved on the applicable test date there was a 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 has not granted any further options under the existing plan. The Board are of the view that this plan no longer represented an appropriate on-going long term incentive structure for the Company post the IPO. Long term incentive plan Shareholders reapproved the current long term incentive plan at the Company’s 2013 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 specified performance periods (minimum two years), with the value of rights allocated between EPS and relative TSR determined each year. 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 per cent of the relevant portion of the award vests for achievement of targets and a further fifty per cent 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 given the current business strategy. From 2011 onwards, the Committee resolved to grant only Executive Directors with nil cost performance rights that will require achievement of EPS and relative TSR targets over specified performance periods. These grants are subject to shareholder approval. In 2014, the Committee resolved given the relevant circumstances, to grant the Executive Director with nil cost performance rights that: Are measured for a single specified performance period of three years; and Requires achievement of only relative TSR targets over the specified performance period. The Committee has considered the use of a single three year performance period appropriate (rather than the previous two, three and four year performance periods) as it simplifies the LTI structure, is more closely aligned with the Company's business cycle and is consistent with market practice. To better support our evolving growth strategy, the Board has determined to prioritise share price growth for the purposes of evaluating long term performance. In these circumstances, relative TSR has been selected as the only performance measure to assess performance under the long term incentive plan. A target over the period of achieving at least the 50th percentile ranking in relative TSR amongst ASX 101-200 companies is considered a fair and appropriate basis for performance measurement which takes into account our growth strategy. NON-EXECUTIVE DIRECTORS’ FEES The current aggregate limit for non-Executive Directors’ fees is $A800,000 per annum. In FY2014 the base fee payable (including superannuation if applicable) to the Chairman was $A206,000 and to a non-Executive Director $A103,000 per annum. Additionally $A10,000 per annum is paid for sub- committee attendances. No increase has been proposed for the coming year commencing 1 August 2014. The Executive Directors do not receive Directors’ fees. The amounts approved for Directors’ fees are expressed in AUD given the specific requirements for remuneration reporting applying to ASX listed companies, however all amounts reported in the tables within this report are specified in NZD, 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 2014 (converted to reporting currency) Chairman Other non-Executive Directors AUD $ 216,000 113,000 NZD $ 244,804 128,069 KATHMANDU ANNUAL REPORT 2014 19 B – DETAILS OF REMUNERATION The following Executives along with the Directors are identified as 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 (resigned effective 25 November 2014) Mark Todd – Chief Operating Officer Tamalin Morton – General Manager, Sales & Marketing (resigned effective 17 December 2014) Michelle Adams – General Manager, Product Caleb Nicolson – General Manager, Supply Chain Paul Stern – General Manager, Business Development & Sustainability Grant Taylor – Chief Information Officer Matthew Watts – General Manager, Retail Australia (resigned 9 August 2014) Brandon Beveridge – General Manager, Retail New Zealand Reuben Casey – General Manager, Finance (appointed 10 October 2013) Rebecca Edwards – General Manager, Human Resources (appointed 28 May 2014) All of the above persons were employed by the Group and were key management personnel for the full years ended 31 July 2014 and 31 July 2013, unless otherwise stated. Mark Todd, Michelle Adams, Caleb Nicolson, Grant Taylor, Brandon Beveridge, Reuben Casey and Rebecca Edwards are employees of Kathmandu Limited (New Zealand domiciled), and Peter Halkett, Tamalin Morton, Paul Stern and Matthew Watts, are employees of Kathmandu Pty Limited (Australian domiciled). The retail function for Australia and New Zealand will be managed from October 2014 by a newly appointed General Manager Retail Stores, Alison Evans. Details of the remuneration of the Directors and total remuneration of other key management personnel of the Group, for the current and prior financial years are set out in note 9 of the financial statements. For the years ended 31 July 2014 and 31 July 2013 the Group’s financial performance targets were not met and thus the annual short term cash and equity incentives were not paid. A smaller discretionary cash bonus was paid to key and senior management personnel in recognition of the EBITDA outcome for the year being very close to the financial performance target once the adverse impact of non-controllable exchange rate (AUD to NZD) translation was adjusted for. COST OF CHIEF EXECUTIVE OFFICER’S CHANGE OF TAX RESIDENCY (FY2013 EXPENSE) In the second half of FY2013 the Board reviewed the appropriate primary workplace of the Chief Executive Officer, and in conjunction with its taxation advisors also assessed his associated current and historical residency for taxation purposes. As Peter Halkett had been required to operate primarily out of our Melbourne office in the period following the Christchurch earthquake in February 2011, it was determined that since May 2011 he was primarily a tax resident in Australia. The Board and Chief Executive Officer negotiated a sharing of the expenses including personal income tax and other associated deductions for the period from May 2011 to July 2013 arising from this required change of taxation residency. This expense for FY2013 is reported in his remuneration in note 9(c) 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. 20 ANNUAL REPORT 2014 KATHMANDU 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. Testing for the vesting of options granted under the Company Employee Option plan was 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 did not vest on initial testing because the TSR performance target for the tested period was not met, the options did not lapse. There was annual retesting against the 15% compound TSR growth target on 1 October each year through to 2013 for each tranche. 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. 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 186,218 186,218 186,219 1 Oct 2010 1 Oct 2013 1 Oct 2011 1 Oct 2013 1 Oct 2012 1 Oct 2013 53,377 53,377 53,377 26,755 26,755 26,756 36,932 36,932 36,933 15,518 15,518 15,518 956,403 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 7,570 186,218 186,218 186,219 53,377 53,377 53,377 26,755 26,755 26,756 36,932 36,932 36,933 15,518 15,518 15,518 442,850 956,403 The fair value of the options granted on 18 November 2009 is $0.46 per option. All options granted under this plan as detailed above vested on the 1 October 2013 as the required performance hurdles were achieved and the employees remained employed with the Company at the vesting date. Any options that vested under this plan must be exercised no later than 18 November 2014. The total payable per employee on the exercise of one or more options on a particular day is the price per share in the Company paid for by the purchasers of shares in the IPO, being $A1.70 and $NZ2.1333, regardless of the number exercised on that day. No grants have been made subsequent to year end. KATHMANDU ANNUAL REPORT 2014 21 Long term incentive plan The Company Long term incentive plan entitles the Board to grant performance rights for no cash consideration, at intervals determined by the Board. For Executives (including Executive Directors) granted rights in 2010, 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. Rights were offered in 2010 to all Executives domiciled in Australia and New Zealand. Since 2011, rights under this long term performance measurement structure were offered to the Executive Directors only. 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. 2014 Grant date Rights granted during the year Date exercisable Expiry date Executive Directors Peter Halkett Peter Halkett Peter Halkett Mark Todd Mark Todd Mark Todd Total 11 Dec 2013 11 Dec 2013 11 Dec 2013 11 Dec 2013 11 Dec 2013 11 Dec 2013 62,278 62,278 62,278 33,051 33,051 33,051 285,987 1 Dec 2015 1 Dec 2016 1 Dec 2017 1 Dec 2015 1 Dec 2016 1 Dec 2017 1 Dec 2015 1 Dec 2016 1 Dec 2017 1 Dec 2015 1 Dec 2016 1 Dec 2017 2013 Grant date Rights granted during the year Date exercisable Expiry date Executive Directors Peter Halkett Peter Halkett Peter Halkett Mark Todd Mark Todd Mark Todd Total 11 Dec 2012 11 Dec 2012 11 Dec 2012 11 Dec 2012 11 Dec 2012 11 Dec 2012 54,688 54,688 54,688 32,315 32,315 32,315 261,009 1 Dec 2014 1 Dec 2015 1 Dec 2016 1 Dec 2014 1 Dec 2015 1 Dec 2016 1 Dec 2014 1 Dec 2015 1 Dec 2016 1 Dec 2014 1 Dec 2015 1 Dec 2016 Total fair value of performance rights at grant date $ 135,766 135 135,766 135,766 72,051 72,051 72,051 623,451 Total fair value of performance rights at grant date $ 82,087 72,188 69,727 48,506 42,657 41,203 356,368 22 ANNUAL REPORT 2014 KATHMANDU Shares Issued to Directors and Other Key Management Personnel on Exercise of Options or Performance Rights: 2014 Type Date Granted Date Exercised Number of Shares Issued Exercised $ Executive Directors Peter Halkett Peter Halkett Mark Todd Mark Todd Mark Todd Other Key Management Personnel Michelle Adams Tamalin Morton Tamalin Morton Paul Stern Caleb Nicolson Grant Taylor Total 2013 Executive Directors Peter Halkett Mark Todd Other Key Management Personnel Michelle Adams Tamalin Morton Paul Stern Caleb Nicolson Grant Taylor Total Rights Rights Rights Rights Options Rights Rights Options Rights Rights Rights 29 Nov 2010 18 Dec 2013 18 Nov 2011 18 Dec 2013 29 Nov 2010 18 Dec 2013 18 Nov 2011 18 Dec 2013 01 Oct 2013 14 May 2014 29 Nov 2010 18 Dec 2013 29 Nov 2010 18 Dec 2013 59,048 19,994 20,833 11,815 160,131 6,131 8,759 - - - - 341,607 - - 01 Oct 2013 7 Nov 2013 110,796 236,328 29 Nov 2010 18 Dec 2013 29 Nov 2010 18 Dec 2013 29 Nov 2010 18 Dec 2013 3,810 5,952 5,357 - - - Type Date Granted Date Exercised 412,626 577,935 Number of Shares Issued Exercised $ Rights Rights Rights Rights Rights Rights Rights 29 Nov 2010 18 Dec 2012 29 Nov 2010 18 Dec 2012 29 Nov 2010 18 Dec 2012 29 Nov 2010 18 Dec 2012 29 Nov 2010 18 Dec 2012 29 Nov 2010 18 Dec 2012 29 Nov 2010 18 Dec 2012 25,686 9,062 2,667 3,810 3,810 2,589 2,330 49,954 - - - - - - - - Performance rights granted to each Executive will, subject to satisfaction of performance conditions, vest on the basis of one ordinary share for each performance right which vests, at the end of each performance period. KATHMANDU ANNUAL REPORT 2014 23 E – ADDITIONAL INFORMATION, PERFORMANCE RIGHTS VESTING For each grant of performance rights included in the table below, the percentage of the grant that vested, in the financial period, and the percentage that was forfeited because the performance criteria were not achieved or the person did not meet the service criteria is as listed. The performance rights vest over several years provided the vesting conditions are met. No performance rights will vest if the conditions are not satisfied, hence the minimum value of each performance right yet to vest is $Nil. The maximum value of performance rights yet to vest has been determined as the total number of performance rights still to vest multiplied by the fair value of each performance right at grant date. Grant Date Vested % Forfeited % Financial periods in which rights may vest Maximum total number of rights yet to vest Maximum total value of grants yet to vest Executive Directors 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 57.0% 0.0% 0.0% 56.5% FY2018 FY2017 FY2016 FY2017 FY2016 FY2015 FY2016 FY2015 FY2014 FY2015 FY2014 FY2013 FY2014 FY2014 FY2014 FY2013 FY2013 FY2013 FY2012 FY2012 FY2012 FY2011 FY2011 FY2011 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 43.0% 0.0% 100.0% 43.5% Peter Halkett Peter Halkett Peter Halkett Peter Halkett Peter Halkett Peter Halkett Peter Halkett Peter Halkett Peter Halkett Peter Halkett Peter Halkett Peter Halkett Following his resignation, all rights granted to Peter Halkett with vesting dates in financial periods after FY2015 will lapse. Mark Todd Mark Todd Mark Todd Mark Todd Mark Todd Mark Todd Mark Todd Mark Todd Mark Todd Mark Todd Mark Todd Mark Todd 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 43.0% 0.0% 100.0% 43.5% FY2018 FY2017 FY2016 FY2017 FY2016 FY2015 FY2016 FY2015 FY2014 FY2015 FY2014 FY2013 FY2014 FY2014 FY2014 FY2013 FY2013 FY2013 FY2012 FY2012 FY2012 FY2011 FY2011 FY2011 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 57.0% 0.0% 0.0% 56.5% 62,278 62,278 62,278 54,687 54,688 54,688 46,499 46,498 - 59,048 - - 33,051 33,051 33,051 32,316 32,315 32,315 27,476 27,476 - 20,833 - - Other Key Management Personnel Michelle Adams Michelle Adams Michelle Adams Tamalin Morton Tamalin Morton Tamalin Morton Paul Stern Paul Stern Paul Stern Caleb Nicolson Caleb Nicolson Caleb Nicolson Grant Taylor Grant Taylor Grant Taylor FY2011 FY2011 FY2011 FY2011 FY2011 FY2011 FY2011 FY2011 FY2011 FY2011 FY2011 FY2011 FY2011 FY2011 FY2011 0.0% 100.0% 43.5% 0.0% 100.0% 43.5% 0.0% 100.0% 43.5% 0.0% 100.0% 43.5% 0.0% 100.0% 43.5% 0.0% 0.0% 56.5% 0.0% 0.0% 56.5% 0.0% 0.0% 56.5% 0.0% 0.0% 56.5% 0.0% 0.0% 56.5% FY2015 FY2014 FY2013 FY2015 FY2014 FY2013 FY2015 FY2014 FY2013 FY2015 FY2014 FY2013 FY2015 FY2014 FY2013 6,131 - - 8,759 - - 8,759 - - 5,952 - - 5,357 - - 135,247 135,247 135,247 69,726 72,188 82,087 81,140 84,161 - 63,181 - - 71,776 71,776 71,776 41,203 42,656 48,505 47,945 49,731 - 22,291 - - 6,560 - - 9,372 - - 9,372 - - 6,369 - - 5,732 - - 24 ANNUAL REPORT 2014 KATHMANDU 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 $9.4m NA FY2011 $39.1m 316.0% FY2012 $34.9m (10.7%) FY2013 $44.2m 26.6% FY2014 $42.2m (4.5%) 0.3 19.5 17.4 22.1 21.0 NA 65x 0.9x 1.3x 0.95x $2.13 $2.05 $2.20 $1.59 $2.68 $2.05 $2.20 $1.59 $2.68 $3.33 (3.8%) 7.3% (27.7%) 68.6% 24.3% $0.07 $0.10 $0.10 $0.12 $0.12 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 the Audit and Risk Committee to ensure they do not impact the impartiality and objectivity of the auditor; and 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. This report is made in accordance with a resolution of the Directors. David Kirk Chairman Mark Todd Finance Director and Chief Operating Officer KATHMANDU ANNUAL REPORT 2014 25 BOARD, MANAGEMENT AND CORPORATE GOVERNANCE CORPORATE GOVERANCE 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 (Third Edition), 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 the principles. The full content of the Company’s Corporate governance policies, practices and procedures can be found on the Company’s website (kathmanduholdings.com). The main policies and practices adopted by the Company are summarised below. BOARD OF DIRECTORS CHARTER 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 and monitoring the progress of major capital expenditure, capital management and acquisitions and divestitures; approving budgets; and approving and monitoring financial and other reporting. 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 “The Board” section of this Annual Report. BOARD PERFORMANCE The Board charter provides for an annual performance evaluation that compares the performance of the Board with the requirements of this charter, reviews the performance of the Board’s committees and individual Directors, and sets forth the goals and objectives of the Board for the upcoming year and effecting any amendments to this charter considered necessary or desirable of the Board and its Committees. The Board undertakes a review of its performance by the anonymous completion by Directors of evaluation questionnaires relating to Board and committee composition and performance, and individual interviews of Directors with the Chairman. 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 (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 David Kirk, John Harvey, John Holland, Sandra McPhee and Christine Cross. BOARD COMMITTEES BOARD COMPOSITION At present, there are seven Directors on the Board. Five out of the seven Directors are non-Executive Directors. Peter Halkett, (Managing Director and Chief Executive Officer, resigning as of 25 November 2014), and Mark Todd (Finance Director and Chief Operating Officer) are the only Executive Directors on the Board. The Chairman of the Board is David Kirk. The biography of each Board member, including each 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. 26 ANNUAL REPORT 2014 KATHMANDU AUDIT AND RISK COMMITTEE Under its charter, this committee must have at least three members, a majority of whom must be independent Directors and all of whom must be non-Executive Directors. Currently, all the non-Executive Directors are members of this committee. John Harvey is Chair of the committee. The primary role of this committee includes: overseeing the process of financial reporting, internal control, continuous disclosure, financial and non-financial risk management and compliance, and external 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; fairly and responsibly remunerates Directors and Executives, having regard to the performance of the Company, the performance of the Executives and the general remuneration environment; and has effective policies and procedures to attract, motivate and retain appropriately skilled persons to meet the Company’s needs. RISK MANAGEMENT POLICY The identification and proper management of the Company’s risks are an important priority of the Board. The Company has a Risk Management Policy (available on the Company’s website kathmanduholdings.com) 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. A risk management framework is in place to identify, oversee, manage and control risk. A formal review of the risk framework was undertaken during the reporting period by the Committee. CONTINUOUS DISCLOSURE POLICY The Company is committed to observing its disclosure obligations under the Listing Rules. The Company has a policy which establishes procedures which are aimed at ensuring that Directors and Executives 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’, Executives’ 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 KATHMANDU ANNUAL REPORT 2014 27 of material price sensitive information, Directors, Executives and Key management personnel 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, Executives and key management personnel must receive clearance for any proposed dealing in shares. CODE OF CONDUCT The Board recognises the need to observe the highest standards of corporate practice and business conduct. Accordingly, the Board has a formal code of conduct, to be followed by all employees and officers. The key aspects of this code are to: act with honesty, integrity and fairness and in the best interest of the Company; act in accordance with all applicable laws, regulations, policies and procedures; and use Company resources and property properly. DIVERSITY POLICY Our employees are a vital resource and play a key role in the success of the company. The skills and expertise of Kathmandu’s employees drive innovation throughout the business. 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 company, without any form of discrimination. 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 Recommendation 1.5. A copy of this Policy can be obtained from the Company's website. Senior Management (Wider Leadership Team): Total 49 = 28 Male (57%), 21 Female (43%) Total Employees New Zealand: Total 760 = 279 Male (37%) and 481 Female (63%) Total Employees Australia: Total 1,281 = 570 Male (44%) and 711 Female (56%) Total Employees United Kingdom: Total 33 = 21 Male (64%) and 12 Female (36%) Total Kathmandu Group: Total 2,074 = 870 Male (42%) and 1,204 Female (58%) Kathmandu considers our current employee gender diversity as a strength and we will continue to support strategies and initiatives that address any significant changes in diversity ratios through employee turnover. Kathmandu is also proud of its ethnic diversity which reflects the diversity of its customers, business partners and community. Return to work and flexible working arrangements which facilitate gender diversity will be expanded to provide further provision to the retention of our team. A study of employee pay parity was conducted and audited as part of the company 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 company. 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 (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. We consider our current level of employee gender diversity to be efficacious; however we will continue to be vigilant in the review of measureable diversity objectives. 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 ASX and NZX. GENDER DIVERSITY In accordance with ASX CGC Corporate Governance Principles and Recommendations, Recommendation 1.5; the proportion of females employed by Kathmandu as at 31 July 2014 was as follows: Board: 29% being 2 female of 7 Directors Executive Management: Total 11 = 8 Male (73%), 3 Female (27%) ECONOMIC, ENVIRONMENTAL AND SOCIAL SUSTAINABILITY The Company prepares a separate Sustainability Report in accordance with the Global Reporting Initiative (GRI) G4 reporting framework. It is available online at kathmanduholdings.com. KATHMANDU ANNUAL REPORT 2014 29 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2014 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 Inventories Intangible assets Investment in subsidiaries CONTENTS OF NOTES TO FINANCIAL STATEMENTS General information 1 Summary of significant accounting policies 2 Standards, interpretations and amendments to published standards 3 Income and expenses 4 Income tax expense 5 Reconciliation of net profit after taxation with cash inflow from operating activities 6 Cash and cash equivalents 7 Trade and other receivables 8 9 Related party disclosures 10 Derivative financial instruments 11 12 Property, plant and equipment 13 14 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 27 Segmental information 28 Earnings per Share 29 Earthquake disclosures 30 Events occurring after the balance date Financial risk management 30 31 32 33 34 35 74 35 35 41 42 43 44 45 45 46 49 50 50 51 53 54 55 55 56 57 61 62 63 63 63 63 64 71 73 73 73 30 ANNUAL REPORT 2014 KATHMANDU DIRECTORS’ APPROVAL OF FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2014 Authorisation for Issue The Board of Directors authorised the issue of these Financial Statements on 23 September 2014. Approval by Directors The Directors are pleased to present the Financial Statements of Kathmandu Holdings Limited for the year ended 31 July 2014 on pages 31 to 73. Director Date: 23 September 2014 Director Date: 23 September 2014 For and on behalf of the Board of Directors KATHMANDU ANNUAL REPORT 2014 31 STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 JULY 2014 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 Comprehensive Income that may be recycled to the Income Statement: 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 2014 NZ$’000 2013 NZ$’000 2014 NZ$’000 2013 NZ$’000 392,918 383,983 (144,777) (141,958) 248,141 242,025 - - - - - - 1,363 864 24,130 20,133 (123,193) (121,800) (62,055) 64,256 257 (4,850) (4,593) (57,700) 63,389 187 (4,594) (4,407) - (1,773) 22,357 70 - 70 - (1,941) 18,192 - (17) (17) 59,663) (17,511) 58,982) (14,808) 22,427) 396 18,175) (45) 42,152 44,174 22,823 18,130 (7,122) (3,794) 8,376 (18,186) (10,916) (9,810) - - - - - - 31,236 34,364 22,823 18,130 21.0cps 20.8cps 200,422 202,303 22.1cps 21.9cps 200,197 202,121 4 4 4 5 20 20 28 28 28 28 32 ANNUAL REPORT 2014 KATHMANDU STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 JULY 2014 Cash Flow Hedge Reserve NZ$’000 Foreign Currency Translation Reserve NZ$’000 Share Based Payments Reserve NZ$’000 GROUP Balance as at 31 July 2012 Profit after tax Other comprehensive income Dividends paid Issue of share capital Share Options / Performance Rights lapsed Share based payment expense Balance as at 31 July 2013 Profit after tax Other comprehensive income Dividends paid Issue of share capital Share Options / Performance Rights lapsed Share based payment expense Balance as at 31 July 2014 Share Capital NZ$’000 197,298 - - - 72 - - (3,309) - 8,376 7,628 - (18,186) - - - - - - - - 197,370 5,067 (10,558) - - - 858 - - - - (7,122) (3,794) - - - - - - - - 198,228 (2,055) (14,352) 739 - - - (72) (53) 209 823 - - - (301) - 211 733 PARENT Balance as at 31 July 2012 Profit after tax Dividends paid Issue of share capital Share Options / Performance Rights lapsed Share based payment expense Balance as at 31 July 2013 Profit after tax Dividends paid Issue of share capital Share Options / Performance Rights lapsed Share based payment expense Balance as at 31 July 2014 Share Capital NZ$’000 422,386 - - 72 - - 422,458 - - 858 - - 423,316 Cash Flow Hedge Reserve NZ$’000 Foreign Currency Translation Reserve NZ$’000 Share Based Payments Reserve NZ$’000 - - - - - - - - - - - - - - - - - - - - - - - - - - 739 - - (72) (53) 209 823 - - (301) - 211 733 Retained Earnings NZ$’000 77,278 44,174 - Total Equity NZ$’000 279,634 44,174 (9,810) (20,018) (20,018) - 53 - - - 209 101,487 294,189 42,152 - (24,047) - - - 42,152 (10,916) (24,047) 557 - 211 119,592 302,146 Retained Earnings NZ$’000 (15,654) 18,130 (20,018) - 53 - Total Equity NZ$’000 407,471 18,130 (20,018) - - 209 (17,489) 405,792 22,823 (24,047) 22,823 (24,047) - - - 557 - 211 (18,713) 405,336 BALANCE SHEETS AS AT 31 JULY 2014 ASSETS Current assets Cash and cash equivalents Trade and other receivables Related party receivable Derivative financial instruments Inventories Current tax assets Total current assets Non-current assets Property, plant and equipment Intangible assets Derivative financial instruments Investment in subsidiaries Deferred tax Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Derivative financial instruments Related party payable Interest bearing liabilities Current tax liabilities Total current liabilities Non-current liabilities Derivative financial instruments Interest bearing liabilities Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity - ordinary shares Reserves Retained earnings Total equity KATHMANDU ANNUAL REPORT 2014 33 Note GROUP 2014 NZ$’000 2013 NZ$’000 PARENT 2014 NZ$’000 2013 NZ$’000 7 8 9 10 11 12 13 10 14 15 16 10 9 17 10 17 18 20 20 7,192 3,779 - 10 103,767 - 2,345 3,668 - 7,887 80,031 - 114,748 93,931 48,402 238,674 138 - 6,335 293,549 408,297 37,489 2,999 - 231 2,739 43,458 209 62,484 62,693 106,151 43,379 234,863 27 - 4,017 282,286 376,217 33,032 58 - 223 5,507 38,820 628 42,580 43,208 82,028 9 262 5 256 84,274 81,944 - - 2,632 87,177 - 5 - - - 2,589 84,794 - 4 - 321,234 321,234 6 321,245 408,422 17 321,255 406,049 82 - 3,004 - - 257 - - - - 3,086 257 - - - - - - 3,086 257 302,146 294,189 405,336 405,792 198,228 (15,674) 119,592 302,146 197,370 (4,668) 101,487 294,189 423,316 422,458 733 (18,713) 405,336 823 (17,489) 405,792 34 ANNUAL REPORT 2014 KATHMANDU STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED 31 JULY 2014 Cash flows from operating activities Cash was provided from: Receipts from customers Dividends received Income tax received Interest received Cash was applied to: Payments to suppliers and employees Income tax paid Interest paid GROUP PARENT Note 2014 NZ$’000 2013 NZ$’000 2014 NZ$’000 2013 NZ$’000 394,163 384,515 - - - - 50 - - 50 24,047 20,018 364 - 462 - 394,213 384,565 24,411 20,480 338,975 19,555 4,488 363,018 315,892 18,411 4,586 338,889 1,585 1,415 - - - - 1,585 1,415 Net cash inflow from operating activities 6 31,195 45,676 22,826 19,065 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 8 8 15,168 9,047 24,215 10 10 14,819 2,600 17,419 12 13 - - - 7 7 - - - 7 7 Net cash outflow from investing activities (24,207) (17,409) (7) (7) Cash flows from financing activities Cash was provided from: Proceeds of loan advances Proceeds from share issues Cash was applied to: Dividends paid Repayment of loan advances 53,577 557 54,134 24,047 32,778 56,825 96,225 - 96,225 20,018 103,758 123,776 674 557 1,231 941 - 941 24,047 20,018 - - 24,047 20,018 Net cash outflow from financing activities (2,691) (27,551) (22,816) (19,077) Net increase / (decrease) in cash held Opening cash and cash equivalents Effect of foreign exchange rates Closing cash 4,297 2,345 550 7,192 716 1,811 (182) 2,345 7 3 5 1 9 (19) 26 (2) 5 KATHMANDU ANNUAL REPORT 2014 35 NOTES TO THE FINANCIAL STATEMENTS 1 GENERAL INFORMATION certain assets as identified in specific accounting policies below. 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. The Company is listed on the NZX and ASX. These audited consolidated financial statements have been approved for issue by the Board of Directors on 23 September 2014. 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 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 New Zealand’s 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 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 (r) (i) & (ii). The recoverable amounts of cash-generating units have been determined based on the value in use. 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 expected to sell 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. New standards first applied in the year The Group has adopted External Reporting Board Standard A1 Accounting Standards Framework (For-profit Entities Update) (XRB A1). XRB A1 establishes a for-profit tier structure and outlines which suite of accounting standards entities in different tiers must follow. The Group is a Tier 1 entity. There was no impact on the current or prior year financial statements. Amendment to NZ IFRS 7, 'Financial instruments: Disclosures', on asset and liability offsetting. This amendment includes new disclosures to facilitate comparison between those entities that prepare NZ IFRS financial statements to those that prepare financial statements in accordance with US GAAP. The adoption of this standard has not resulted in any additional disclosures. NZ IFRS 10, 'Consolidated financial statements' builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. The adoption of this standard has not resulted in any changes to the consolidated Group. NZ IFRS 13, 'Fair value measurement', aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across NZ 36 ANNUAL REPORT 2014 KATHMANDU IFRSs. The requirements, which are largely aligned between NZ IFRSs and US GAAP, do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within NZ IFRSs. The adoption of this standard has not resulted in any measurement changes. Amendments to NZ IAS 36, 'Impairment of assets', on the recoverable amount disclosures for non-financial assets. This amendment removed certain disclosures of the recoverable amount of cash generating units which had been included in NZ IAS 36 by the issue of NZ IFRS 13. The amendment is not mandatory for the Group until 1 January 2014, however the Group has decided to early adopt the amendment as of 1 August 2013. (B) PRINCIPLES OF CONSOLIDATION (i) Subsidiaries Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. When necessary, amounts reported by subsidiaries have been adjusted to conform with the Group’s accounting policies. (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 other comprehensive income. 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 in other comprehensive income. On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders’ equity. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. (E) REVENUE RECOGNITION Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services, excluding Goods and Services Tax, rebates and discounts and after eliminating sales within the Group. Revenue is recognised as follows: (i) Sales of goods Sales of goods are recognised when a Group entity has delivered a product to the customer. Retail sales are usually in cash or by credit card. The recorded revenue is the gross amount of sale (excluding GST). (ii) Sales of services Management fees are recognised in the accounting period in which the services are rendered. KATHMANDU ANNUAL REPORT 2014 37 (iii) Interest income Interest income is recognised on a time-portion basis using the effective interest method. or different taxable entities where there is an intention to settle the balances on a net basis. (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 period comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. 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 are subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. (G) GOODS AND SERVICES TAX (GST) The income statement and the cash flow statement have been prepared so that all components are stated exclusive of GST. All items in the balance sheet are stated net of GST, with the exception of receivables and payables, which include GST invoiced. (H) LEASES The Group is the lessee Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. (I) IMPAIRMENT OF NON-FINANCIAL ASSETS Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Intangible assets that have an indefinite useful life, including goodwill, are not subject to amortisation and are tested annually for impairment irrespective of whether any circumstances identifying a possible impairment have been identified. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows e.g. cash generating units. (J) CASH AND CASH EQUIVALENTS Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet. (K) TRADE RECEIVABLES Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity 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 38 ANNUAL REPORT 2014 KATHMANDU 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 as 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. Regular purchases and sales of financial assets are recognised on the trade date – the date on which the Group commits to purchase or sell the asset. Management determines the classification of its investments at the initial recognition and re-evaluates this designation at every reporting date. (i) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of selling the receivable. They are included in current assets, except for those with maturities greater than 12 months after the balance sheet date which are classified as non-current assets. (ii) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this 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 hedges); or (2) hedges of highly probable forecast transactions (cash flow hedges). The Group documents, at the inception of the transaction, the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an 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. (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. (ii) Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in equity in the hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated KATHMANDU ANNUAL REPORT 2014 39 in equity are recycled in the income statement in the periods when the hedged item will affect profit or loss (for instance when the forecast sale that is hedged takes place). However, when the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory) or a non-financial liability, the gains and losses previously deferred in equity are transferred from equity and included in the measurement of the initial cost or carrying amount of the asset or liability. When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. (iii) Derivatives that do not qualify for hedge accounting Where 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. 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 carrying value of payables are assumed to approximate their fair values. (P) OFFSETTING FINANCIAL INSTRUMENTS Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. (Q) 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 which they are incurred. Depreciation of property, plant and equipment is calculated using diminishing value method so as to expense the cost of the assets over their useful lives. The rates are as follows: Leasehold Improvements Office, Plant and Equipment Furniture and Fittings Computer Equipment Motor Vehicles 8 – 50% 8 – 84% 10 – 60% 10 – 67% 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. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement. (R) 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 40 ANNUAL REPORT 2014 KATHMANDU 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 straight line and diminishing value methods and rates of 10-67%. 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. (S) 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. (T) 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. (U) 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. (V) 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. (W) 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. 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. (iv) Equity settled long term incentive plan The Executive and Senior Management Long Term Incentive plan grants Group employees performance rights subject KATHMANDU ANNUAL REPORT 2014 41 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. For financial liabilities, the standard retains most of the NZ IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. The new hedge accounting model more closely aligns hedge accounting with risk management activities undertaken by companies when hedging their financial and non-financial risks. NZ IFRS 9 introduces a new expected credit loss model for calculating the impairment of financial assets. This standard is effective for reporting periods beginning on or after 1 January 2018. The Group is yet to assess NZ IFRS 9’s full impact. NZ IFRS 15, ‘Revenue from contracts with customers’ is effective for annual reporting periods beginning on or after 1 January 2017. NZ IFRS 15 addresses recognition of revenue from contracts with customers. It replaces the current revenue recognition guidance in NZ IAS 18 Revenue and NZ IAS 11 Construction contracts and is applicable to all entities with revenue. It sets out a 5 step model for revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Group has yet to determine the changes and impact on the Group’s financial statements. The Group will apply this standard from 1 August 2017. (X) DIVIDENDS Dividend distribution to the Company shareholders is recognised as a liability in the Company’s and Group’s financial statements in the period in which the dividends are approved by the Company’s shareholders. (Y) CASH FLOW STATEMENT The following are definitions of the terms used in the Cash Flow Statement: a. Cash comprises; cash at bank, cash on hand and overdraft balances; b. 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; c. Financing activities are those activities which result in changes in the size and composition of the capital structure of the Company; d. Operating activities include all transactions and other events that are not investing or financing activities. 3 STANDARDS, INTERPRETATIONS AND AMENDMENTS TO PUBLISHED STANDARDS Standards, interpretations and amendments to published standards that are not yet effective NZ IFRS 9, ‘Financial instruments’, was issued in September 2014 as a complete version of the standard. NZ IFRS 9 replaces the parts of NZ IAS 39 that relate to the classification and measurement of financial instruments, hedge accounting and impairment. NZ IFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortised cost. The determination is made at initial recognition. The classification depends on the entity's business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. 42 ANNUAL REPORT 2014 KATHMANDU 4 INCOME AND EXPENSES Profit before income tax includes the following specific (income) and expenses: Income Dividends received EXPENSES Depreciation - Leasehold improvements - Office, plant and equipment - Furniture and fittings - Computer equipment - Motor vehicles Total depreciation Amortisation - Software Total amortisation Loss/(Gain) 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 loss/(gain) on foreign currency borrowings GROUP PARENT 2014 NZ$’000 2013 NZ$’000 2014 NZ$’000 2013 NZ$’000 - - (24,047) (20,018) 4,277 438 2,429 1,348 8 8,500 1,698 1,698 597 44,461 725 71,871 211 (50) 3,904 570 169 5,225 537 2,544 496 12 8,814 1,795 1,795 955 43,801 717 68,719 209 (50) 3,868 607 (18) - - - - - - 6 6 - - 725 - 211 - - - (70) - - - - - - 3 3 - - 717 - 209 - - - 17 Remuneration of auditors is detailed in note 22. Depreciation and amortisation expenditure is included in administration and general expenses in the Income Statement. KATHMANDU ANNUAL REPORT 2014 43 5 INCOME TAX EXPENSE GROUP PARENT Note 2014 NZ$’000 2013 NZ$’000 2014 NZ$’000 2013 NZ$’000 Income statement Current income tax charge Deferred income tax charge / (credit) (refer note 15) Income tax charge / (credit) reported in income statement Reconciliation of effective tax charge Profit before income tax Income tax calculated at 28% (2013: 28%) Adjustments to taxation: Adjustments due to different rate in different jurisdictions Non-taxable income Expenses not deductible for tax purposes Effect of change in corporate tax rate Utilisation of tax losses by group companies Tax expense transferred to foreign currency translation reserve Adjustments in respect of prior years Income tax charge / (credit) reported in income statement 16,846 665 17,511 59,663 16,706 812 (197) 863 - - (670) (3) 17,511 18,826 (4,018) 14,808 58,982 16,515 530 - 630 - - (2,929) 62 14,808 (407) 11 (396) 62 (17) 45 22,427 6,280 18,175 5,089 - - (6,734) (5,606) 60 - - - (2) (396) 69 - - - 493 45 The tax charge / (credit) relating to components of other comprehensive income is as follows: GROUP 2014 NZ$’000 2013 NZ$’000 PARENT 2014 NZ$’000 2013 NZ$’000 Movement in cash flow hedge reserve before tax Tax impact relating to cash flow hedge reserve Movement in cash flow hedge reserve after tax Foreign currency translation reserve before tax Tax credit / (charge) relating to foreign currency translation reserve (10,198) 3,076 (7,122) (4,371) 577 11,203 (2,827) 8,376 (20,723) 2,537 Movement in foreign currency translation reserve after tax (3,794) (18,186) Total other comprehensive income before tax Total tax credit / (charge) on other comprehensive income Total other comprehensive income after tax Current tax Deferred tax Total tax credit / (charge) on other comprehensive income (14,569) 3,653 (10,916) 670 2,983 3,653 (9,520) (290) (9,810) 2,929 (3,219) (290) 15 - - - - - - - - - - - - - - - - - - - - - - - - 44 ANNUAL REPORT 2014 KATHMANDU UNRECOGNISED TAX LOSSES The Group has estimated tax losses to carry forward from Kathmandu (U.K.) Limited of £9,529,783 (NZ$18,612,857) (2013: £8,186,293 (NZ$15,387,769)) which can be carried forward to be offset against future profits generated within the UK. IMPUTATION CREDITS GROUP PARENT 2014 NZ$’000 2013 NZ$’000 2014 NZ$’000 2013 NZ$’000 Imputation credits available for use in subsequent reporting periods based on a tax rate of 28% 6,156 4,527 - (1) The above amounts represent the balance of the imputation account as at the end of July 2014, 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 in subsequent periods as at 31 July 2014 is A$5,318,617 (2013: A$5,794,857). 6 RECONCILIATION OF NET PROFIT AFTER TAXATION WITH CASH INFLOW FROM OPERATING ACTIVITIES Profit after taxation Movement in working capital: (Increase) / decrease in trade and other receivables (Increase) / decrease in inventories Increase / (decrease) in trade and other payables Increase / (decrease) in tax liability Add non cash items: Depreciation Amortisation of intangibles Revaluation of derivative financial instruments (Increase) / decrease in deferred taxation Employee share based remuneration Loss on sale of property, plant and equipment Cash inflow from operating activities GROUP 2014 NZ$’000 2013 NZ$’000 PARENT 2014 NZ$’000 2013 NZ$’000 42,152 44,174 22,823 18,130 (119) (24,978) 5,176 (2,689) (22,610) 8,500 1,698 3,079 (2,432) 211 597 11,653 31,195 (332) (11,915) 6,348 (243) (6,142) 8,814 1,795 (3,053) (1,076) 209 955 7,644 (6) - (175) (43) (225) - 6 - 11 211 - 228 5 - 210 525 740 - 3 - (17) 209 - 195 45,676 22,826 19,065 7 CASH AND CASH EQUIVALENTS Cash on hand Cash at bank Short term deposits KATHMANDU ANNUAL REPORT 2014 45 GROUP 2014 2013 PARENT 2014 2013 NZ$’000 NZ$’000 NZ$’000 NZ$’000 169 7,009 14 7,192 165 2,166 14 2,345 - 9 - 9 5 4 - - - 9 - 5 - 5 5 - - - - 5 The carrying amount of the Group's cash and cash equivalents are denominated in the following currencies: NZD AUD GBP USD EUR 8 TRADE AND OTHER RECEIVABLES 1,624 5,263 250 52 3 7,192 527 1,464 270 84 - 2,345 GROUP 2014 2013 PARENT 2014 2013 NZ$’000 NZ$’000 NZ$’000 NZ$’000 Trade receivables Sundry debtors and prepayments 211 3,568 3,779 125 3,543 3,668 - 262 262 Bad and doubtful trade receivables The Group has not recognised a loss in respect of bad and doubtful trade receivables during the year ended 31 July 2014 (2013: nil). The carrying amount of the Group’s trade and other receivables are denominated in the following currencies: NZD AUD GBP 1,075 2,435 269 3,779 2,076 1,019 573 3,668 199 63 - 262 - 256 256 256 - - 256 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 and Milford Group Holdings Limited) $84,274,467 (2013: $81,944,045). Loans to the parent from subsidiaries $3,004,251 (2013: nil). GROUP 2014 NZ$’000 2013 NZ$’000 PARENT 2014 NZ$’000 2013 NZ$’000 3,450 350 211 - 4,011 3,124 1,187 202 7 4,520 - - 211 - 211 - - 202 7 209 46 ANNUAL REPORT 2014 KATHMANDU 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 $50,180 (2013: $84,863) 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 2014, there were outstanding legal fees of $5,437 (2013: $4,989). During the year, operating lease costs of $238,407 (2013: $229,282) were paid to Chalmers Properties Limited, a subsidiary of Port Otago Limited. John Harvey is a Director of both of these companies. All subsidiaries within the Group (note 14) are related parties. No amounts owed to related parties have been written off or forgiven during the year. (a) Key Management Personnel Salaries Other short-term employee benefits Employee performance rights Employee share option plans Key management personnel include the following employees: Executive Directors: Chief Executive Officer Chief Operating Officer Other Key Management Personnel: GM, Product GM, Finance GM, Marketing GM, Business Development & Sustainability GM, Supply Chain Chief Information Officer GM, Retail (Australia) GM, Retail (New Zealand) KATHMANDU ANNUAL REPORT 2014 47 (b) Non-Executive Directors Total directors fees 725 717 725 717 GROUP 2014 NZ$’000 2013 NZ$’000 PARENT 2014 NZ$’000 2013 NZ$’000 Directors fees for the Parent company were paid to the following: David Kirk (appointed as a Director 21 November 2013, appointed Chairman 5 February 2014) Sandra McPhee John Harvey (acting Chairman until 5 February 2014) John Holland Christine Cross (c) Remuneration Detail (as referred to in the Remuneration Report) 2014 Short-Term Benefits Post- employment benefits Share based payments Name Cash Salary and fees $ Cash bonus $ Non- Monetary benefits $ Super- annuation $ Share Options $ Performance Rights $ Equity related $ Total $ Performance related $ Non-Executive Directors David Kirk John Harvey John Holland Sandra McPhee Christine Cross 144,853 196,039 128,069 128,069 128,069 Total Non-Executive Directors 725,099 - - - - - - - - - - - - - - - - - - Executive Directors Peter Halkett Mark Todd Total Executive Directors 888,846 87,568 488,860 48,750 10,637 3,909 22,057 17,066 1,377,706 136,318 14,546 39,123 Other Key Management Personnel Total 1,949,221 167,539 4,052,026 303,857 31,676 46,222 83,577 122,700 - - - - - - - - - - - - - - - - - 0.0% 0.0% 0.0% 0.0% 0.0% 144,853 196,039 128,069 128,069 128,069 0.0% 725,099 129,976 73,633 11.4% 11.6% 1,139,084 632,218 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 7.7% 7.7% 203,609 11.5% 1,771,302 7.7% 7,883 211,492 0.4% 4.5% 2,239,896 4,736,297 7.5% 6.4% 48 ANNUAL REPORT 2014 KATHMANDU 2013 Short-Term Benefits Post- employment benefits Share based payments Cash Salary and fees $ Cash bonus $ Non- Monetary benefits $ Super- annuation $ Share Options $ Performance Rights $ Equity related $ Total $ Performance related $ Name Non-Executive Directors James Strong John Harvey John Holland Sandra McPhee Christine Cross 159,136 191,984 140,139 140,139 85,229 Total Non-Executive Directors 716,627 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 0.0% 0.0% 0.0% 0.0% 0.0% 159,136 191,984 140,139 140,139 85,229 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 716,627 0.0% Executive Directors Peter Halkett1 Mark Todd Total Executive Directors 831,975 100,000 680,998 483,171 80,000 3,551 45,738 11,261 3,689 1,057 117,508 58,977 6.8% 9.4% 1,779,908 638,017 5.6% 12.5% 1,315,146 180,000 684,549 56,999 4,746 176,485 7.5% 2,417,925 7.4% Other Key Management Personnel Total 1,686,329 304,502 18,323 3,718,102 484,502 702,872 65,475 122,474 1,769 6,515 26,006 1.3% 2,102,404 202,491 4.0% 5,236,956 14.5% 9.3% 1. This includes amounts paid by the Company in settling the obligations arising from a change in the primary tax residency (from New Zealand to Australia) for the period from May 2011 to July 2013. The amounts involved are primarily non-monetary benefits, being net amounts paid or payable directly to the relevant taxation authorities as a result of the prior taxation residency being corrected. KATHMANDU ANNUAL REPORT 2014 49 GROUP 2014 NZ$’000 2013 NZ$’000 PARENT 2014 NZ$’000 2013 NZ$’000 148 - 148 138 10 298 2,910 3,208 209 2,999 27 7,887 7,914 27 7,887 686 - 686 628 58 - - - - - - - - - - - - - - - - - - - - 10 DERIVATIVE FINANCIAL INSTRUMENTS Asset Interest rate swaps - cash flow hedge Foreign exchange contracts - cash flow hedge Less non-current portion: Interest rate swaps - cash flow hedge 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 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 (b) Foreign exchange contracts - 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 floating rate 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 notional amount of interest rate swaps at balance date was $48,373,626 (2013: $44,971,623). The fixed interest rates range between 3.05% and 5.71% (2013: 3.05% and 5.71%). Refer note 26 for timing of expected cash flows relating to interest rate swaps. 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 notional amount of foreign exchange contracts amount to US$100,250,000, NZ$122,888,501 (2013: US$90,700,000, NZ$107,499,336). No material hedge ineffectiveness for interest rate swaps or foreign exchange contracts exists as at balance date (2013: nil). Refer to note 26(a) for a sensitivity analysis of foreign exchange risk associated with derivative financial instruments. 50 ANNUAL REPORT 2014 KATHMANDU 11 INVENTORIES Trading stock Goods in transit GROUP 2014 NZ$’000 91,392 12,375 103,767 2013 NZ$’000 64,597 15,434 80,031 PARENT 2014 NZ$’000 2013 NZ$’000 - - - - - - Inventory has been reviewed for obsolescence and a provision of $348,189 (2013: nil) has been made. 12 PROPERTY, PLANT AND EQUIPMENT GROUP Year ended 31 July 2013 Opening net book value Additions Disposals Depreciation charge Exchange differences Closing net book value As at 31 July 2013 Cost Accumulated depreciation Closing net book value Year ended 31 July 2014 Opening net book value Additions Disposals Depreciation charge Exchange differences Closing net book value As at 31 July 2014 Cost Accumulated depreciation Closing net book value Leasehold improvement $’000 Office, plant & equipment $’000 Furniture & fittings $’000 Computer equipment $’000 Motor vehicles $’000 30,346 5,633 (985) (5,225) (2,390) 27,379 49,298 (21,919) 27,379 27,379 5,318 (339) (4,277) (567) 27,514 49,640 (22,126) 27,514 1,449 1,224 (169) (537) (82) 1,885 4,868 (2,983) 1,885 1,885 394 (27) (438) (26) 1,788 4,971 (3,183) 1,788 7,325 7,056 (350) (2,544) (438) 11,049 19,279 (8,230) 11,049 11,049 8,901 (279) (2,429) (261) 16,981 26,802 (9,821) 16,981 2,732 906 (38) (496) (75) 3,029 7,279 (4,250) 3,029 3,029 555 (131) (1,348) (15) 2,090 7,307 (5,217) 2,090 59 - (7) (12) (3) 37 191 (154) 37 37 - - (8) - 29 189 (160) 29 Total $’000 41,911 14,819 (1,549) (8,814) (2,988) 43,379 80,915 (37,536) 43,379 43,379 15,168 (776) (8,500) (869) 48,402 88,909 (40,507) 48,402 KATHMANDU ANNUAL REPORT 2014 51 Goodwill NZ$’000 Brand NZ$’000 Software NZ$’000 Total NZ$’000 75,406 170,326 - - - - 75,406 76,677 (1,271) 75,406 - - - (14,900) 155,426 155,426 - 155,426 75,406 155,426 - - - - 75,406 76,677 (1,271) 75,406 - - - (3,328) 152,098 152,098 - 152,098 3,360 2,600 - (1,795) (134) 4,031 9,942 (5,911) 4,031 4,031 9,047 (155) (1,698) (55) 11,170 18,700 (7,530) 11,170 249,092 2,600 - (1,795) (15,034) 234,863 242,045 (7,182) 234,863 234,863 9,047 (155) (1,698) (3,383) 238,674 247,475 (8,801) 238,674 13 INTANGIBLE ASSETS GROUP Year ended 31 July 2013 Opening net book value Additions Disposals Amortisation Exchange differences Closing net book value As at 31 July 2013 Cost Accumulated amortisation/impairment Closing net book value Year ended 31 July 2014 Opening net book value Additions Disposals Amortisation Exchange differences Closing net book value As at 31 July 2014 Cost Accumulated amortisation/impairment Closing net book value 52 ANNUAL REPORT 2014 KATHMANDU PARENT Year ended 31 July 2013 Opening net book value Additions Disposals Amortisation Exchange differences Closing net book value As at 31 July 2013 Cost Accumulated amortisation Closing net book value Year ended 31 July 2014 Opening net book value Additions Disposals Amortisation Exchange differences Closing net book value As at 31 July 2014 Cost Accumulated amortisation Closing net book value Goodwill NZ$’000 Brand NZ$’000 Software NZ$’000 Total NZ$’000 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 7 - (3) - 4 7 (3) 4 4 7 - (6) - 5 14 (9) 5 - 7 - (3) - 4 7 (3) 4 4 7 - (6) - 5 14 (9) 5 Impairment tests for goodwill and brand The aggregate carrying amounts of goodwill and brand allocated to each unit are as follows: GROUP New Zealand Australia GOODWILL 2014 NZ$’000 2013 NZ$’000 BRAND 2014 NZ$’000 2013 NZ$’000 28,654 46,752 75,406 28,654 46,752 75,406 51,000 101,098 152,098 51,000 104,426 155,426 KATHMANDU ANNUAL REPORT 2014 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 value in use. The discounted cash flow valuations were calculated using projected five year future cash flows based on Board approved business plans. Business plans are modelled assuming like for like sales growth based on historical performance taking into account changing market conditions and the continuation of the store rollout programme (approximately fifteen stores per year). The key assumptions used for the value in use calculation and the recoverable amounts are as follows: 2014 2013 Terminal growth rate 2.5% 2.5% New Zealand CGU pre-tax discount rate Australia CGU pre-tax discount rate 15.0% 14.0% 15.0% 14.6% Consolidated pre-tax discount rate 14.5% 14.8% The calculations confirmed that there was no impairment of goodwill and brand during the year (2013: 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. 14 INVESTMENT IN SUBSIDIARIES 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 Equity holding Milford Group Holdings Limited Kathmandu Limited Kathmandu Pty Limited Kathmandu (U.K.) Limited 2014 100% 100% 100% 100% 2013 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 the 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 New Zealand New Zealand Australia United Kingdom 2014 NZ$ 321,233,808 - - - Principal Activity Holding company Outdoor retailer Outdoor retailer Outdoor retailer 2013 NZ$ 321,233,808 - - - 321,233,808 321,233,808 54 ANNUAL REPORT 2014 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: GROUP Tax depreciation NZ$’000 Employee obligations NZ$’000 Losses NZ$’000 Other timing differences NZ$’000 Reserves NZ$’000 Total NZ$’000 As at 31 July 2012 Recognised in the income statement Recognised in other comprehensive income As at 31 July 2013 Recognised in the income statement Recognised in other comprehensive income As at 31 July 2014 87 125 - 212 6 - 218 837 285 - 1,122 (36) - 1,086 1 - - 1 - - 1 PARENT 1,751 3,608 (392) 4,967 (635) (93) 4,239 542 - (2,827) (2,285) - 3,076 791 3,218 4,018 (3,219) 4,017 (665) 2,983 6,335 As at 31 July 2012 Recognised in the income statement As at 31 July 2013 Recognised in the income statement As at 31 July 2014 Tax depreciation NZ$’000 Employee obligations NZ$’000 Losses NZ$’000 Other timing differences NZ$’000 Reserves NZ$’000 Total NZ$’000 - - - - - - - - - - - - - - - - 17 17 (11) 6 - - - - - - 17 17 (11) 6 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 2014 NZ$’000 2013 NZ$’000 PARENT 2014 NZ$’000 2013 NZ$’000 2,081 4,661 (383) (24) 6,335 1,705) 2,803) (342) (149) 4,017) - 6 - - 6 -) 17) -) -) 17) KATHMANDU ANNUAL REPORT 2014 55 GROUP 2014 NZ$’000 2013 NZ$’000 PARENT 2014 NZ$’000 2013 NZ$’000 11,868 6,165 19,456 37,489 7,930 6,989 18,113 33,032 9,064 26,067 502 1,856 37,489 7,534 22,301 906 2,291 33,032 - - 82 82 44 38 - - 82 43 - 214 257 169 88 - - 257 GROUP 2014 NZ$’000 2013 NZ$’000 PARENT 2014 NZ$’000 2013 NZ$’000 231 62,484 62,715 223 42,580 42,803 - - - - - - 16 TRADE AND OTHER PAYABLES Trade payables Employee entitlements Sundry creditors and accruals NZD AUD GBP USD 17 INTEREST BEARING LIABILITIES Current portion Non-current portion Total term loans The carrying amount of the Group's trade and other payables are denominated in the following currencies: 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 2015. Interest is payable based on the BKBM rate (NZD borrowings), the BBSY rate (AUD 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 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 2014. The current interest rates, prior to hedging, on the term loans ranged between 3.48% - 4.56% (2013: 3.53% - 3.73%). The Group has entered into a 36 month loan to finance software licenses. For accounting purposes, an interest rate has been imputed on the loan. The imputed rate is within the range shown above for current interest rates on external borrowings. The loan balance at 31 July 2014 is $270,750 (2013: $493,894). The loan is not repayable on demand. 56 ANNUAL REPORT 2014 KATHMANDU The principal of interest bearing liabilities is: Payable within 1 year Payable 1 to 2 years Payable 2 to 3 years Payable 3 to 4 years 18 CONTRIBUTED EQUITY - ORDINARY SHARES GROUP 2014 NZ$’000 2013 NZ$’000 PARENT 2014 NZ$’000 2013 NZ$’000 231 62,484 - - 223 - 42,580 - 62,715 42,803 - - - - - - - - - - GROUP 2014 NZ$’000 2013 NZ$’000 PARENT 2014 NZ$’000 2013 NZ$’000 Ordinary shares fully paid ($) 198,228 197,370 423,316 422,458 Balance at beginning of year 197,370 197,298 422,458 422,386 Issue of shares under Executive and Senior Management Long Term Incentive Plan 858 72 858 72 Balance at end of year 198,228 197,370 423,316 422,458 NUMBER OF ISSUED SHARES GROUP 2014 ’000 2013 ’000 PARENT 2014 ’000 2013 ’000 Ordinary shares on hand at beginning of the year 200,216 200,166 200,216 200,166 Shares issued under Executive and Senior Management Long Term Incentive Plan 417 50 417 50 Ordinary shares on hand at end of the year 200,633 200,216 200,633 200,216 (a) Ordinary shares As at 31 July 2014 there were 200,633,469 ordinary issued shares in Kathmandu Holdings Limited and these are classified as equity. 146,648 shares (2013: 49,954) were issued under the “Executive and Senior Management Long Term Incentive Plan 24 November 2010” and 270,927 shares (2013: nil) were issued under the “Executive Share Option Plan 16 October 2009” during the year ending 31 July 2014. All ordinary shares carry equal rights in respect of voting and the receipt of dividends. Ordinary shares do not have a par value. KATHMANDU ANNUAL REPORT 2014 57 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 expired 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 (2013: nil) to Executive Directors and senior executives. The fair value of options issued during the financial year is $0 (2013: $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 pay-out 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 $0 (2013: $6,515) which represents this amortisation. Movements in the number of share options outstanding and their related weighted average exercise price are as follows: 2014 2013 Average exercise price $ per share Options ‘000 Average exercise price $ per share Options ‘000 Balance at beginning of year Issued Exercised Forfeited Balance at end of year 2.1333 - 2.1333 - 2.1333 956 - (271) - 685 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 Expiry Month Last Vesting Month Exercise Price December 2014 October 2013 December 2014 October 2013 December 2014 October 2013 $2.1333 $2.1333 $2.1333 2014 ‘000 229 228 228 685 956 - - - 956 2013 ‘000 319 319 318 956 58 ANNUAL REPORT 2014 KATHMANDU Executive and Senior Management Long Term Incentive Plan On 20 November 2013, shareholders approved at the Annual General Meeting the continuation of an Employee Long Term Incentive Plan (LTI) (previously established 24 November 2010) 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* 11 Dec 2013 11 Dec 2012 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 - 261,009 221,920 229,678 712,607 285,987 - - - 285,987 - - (31,809) (114,839) (146,648) - - (42,165) - (42,165) 285,987 261,009 147,946 114,839 809,781 * From 2011 Performance Rights granted to Executive Directors only. The performance rights granted on 11 December 2013 are Long Term Incentive components only. Long Term Incentive 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 The TSR performance is calculated for the following performance periods: % Vesting 0% 50% 50% + 2% for each percentile above the 50th 100% 2013 2014 24 months to 1 December 2015 24 months to 1 December 2014 36 months to 1 December 2016 36 months to 1 December 2015 48 months to 1 December 2017 48 months to 1 December 2016 Tranche Tranche 1 Tranche 2 Tranche 3 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: KATHMANDU ANNUAL REPORT 2014 59 2014 $233,556 $3.10 3.65% 2-4 38% 2013 $158,346 $1.95 2.92% 2-4 40% Fair value of TSR rights Current price at issue date Risk free interest rate Expected life (years) Expected share volatility The estimated fair value for each tranche of rights issued is amortised over the vesting period from the grant date. The Company has recognised a compensatory expense in the income statement of $60,721 (2013: $36,925) 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 2013. The applicable performance periods are: Tranche Tranche 1 Tranche 2 Tranche 3 2014 Performance Period 2013 Performance Period FY15 EPS relative to FY13 EPS FY14 EPS relative to FY12 EPS FY16 EPS relative to FY13 EPS FY15 EPS relative to FY12 EPS FY17 EPS relative to FY13 EPS FY16 EPS relative to FY12 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 $41,104 (2013: $47,907) which represents this amortisation. Key Management Personnel Performance rights granted to Key Management Personnel, all Short Term Incentives under the shareholder approved Employee Long Term Incentive Plan are summarised below: Grant Date 05 Dec 2013 04 Dec 2012 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 - - - 162,369 - 162,369 - - - (162,369) - (162,369) - - - 60 ANNUAL REPORT 2014 KATHMANDU Short Term Incentive performance rights vest: upon the Company achieving non-market 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 2014 05 Dec 2013 31 Jul 2014 31 Jul 2016 2013 04 Dec 2012 31 Jul 2013 31 Jul 2015 The fair value of the rights were 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$3.16 per right (2013: $1.58). The non-market performance hurdles set for the year ending 31 July 2014 were not met and accordingly: no expense has been recorded in the income statement; and all of these rights have lapsed. Senior Management Performance rights granted to Key Management Personnel, all Short Term Incentives under the shareholder approved Employee Long Term Incentive Plan are summarised below: Grant Date 05 Dec 2013 04 Dec 2012 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 - - - 273,813 - 273,813 - - - (273,813) - (273,813) - - - Short Term Incentive performance rights vest: upon the Company achieving specified non-market 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 2014 05 Dec 2013 31 Jul 2014 31 Jul 2015 2013 04 Dec 2012 31 Jul 2013 31 Jul 2014 KATHMANDU ANNUAL REPORT 2014 61 The fair value of the rights were 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$3.29 per right (2013: $1.70). The non-market performance hurdles set for the year ending 31 July 2014 were not met and accordingly: no expense has been recorded in the income statement; and all of these rights have lapsed. Expenses arising from equity settled share based payments transactions: Share Option Plan 2009 Executive Directors and Key Management Personnel Senior Management 20 RESERVES AND RETAINED EARNINGS (A) RESERVES (i) Cash flow hedging reserve Opening balance Revaluation - gross Deferred taxation on revaluation Transfer to net profit - gross Closing balance (ii) Foreign currency translation reserve Opening balance Currency translation differences – Gross Currency translation differences – Taxation Closing balance (iii) Share based payments reserve Opening balance Current year amortisation Transfer to Share Capital on vesting of shares to Employees Share Options / Performance Rights lapsed Closing balance Total Reserves GROUP 2014 NZ$’000 2013 NZ$’000 PARENT 2014 NZ$’000 2013 NZ$’000 - 211 - 211 7 202 - 209 - 211 - 211 7 202 - 209 Note GROUP 2014 NZ$’000 2013 NZ$’000 PARENT 2014 NZ$’000 2013 NZ$’000 5 5 5,067 (10,231) 3,076 33 (2,055) (10,558) (4,371) 577 (14,352) 823 211 (301) - 733 (3,309) 11,230 (2,827) (27) 5,067 7,628 (20,723) 2,537 (10,558) 739 209 (72) (53) 823 - - - - - - - - - 823 211 (301) - 733 (15,674) (4,668) 733 - - - - - - - - - 739 209 (72) (53) 823 823 62 ANNUAL REPORT 2014 KATHMANDU Nature and purpose of reserves (i) Cash flow hedging reserve The hedging reserve is used to record gains or losses on a hedging instrument in a cash flow hedge that are recognised directly in other comprehensive income, as described in policy 2 (n) (ii). The amounts are recognised in profit and loss when the associated hedged transaction affects profit and loss. (ii) Foreign currency translation reserve The FCTR is used to record foreign currency translation differences arising on the translation of the Group entities results and financial position. The amounts are accumulated in other comprehensive income and recognised in profit and loss when the foreign operation is partially disposed of or sold. (iii) Share based payments reserve The share based payments reserve is used to recognise the fair value of share options and performance rights granted but not exercised or lapsed. Amounts are transferred to share capital when vested options are exercised by the employee or performance rights are granted. B) RETAINED EARNINGS Opening retained earnings Profit for the year Share Options/Performance Rights lapsed Less dividends paid Balance at 31 July 21 DIVIDENDS Prior year final dividend paid Current year interim dividend paid Dividends paid ($ 0.12 per share (2013: $ 0.10)) GROUP 2014 NZ$’000 2013 NZ$’000 PARENT 2014 NZ$’000 2013 NZ$’000 101,487 42,152 - (24,047) 119,592 77,278 44,174 53 (20,018) 101,487 (17,489) 22,823 - (24,047) (18,713) (15,654) 18,130 53 (20,018) (17,489) GROUP 2014 NZ$’000 2013 NZ$’000 PARENT 2014 NZ$’000 2013 NZ$’000 18,028 6,019 24,047 14,012 6,006 20,018 18,028 6,019 24,047 14,012 6,006 20,018 KATHMANDU ANNUAL REPORT 2014 63 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 services1 Total remuneration for audit services 1 Other assurance services relate to the preparation of revenue certificates. 23 CONTINGENT LIABILITIES GROUP 2014 NZ$’000 2013 NZ$’000 PARENT 2014 NZ$’000 2013 NZ$’000 126 30 7 163 121 28 19 168 48 30 - 78 78 28 - 106 GROUP 2014 NZ$’000 2013 NZ$’000 PARENT 2014 NZ$’000 2013 NZ$’000 Liabilities outstanding under letters of credit 1,301 2,161 Rent guarantees Financial guarantees 9,923 1,286 9,131 1,813 - - - - - - 24 CONTINGENT ASSETS There are no contingent assets in 2014 (2013: nil). 25 COMMITMENTS (a) Capital commitments Capital commitments contracted for at balance date are: Property, plant and equipment Intangible assets GROUP 2014 NZ$’000 2013 NZ$’000 PARENT 2014 NZ$’000 2013 NZ$’000 3,420 1,135 4,555 479 720 1,199 - - - - - - 64 ANNUAL REPORT 2014 KATHMANDU (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 2014 NZ$’000 2013 NZ$’000 PARENT 2014 NZ$’000 2013 NZ$’000 45,220 38,531 62,999 9,157 43,618 38,618 70,916 16,159 155,907 169,311 - - - - - - - - - - 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. 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. KATHMANDU ANNUAL REPORT 2014 65 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 Net Principal subject to floating interest rates1 GROUP 2014 NZ$’000 2013 NZ$’000 PARENT 2014 NZ$’000 2013 NZ$’000 62,444 (48,374) 14,070 42,309 (44,972) (2,663) - - - - - - 1. Debt levels fluctuate throughout the year and as at 31 July, are typically at a cyclical low. Interest rates on loans currently range from 3.48% – 4.56% (2013: 3.53% – 3.73%). The Group has entered into interest rate swap agreements to reduce the impact of changes in interest rates on its long-term debt. The cash flow hedge (gain)/loss on interest rate swaps at balance date was $150,844 (2013: $659,211). 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% (2013: -10% / +10%) 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% (2013: -10% / +10%) 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% (2013: 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. The impact on equity is presented exclusive of the impact on retained earnings. GROUP 31 July 2014 INTEREST RATE RISK +1% -1% FOREIGN EXCHANGE RISK -10% +10% Carrying amount $’000 Profit $’000 Equity $’000 Profit $’000 Equity $’000 Profit $’000 Equity $’000 Profit $’000 Equity $’000 Derivative financial instruments (asset) / liability Financial assets Cash Trade receivables and sundry debtors Financial liabilities Trade payables Borrowings Total increase / (decrease) 3,060 (572) 852 572 (885) - (12,588) - 10,299 7,192 1,572 37,489 62,444 (52) - (52) - 624 624 - - - - - - - 52 - 52 - (624) (624) - - - - - - 445 (112) 333 (2,274) - (2,274) - - - - (4,396) (4,396) (364) 91 (273) 1,861 - 1,861 - - - - 3,596 3,596 852 - (885) (1,941) (16,984) 1,588 13,895 66 ANNUAL REPORT 2014 KATHMANDU GROUP 31 July 2013 Derivative financial instruments (asset) / liability Financial assets Cash Trade receivables and sundry debtors Financial liabilities Trade payables Borrowings INTEREST RATE RISK +1% -1% FOREIGN EXCHANGE RISK -10% +10% Carrying amount $’000 Profit $’000 Equity $’000 Profit $’000 Equity $’000 Profit $’000 Equity $’000 Profit $’000 Equity $’000 (7,228) (449) 735 449 (761) - (12,036) - 9,847 2,345 1,008 33,032 42,309 (17) - (17) - 423 423 - - - - - - 17 - 17 - (423) (423) - - - - - - 145 (17) 128 (2,040) - - - - - (2,225) (119) 14 (105) 1,669 - (2,040) (2,225) 1,669 - - - - 1,820 1,820 Total increase / (decrease) (43) 735 43 (761) (1,912) (14,261) 1,564 11,667 The parent is not sensitive to either interest rate or foreign exchange risk. b) Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. This would arise principally from the Group’s receivables from customers. The nature of the customer base is such that there is no individual customer concentration of credit risk. Other financial instruments which potentially subject the Group to credit risks principally consist of bank balances, loans, advances and refund of taxes. Trade and other receivables The nature of the customer base is such that there is no individual customer concentration of credit risk. The Group does not carry out credit evaluations for all new customers requiring credit. Credit is generally only given to government or local council backed institutions. Exposure to credit risk The below balances are recorded at their carrying amount after any provision for loss on these financial instruments. The maximum exposure to credit risk at reporting date was: CARRYING AMOUNT Cash and cash equivalents Trade receivables Sundry debtors GROUP 2014 NZ$’000 2013 NZ$’000 PARENT 2014 NZ$’000 2013 NZ$’000 7,192 211 1,360 8,763 2,345 125 883 3,353 9 - - 9 5 - - 5 KATHMANDU ANNUAL REPORT 2014 67 As at balance date the carrying amount is also considered to approximate fair value for each of the financial instruments. There are no past due balances. The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings (if available) or to historical information about counterparty default rates: GROUP 2014 NZ$’000 2013 NZ$’000 PARENT 2014 NZ$’000 2013 NZ$’000 6,949 - 243 7,192 - 212 212 2,075 270 - 2,345 - 125 125 9 - - 9 - - - 5 - - 5 - - - Cash and cash equivalents Standard & Poors - AA- Standard & Poors - A Standard & Poors - BBB+ Total cash and cash equivalents Trade receivables: Counterparties with external credit rating Counterparties without external credit rating1 Total trade receivables 1. Existing customers with no defaults in the past. (c) Liquidity risk Liquidity risk is the risk that an unforeseen event or miscalculation in the required liquidity level will result in the Group foregoing investment opportunities or not being able to meet its obligations in a timely manner, and therefore gives rise to lower investment income or to higher borrowing costs than normal. Prudent liquidity risk management includes maintaining sufficient cash, and ensuring the availability of funding from adequate amounts of credit facilities. The Group's liquidity exposure is managed by ensuring sufficient levels of liquid assets and committed facilities are maintained based on regular monitoring of cash flow forecasts. The Group has lending facilities of $126,373,626 / $115,000,000 AUD (2013: $130,533,485 / $115,000,000 AUD) and operates well within this facility. This includes short term bank overdraft requirements, and at balance date no bank accounts were in overdraft. The table below analyses the Group’s financial liabilities and net-settled derivative financial liabilities into relevant maturity groupings based on the remaining period at the balance date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Group 2014 Trade and other payables Guarantees Borrowings Group 2013 Trade and other payables Guarantees Borrowings Less than 1 year NZ$’000 Between 1 and 2 years NZ$’000 Between 2 and 5 years NZ$’000 Over 5 years NZ$’000 37,489 12,361 2,295 52,145 33,032 13,105 1,542 47,679 - - 63,344 63,344 - - 1,542 1,542 - - - - - - 42,914 42,914 - - - - - - - - 68 ANNUAL REPORT 2014 KATHMANDU The Group enters into forward exchange contracts to manage the risks associated with the purchase of foreign currency denominated products. The table below analyses the Group’s derivative financial instruments that will be settled on a gross basis into relevant maturity groupings based on the remaining period at the balance date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. They are expected to occur and affect the profit or loss at various dates between balance date and the following five years. At 31 July 2014 Forward foreign exchange contracts - Inflow - Outflow Net Inflow / (Outflow) Net settled derivatives – interest rate swaps Net Inflow / (Outflow) At 31 July 2013 Forward foreign exchange contracts - Inflow - Outflow Net Inflow / (Outflow) Net settled derivatives – interest rate swaps Net Inflow / (Outflow) Less than 1 year NZ$’000 Between 1 and 2 years NZ$’000 Between 2 and 5 years NZ$’000 119,979 (122,889) (2,910) - - - - - - (181) (73) (46) 115,386 (107,499) 7,887 - - - - - - (470) (240) (102) KATHMANDU ANNUAL REPORT 2014 69 (d) Fair values The only financial instruments held by the Group that are measured at fair value are over-the-counter derivatives used for hedging. These derivatives have all been determined to be within level 2 (for the purposes of NZ IFRS 13) of the fair value hierarchy as all significant inputs required to ascertain the fair value of these derivatives are observable. 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 2014 Cash and cash equivalents Trade and other receivables Derivative financial instrument assets Total financial assets Trade and other payables Interest bearing liabilities Derivative financial instrument liabilities Total financial liabilities At 31 July 2013 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 2014 Cash and cash equivalents Related party receivable Total financial assets Trade and other payables Related party payable Total financial liabilities At 31 July 2013 Cash and cash equivalents Related party receivable Total financial assets Trade and other payables Total financial liabilities 7,192 1,572 - 8,764 - - - - 2,345 1,008 - 3,353 - - - - 9 84,274 84,283 - 3,004 3,004 5 81,944 81,949 - - - - 148 148 - - 3,208 3,208 - - 7,914 7,914 - - 686 686 - - - - - - - - - - - - - - - 33,087 62,444 - 95,531 - - - - 29,901 42,309 - 72,210 - - - 82 - 82 - - - 257 257 7,192 1,572 148 8,912 33,087 62,444 3,208 98,739 2,345 1,008 7,914 11,267 29,901 42,309 686 72,896 9 84,274 84,283 82 3,004 3,086 5 81,944 81,949 257 257 70 ANNUAL REPORT 2014 KATHMANDU The following methods and assumptions were used to estimate the fair values for each class of financial instrument: Trade debtors, trade creditors and bank balances The carrying value of these items is equivalent to their fair value. 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 approximately nil. Details of guarantees are included in note 23. All guarantees are payable on demand. 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. The fair value of term liabilities equates to their current carrying value. Foreign exchange contracts and interest rate swaps The fair value of these instruments is determined by using valuation techniques (as they are not traded in an active market). These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. Specific valuation techniques used to value financial instruments include the fair value of interest rate swaps calculated as the present value of the estimated future cash flows based on observable yield curves and the fair value of forward foreign exchange contracts determined using forward exchange rates at the balance sheet date, with the resulting value discounted back to present value. (e) 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. (f) 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. KATHMANDU ANNUAL REPORT 2014 71 27 SEGMENTAL INFORMATION The Group operates in three geographical areas: New Zealand, Australia and the United Kingdom. 31 July 2014 Australia NZ$’000 New Zealand NZ$’000 United Kingdom NZ$’000 Elimination NZ$’000 Segment profit / (loss) before income tax 29,651 30,721 (3,107) 2,398 Income tax expense (8,926) (8,585) - 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) Depreciation and software amortisation Exchange gain/(loss) on foreign currency borrowing 247,305 1,064 (83,454) 27 (2,762) (331) (2,704) 140,951 1,464 (58,974) 23 (1,142) (239) 2,704 (9,679) 10,355 (6,160) (2,704) (3,697) (1) Additions of non-current assets 11,252 12,016 Total current assets Total non-current assets Total assets Total current liabilities Total non-current liabilities Total liabilities 69,615 138,501 208,116 (102,594) (55,154) (157,748) 427,334 347,978 775,312 (13,320) (7,539) (20,859) 4,662 181 (2,349) - - - - (676) (341) 138 947 3,277 1,898 5,175 (14,227) - (14,227) Total NZ$’000 59,663 (17,511) 42,152 392,918 - (144,777) 50 (3,904) (570) - - (10,198) (169) - - (2,709) - - - - - - - 2,398 - 24,215 (385,478) (194,828) (580,306) 86,683 - 86,683 114,748 293,549 408,297 (43,458) (62,693) (106,151) 72 ANNUAL REPORT 2014 KATHMANDU 31 July 2013 Australia NZ$’000 New Zealand NZ$’000 United Kingdom NZ$’000 Elimination NZ$’000 Total NZ$’000 Segment profit / (loss) before income tax 20,540 30,330 (2,348) 10,460 58,982 Income tax expense (6,183) (8,625) - 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) Depreciation and software amortisation Exchange gain/(loss) on foreign currency borrowing 241,130 588 (81,251) 40 (2,148) (299) (3,386) 136,983 1,169 (57,881) 10 (1,720) (308) 3,386 (8,895) 9,575 (7,009) (10,415) (3,202) (164) Additions of non-current assets 10,238 5,555 Total current assets Total non-current assets Total assets Total current liabilities Total non-current liabilities Total liabilities 50,904 136,438 187,342 (98,524) (28,341) (126,865) 420,143 339,257 759,400 (11,562) (14,867) (26,429) 5,870 - (2,826) - - - - (680) (398) 137 1,626 2,779 1,419 4,198 (9,834) - (9,834) - - (1,757) - - - - - - - 10,460 (14,808) 44,174 383,983 - (141,958) 50 (3,868) (607) - - (10,609) 18 - 17,419 (379,895) (194,828) (574,723) 81,100 - 81,100 93,931 282,286 376,217 (38,820) (43,208) (82,028) 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 (the Executive Management Team), and the comparative information has been updated to reflect this. The Group has no reliance on any single major customers. Costs recharged between Group companies are calculated on an arms-length basis. The default basis of allocation is % of revenue with other bases being used where appropriate. KATHMANDU ANNUAL REPORT 2014 73 28 EARNINGS PER SHARE Basic earnings per share is calculated by dividing the profit after tax 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. Weighted average number of shares in issue Adjustment for: -Share options / performance rights 29 EARTHQUAKE DISCLOSURES 2014 ’000 2013 ’000 200,422 200,197 1,881 202,303 1,924 202,121 The ongoing material damage and business interruption insurance claim following the Christchurch earthquake that occurred on 22 February 2011 was settled in full during the year. In the financial statements: Net proceeds received of $1,329,000 (2013: $293,000) has been recognised in the financial statements. All assets lost or damaged as a result of the earthquake have been written off, and the cost of this write-off is included in the calculation of net proceeds above. 30 EVENTS OCCURRING AFTER THE BALANCE DATE As announced on 25 August 2014, Chief Executive Officer Peter Halkett tendered his resignation with effect from 25 November 2014. There is no impact on the current year financial statements. 74 ANNUAL REPORT 2014 KATHMANDU KATHMANDU ANNUAL REPORT 2014 75 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 $ 100,000 110,001 120,001 130,001 140,001 150,001 160,001 170,001 180,001 190,001 200,001 220,001 230,001 240,001 260,001 290,001 300,001 350,001 630,001 1,130,001 $ 110,000 120,000 130,000 140,000 150,000 160,000 170,000 180,000 190,000 200,000 210,000 230,000 240,000 250,000 270,000 300,000 310,000 360,000 640,000 1,140,000 - - - - - - - - - - - - - - - - - - - - 3 5 11 3 5 4 1 1 1 2 1 1 2 1 2 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 872 1,403 512 362 41 % 27% 44% 16% 12% 1% 3,190 100% Number of Ordinary Shares 480,852 3,692,782 3,774,496 8,960,808 % 0% 2% 2% 4% 183,724,531 200,633,469 92% 100% The details set out above were as at 8 September 2014. 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. 76 ANNUAL REPORT 2014 KATHMANDU There were 101 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 8 September 2014. There are no restricted securities or securities subject to voluntary escrow on issue. LIMITATIONS ON THE ACQUISITION OF SECURITIES The Company is not subject to Chapters 6, 6A, 6B and 6C of the Corporations Act 2001 (Australia) dealing with the acquisition of shares (i.e. substantial holdings and takeovers). Limitations on the acquisition of the securities imposed by the jurisdiction in which the Company is incorporated (New Zealand) are: (a) In general, securities in the Company are freely transferable and the only significant restrictions or limitations in relation to the acquisition of securities are those imposed by New Zealand laws relating to takeovers, overseas investment and competition. (b) The New Zealand Takeovers Code creates a general rule under which the acquisition of 20% or more of the voting rights in the Company or the increase of an existing holding of 20% or more of the voting rights of the Company can only occur in certain permitted ways. These include a full takeover offer in accordance with the Takeovers Code, a partial takeover offer in accordance with the Takeovers Code, an acquisition approved by an ordinary resolution, an allotment approved by an ordinary resolution, a creeping acquisition (in certain circumstances) or compulsory acquisition of a shareholder holds 90% or more of the shares of the Company. (c) The New Zealand Overseas Investment Act 2005 and Overseas Investment Regulations 2005 (New Zealand) regulate certain investments in New Zealand by overseas persons. In general terms, the consent of the New Zealand Overseas Investment Office is likely to be required where an “overseas person” acquires shares in the Company that amount to 25% or more of the shares issued by the Company, or if the overseas person already holds 25% or more, the acquisition increases that holding. (d) The New Zealand Commerce Act 1986 is likely to prevent a person from acquiring shares in the Company if the acquisition would have, or would be likely to have, the effect of substantially lessening competition in the market. SUBSTANTIAL SECURITY HOLDERS According to notices given under the Securities Markets Act 1988 (New Zealand), the substantial security holders in ordinary shares (being the only class of listed voting securities) of the Company and their relevant interests according to the substantial security holder file as at 8 September 2014, were as follows: Accident Compensation Corporation (13 August 2014) National Australia Bank (30 May 2014) Ordinary shares 15,560,506 14,144,444 Commonwealth Bank of Australia (3 September 2014) 13,842,744 FIL Limited (27 June 2014) 12,720,612 Milford Asset Management Limited (5 September 2014) 12,388,077 Tribeca Investment Partners (22 July 2014) 11,469,797 Fisher Funds Management Limited (18 December 2013) 10,060,547 % 7.8% 7.0% 6.9% 6.3% 6.2% 5.7% 5.0% As at 8 September 2014, the Company had 200,633,469 ordinary shares on issue. KATHMANDU ANNUAL REPORT 2014 77 PRINCIPAL SHAREHOLDERS The names and holdings of the twenty largest shareholders as at 8 September 2014 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 J P MORGAN NOMINEES AUSTRALIA LIMITED NATIONAL NOMINEES 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 THOMAS HALKETT NEW ZEALAND DEPOSITORY NOMINEE LIMITED AMP LIFE LIMITED NATIONAL NOMINEES LIMITED RBC INVESTOR SERVICES - AUSTRALIA NOMINEES PTY LIMITED ABN AMRO CLEARING SYDNEY - NOMINEES PTY LTD UBS NOMINEES PTY LTD DAVID ALAN KENDALL & JILL MARJORIE TODD & MARK ARCHIBALD TODD FRANED PTY LIMITED INVESTMENT CUSTODIAL SERVICES LIMITED FNZ CUSTODIANS LIMITED MARK ARCHIBALD TODD DIRECTORS’ SHAREHOLDINGS Directors held interests in the following shares of the Company at 31 July 2014: Peter Halkett Mark Todd David Kirk John Harvey John Holland Sandra McPhee beneficially owned beneficially owned beneficially owned beneficially owned beneficially owned beneficially owned 72,474,998 42,518,296 29,609,288 13,609,178 8,433,519 4,894,996 1,973,730 1,230,238 949,560 846,031 616,153 558,699 519,607 502,148 340,624 330,000 300,000 294,168 243,217 233,259 999,560 563,259 24,300 51,563 102,033 58,823 % 36.12% 21.19% 14.76% 6.78% 4.20% 2.44% 0.98% 0.61% 0.47% 0.42% 0.31% 0.28% 0.26% 0.25% 0.17% 0.16% 0.15% 0.15% 0.12% 0.12% 78 ANNUAL REPORT 2014 KATHMANDU 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 2013 and 31 July 2014, the details of those dealings were entered in the Company’s interests register. The particulars of such disclosures are: Director Peter Halkett Peter Halkett 1 Mark Todd Mark Todd 1 Mark Todd 2 David Kirk Nature of Interest Shares Acquired / (Sold) Consideration Beneficial Beneficial Non-beneficial Beneficial Beneficial Beneficial (565,000) 79,042 (43,437) 32,648 160,131 24,300 NZD $3.623 - NZD $3.484 - NZD $2.133 AUD $3.61 Date 21/10/2013 18/12/2013 09/10/2013 18/12/2013 14/05/2014 08/05/2014 1. Shares were issued as part of the Long Term Incentive Plan (refer note 19 of the financial statements). 2. Shares were issued on exercise of options as part of the Share Option Plan 2009 (refer note 19 of the financial statements). 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 2014. 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 2014, 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 2014, and those who ceased to hold office during the year ended 31 July 2013, 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 KATHMANDU ANNUAL REPORT 2014 79 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 2014 are as follows: DAVID KIRK Chairman of: The Hoyts Group TradeMe Group Limited Food Share Limited Standard Media Index Limited Director of: Bailador Investment Management Pty Limited Forsyth Barr Group Limited NZPH Limited Sydney Medical School Foundation Online Ventures Pty Limited (trading as SiteMinder) Viocorp International Limited David Kirk Pty Limited Kirk Family Trust Pty Limited Ocean Beach Wilderness Property Limited MARK TODD Director of: City Care Limited JOHN HARVEY Chairman of: New Zealand Opera Limited Director of: DNZ Property Fund Limited and subsidiary Port Otago Limited and subsidiary Heartland Bank Limited Balance Agri-Nutrients Limited Pomare Investments Limited An Advisor to the Board of: Resource Coordination Partnership Limited SANDRA McPHEE Director of: AGL Energy Limited Tourism Australia Fairfax Media Limited Scentre Group Limited Vice President of: The Art Gallery of NSW Trust Director of: Southbase Construction Limited A member of: Financial Markets Authority Capital Markets Disclosure Consideration Panel CHRISTINE CROSS Director of: Sonae Group Plc Woolworths Limited Plantasjen ASA Brambles Limited Retail Advisor to: Warburg Pincus LLC Apax Private Equity 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 David Kirk Chairman, Non-Executive Director Peter Halkett Mark Todd Managing Director and Chief Executive Officer (resigning 25 November 2014) Finance Director and Chief Operating Officer A member of: JP Morgan Advisory Council Advisory Board of MMC St Vincents and Mater Health Sydney Community Advisory Council JOHN HOLLAND Partner of: Chapman Tripp John Harvey Non-Executive Director Christine Cross Non-Executive Director John Holland Non-Executive Director Sandra McPhee Non-Executive Director EXECUTIVES’ DETAILS Peter Halkett Chief Executive Officer Mark Todd Chief Operating Officer 80 ANNUAL REPORT 2014 KATHMANDU 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 SHARE REGISTRY In New Zealand: Link Market Services (LINK) Physical Address: Level 16, Brookfields House, 19 Victoria Street West, Auckland 1010 New Zealand Postal Address: PO Box 91976, Auckland, 1142 New Zealand Telephone: +64 9 375 5999 Investor enquiries: +64 9 375 5998 Facsimile: +64 9 375 5990 Internet address: www.linkmarketservices.com In Australia: Link Market Services (LINK) Physical Address: Level 1, 333 Collins Street Postal Address: Melbourne, VIC 3000 Australia Locked Bag A14 Sydney, South NSW 1235 Australia Telephone: +61 2 8280 7111 Investor enquiries: +61 2 8280 7111 Facsimile: +61 2 9287 0303 Internet address: 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 kathmandu.com.au VIC Ballarat Bendigo Blackburn Camberwell Chadstone Inner Chadstone Outer Doncaster Emporium Fitzroy Fountain Gate Frankston Geelong Hampton East Highpoint Knox Melbourne (Bourke Street) Moonee Ponds Moorabbin Outlet Store Northland Nunawading Outlet Store Prahran Richmond Shepparton Smith Street Outlet Store South Wharf DFO Outlet Store Southland Spencer Street Outlet Store The Glen Traralgon Uni Hill Outlet Store Warrnambool NSW Albury Birkenhead Point Outlet Store Bondi Junction Castle Towers Charlestown Chatswood Coffs Harbour Cronulla Eastgardens Erina Fair Hornsby Macarthur Macquarie Newcastle Orange Parramatta Penrith Sydney City (Kent Street) Sydney City (Pitt Street) Redyard (Auburn) Rouse Hill Shellharbour Tamworth The Rocks Tuggerah Wagga Wagga Warringah Wollongong SA Adelaide Harbour Town Outlet Store Adelaide (Rundle Street) Marion Tea Tree West Lakes ACT Belconnen Canberra Centre Canberra Outlet Store Woden NEW ZEALAND kathmandu.co.nz NORTH ISLAND Albany Auckland (Queen Street) Auckland (Victoria Street) Botany Broadway Coastlands Gisborne Hamilton Hastings Lyall Bay Manukau Masterton Napier New Plymouth Onehunga Outlet Store Otaki Outlet Store Palmerston North Petone Pukekohe Rotorua St Lukes Sylvia Park Takapuna Taupo Tauranga CBD Tauranga (Fraser Cove) Te Rapa Waitakere Wanganui Whakatane Whangarei UNITED KINGDOM kathmandu.co.uk Bristol London (Covent Garden) London (High Street Kensington) London (Spitalfields) QLD Brisbane City Cairns Carindale Chermside Fortitude Valley Hervey Bay Indooroopilly Jindalee Outlet Store Kawana Logan Mackay Pacific Fair (Broadbeach) Robina Rockhampton Southport Toowoomba Townsville TAS Devonport Hobart (Salamanca Square) Hobart CBD (Elizabeth Street) Launceston WA Belmont Bunbury Carousel Cottesloe Fremantle Innaloo Morley Perth CBD Perth Harbourtown Outlet Store Whitford NT Casuarina Wellington Westgate Willis Street Outlet Store SOUTH ISLAND Ashburton Blenheim Christchurch (Cashel Street) Dunedin Invercargill Nelson Papanui Queenstown Riccarton Outlet Store The Palms Timaru Tower Junction This report is printed on paper pulp sourced from sustainably grown and managed forests, using Elemental Chlorine Free (ECF) bleaching and printed with 100% vegetable - based inks. Design & Print Production - Mosha KATHMANDU HOLDINGS LIMITED ANNUAL REPORT 2014 kathmanduholdings.com 

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