Maximus Annual Report 2010

Plain-text annual report

ANNUAL REPOR T 201 0 CONTENTS DIRECTORS’ REPORT CORPORATE GOVERNANCE STATEMENT STATEMENTS OF COMPREHENSIVE INCOME STATEMENTS OF FINANCIAL POSITION STATEMENTS OF CHANGES IN EQUITY STATEMENTS OF CASH FLOWS NOTES TO THE FINANCIAL STATEMENTS DIRECTORS’ DECLARATION INDEPENDENT AUDIT REPORT AUDITOR’S INDEPENDENCE DECLARATION SHAREHOLDER INFORMATION 1 16 20 21 22 23 24 59 60 63 64 CORPORATE DIRECTORY Inside front cover ANNUAL GENERAL MEETING The Annual General Meeting of the members of McMillan Shakespeare Limited A.B.N. 74 107 233 983 will be held on 19 October 2010 at 10:00am at Hoyts Melbourne Central, Melbourne Central - Level 4, Cnr Swanston & Latrobe Streets, Melbourne, Victoria. CORPORATE DIRECTORY Directors Ronald Pitcher, AM (Chairman) Michael Kay (Managing Director) John Bennetts Ross Chessari Graeme McMahon Anthony Podesta Company Secretary Paul McCluskey Registered Office Level 19, 360 Elizabeth Street Melbourne Victoria 3000 Tel: +61 3 9097 3000 Fax: +61 3 9097 3060 Company Auditor Grant Thornton Level 2, 215 Spring Street Melbourne Victoria 3000 Share Registry Computershare Investor Services Pty Limited Yarra Falls, 452 Johnston Street Abbotsford Victoria 3067 Tel: +61 3 9415 4000 Website www.mcms.com.au DIRECTORS’ REPORT The Directors of McMillan Shakespeare Limited (Company or MSL) present this report on the consolidated entity, consisting of the Company and the entities that it controlled at the end of, and during, the ﬁ nancial year ended 30 June 2010 (Group or economic entity). DIRECTORS As at the date of this Annual Report, the Directors of the Company are Mr Ronald Pitcher AM (independent Chairman), Mr Michael Kay (Managing Director and Chief Executive Ofﬁ cer), Mr John Bennetts (Non-Executive Director), Mr Ross Chessari (Non-Executive Director), Mr Graeme McMahon (independent Non-Executive Director) and Mr Anthony Podesta (Non-Executive Director) (Directors). Each Director held ofﬁ ce as a Director throughout the ﬁ nancial year ended 30 June 2010. Details of the qualiﬁ cations, experience and special responsibilities of the Directors at the date of this Annual Report are set out on pages 4 and 5. The Directors that are noted above as independent Directors, as determined in accordance with the Company’s deﬁ nition of independence, have been independent at all times throughout the ﬁ nancial year ended 30 June 2010. DIRECTORS’ MEETINGS The number of meetings held by the board of Directors (Board) (including meetings of committees of the Board) and the number of meetings attended by each of the Directors during the ﬁ nancial year ended 30 June 2010 were as follows: Director Eligible to Attend Attended Eligible to Attend Attended Eligible to Attend Attended Board Meetings Audit Committee Meetings Remuneration Committee Meetings Mr R. Pitcher, AM (Chairman) Mr M. Kay (Managing Director and CEO)1 Mr J. Bennetts Mr R. Chessari Mr G. McMahon Mr A. Podesta1 14 14 14 14 14 14 14 14 14 14 13 14 3 - 3 3 3 - 3 - 3 3 2 - 2 - 2 2 2 - 2 - 2 2 2 - 1 Mr Kay and Mr Podesta attend the Audit Committee and Remuneration Committee meetings by invitation. PRINCIPAL ACTIVITIES The principal activities of the Company and its controlled entities during the course of the ﬁ nancial year ended 30 June 2010 was the provision of remuneration, asset management and ﬁ nance services to public and private organisations throughout Australia. In the opinion of the Directors, there were no signiﬁ cant changes in the nature of the activities of the Company and its controlled entities during the course of the ﬁ nancial year ended 30 June 2010 that are not otherwise disc losed in this Annual Report. RESULTS Details of the results for the ﬁ nancial year ended 30 June 2010 are as follows: Results Net proﬁ t after income tax (NPAT) Basic earnings per share Earnings per share on a diluted basis 2010 2009 $44,959,784 $20,522,752 66.5 cents/share 66.5 cents/share 30.4 cents/share 30.4 cents/share McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 1 Financial Highlights 35 30 25 20 15 10 5 0 s n o i l l i m $ 30.0 25.0 20.0 15.0 s t n e c 10.0 5.0 0.0 NPAT Performance Revenue performance 17.1 27.9 20.5 17.4 13.2 11.3 5.2 FY05 FY06 FY07 FY08 FY09 FY10 140 120 100 80 60 40 20 0 s n o i l l i m $ 39 Revenue 5-year CAGR of 21.0% 93 77 67 55 49 36 FY05 FY06 FY07 FY08 FY09 FY10 NPAT (continuing Operations) Acquisition Gain Revenue pre-acquisition Revenue Interleasing Total dividends per share Normalised earnings per share (EPS) (1) EPS 5-year CAGR of 39.0% 50.0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 s t n e c FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY04 FY05 FY06 FY07 FY08 FY09 FY10 McMillan Shakespeare Limited Share price - June 04 to June 10 Basic EPS Cash EPS $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 4 0 - n u J 4 0 - p e S 4 0 - c e D 5 0 - r a M 5 0 - n u J 5 0 - p e S 5 0 - c e D 6 0 - r a M 6 0 - n u J 6 0 - p e S 6 0 - c e D 7 0 - r a M 7 0 - n u J 7 0 - p e S 7 0 - c e D 8 0 - r a M 8 0 - n u J 8 0 - p e S 8 0 - c e D 9 0 - r a M 9 0 - n u J 9 0 - p e S 9 0 - c e D 0 1 - r a M 0 1 - n u J 1 Normalised EPS excludes the proﬁ t recognised on acqusition of Interleasing (Australia) Limited. 2 DIVIDENDS Details of dividends declared and/or paid by the Company during the ﬁ nancial year ended 30 June 2010 are as follows: Dividends Final dividend for the ﬁ nancial year ended 30 June 2009 of 10.5 cents (2008: 9.0 cents) per ordinary share paid on 16 October 2009 fully franked at the tax rate of 30% (2008: 30%) Interim dividend for the ﬁ nancial year ended 30 June 2010 of 10.0 cents (2009: 8.5 cents) per ordinary share paid on 1 April 2010 fully franked at the tax rate of 30% (2009: 30%) Total 2010 $ 2009 $ 7,096,261 6,082,508 6,758,343 5,744,592 13,854,603 11,827,100 Subsequent to the ﬁ nancial year ended 30 June 2010, the Directors declared a ﬁ nal dividend of 14.0 cents per ordinary share (fully franked at the tax rate of 30%) to be paid on 15 October 2010 out of retained proﬁ ts as at 30 June 2010, bringing the total dividend to be paid for the ﬁ nancial year ended 30 June 2010 to 24.0 cents per ordinary share, an increase of 26%. REVIEW OF OPERATIONS Building on the foundations set in previous years, the 09/10 year saw many things achieved for the McMillan Shakespeare (MMS) Group, its staff, customers and shareholders. In particular: • The Henry Review of the taxation system was tabled with the Federal Government’s response. This saw the current salary packaging arrangements (both for the exempt sector and the FBT concessions on cars) left unchanged. Indeed, for the exempt sector, the Government took the unusual step of ruling out any changes “at any time”. This result provides great clarity and conﬁ dence for both our customers and shareholders. MMS played a lead role in representing the views of our customers and the salary packaging industry throughout the 18 months of the review. • On 31 March 2010, MMS acquired the Interleasing Group (ILA) including Holden Leasing. ILA is a provider of operating and novated leases, and of vehicle management services. The asset was purchased at a signiﬁ cant discount to net assets. This was due to the global vendor, having been heavily affected by the global ﬁ nancial crisis, wishing to sell its Australian assets. More importantly, the acquisition cemented MMS’ position as a leading provider of novated and operating leasing services in Australia and put it in the unique position of being able to solve all customers’ vehicle needs; i.e. operating leases and management services for tool of trade cars, novated leases and a full FBT administration service. This unique offering has already resonated with the market; in the ﬁ rst few months since the acquisition took place, MMS has won ﬁ ve new contracts and has successfully cross-sold additional services to four existing customers. • MMS again delivered excellent results. On a normalised basis, the MMS business, excluding ILA, delivered revenue growth of 21%, and NPAT growth of 23%. Growth was driven by new business and improving penetration rates in our existing business. Underpinning this growth was continuing improvements in our service delivery. • Our service metrics are now at or above the benchmarks we set ourselves two years ago. We are satisﬁ ed our service is, by some margin, the best in our industry. Productivity has improved too. • The results in the ILA businesses for our ﬁ rst quarter of ownership were also excellent and exceeded the assumptions incorporated in the model we built for the acquisition. Despite the high levels of activity and growth in the businesses, we also invested in the future: • We successfully launched our new operating brand “Maxxia”. The McMillan Shakespeare brand is now solely investor facing. All business is carried out through Maxxia, RemServ, Interleasing and Holden leasing. • We moved our Melbourne operations to Melbourne Central Tower, on time and under budget. • We rolled out new IT infrastructure complete with “disaster recovery” capability and “warm sites” to accommodate our growth and provide customers with complete peace of mind. This project was delivered on time and on budget. • • A new telephony system was delivered on time and on budget. A new CRM system was delivered on time and on budget. • We continued to strengthen our management team right throughout the structure; but notably with the addition of Abe Tomas (former Australia CEO and Global CFO of LeasePlan) and Michael Mitrovits (former MD of ILA). In all, the 09/10 year not only delivered signiﬁ cant shareholder value, but also saw a continuation of proactive and sensible investments in our business that will accommodate our ongoing proﬁ table growth and ensure our customers are well serviced and well satisﬁ ed. This will make our business sustainable as it moves to the next level. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 3 Strategy and Prospects The MMS Group strategy of providing beneﬁ ts (ie: products and services) in the workplace (a channel that is cost effective and fertile but which is also invisible and inaccessible to most competitors) has not changed with the acquisition of ILA; indeed it has been enhanced. We have been encouraged by the reaction of customers to our new value proposition. We believe it is unique; we believe it will give us access to new customers, particularly in the private sector; it will allow us to increase the rate of cross-sell; it will also enrich our relationship with our customers, thus making them more likely to stay with us. 2010/11 will be a year of consolidation. We need to ensure the ILA business is integrated successfully into the MMS Group. We may need to moderate our growth aspirations and opportunities in light of the integration task. Nevertheless, in the absence of unexpected external inﬂ uences we anticipate another year of solid proﬁ table growth. We will concentrate on selling our enhanced value proposition to new customers and cross-selling products (particularly novated leasing and salary packaging administration) between the business units. Low participation rates in some sections of the traditional MMS business remain an ongoing opportunity. The other major focus for 2010/11 will be IT. The Interleasing IT system requires upgrading to the new version of its current software. This was fully costed, with a contingency, into our acquisition valuation model. The new system will provide a range of additional capabilities and efﬁ ciencies that will beneﬁ t both customers and the group. STATE OF AFFAIRS There were no signiﬁ cant changes in the state of affairs of the Company and its controlled entities that occurred during the ﬁ nancial year ended 30 June 2010 that are not otherwise disclosed in this Annual Report. EVENTS SUBSEQUENT TO BALANCE DATE As at the date of this Annual Report, the Directors are not aware of any matter or circumstance that has arisen that has signiﬁ cantly affected or may signiﬁ cantly affect the operations of the Company and its controlled entities, the results of those operations or the state of affairs of the Company and its controlled entities in the ﬁ nancial years subsequent to 30 June 2010 that are not otherwise disclosed in this Annual Report. LIKELY DEVELOPMENTS Other than the information disclosed in this Annual Report, information as to the likely developments in the operations of the Company and its controlled entities and the expected results of those operations in subsequent years has not been included in this Annual Report because the Directors believe, on reasonable grounds, that to include such information would be likely to result in unreasonable prejudice to the Company and its controlled entities. DIRECTORS’ EXPERIENCE & SPECIAL RESPONSIBILITIES Ronald Pitcher AM, FCA, FCPA Name: Appointed: 4 February 2004 Positions: Chairman of the Board Chairman of the Audit Committee Chairman of the Remuneration Committee 71 Age: Mr Pitcher is a Chartered Accountant with over 45 years experience in the accounting profession and the provision of business advisory services. Mr Pitcher is also the Chairman of Cellestis Limited (since 2001) and a director of National Can Industries Limited (since 1994) and Reece Australia Limited (since 2003). Under the Company’s deﬁ nition of independence, Mr Pitcher is considered to be independent. Michael Kay LLB Name: Appointed: 15 July 2008 Positions: Managing Director and Chief Executive Ofﬁ cer Age: 52 Before joining the Company in May 2008, Mr Kay was the Chief Executive Ofﬁ cer of Australian Associated Motor Insurers Limited (AAMI). Mr Kay joined AAMI in 1993, and before rising to the position of Chief Executive Ofﬁ cer in 2006, he served as General Manager, Southern Region (comprising Victoria, Tasmania and South Australia) and Executive Chairman, Corporate Affairs and then, from 2002, as the Chief Operating Ofﬁ cer. Before joining AAMI, Mr Kay practised for 10 years as a solicitor. Mr Kay is a director of RAC Insurance and a former member of the Commonwealth Consumer Affairs Advisory Council, the Administrative Law Committee of the Law Council of Australia, the Victorian Government Finance Industry Council and the Committee for Melbourne. Mr Kay holds a Bachelor of Laws from the University of Sydney. 4 Anthony Podesta B Ed (Bus), MTMA, FTIA, MAICD Name: Appointed: 1 December 2003 Positions: Non-Executive Director Age: 54 Mr Podesta founded the McMillan Shakespeare business in 1988 and has been instrumental in the growth of its operations and the development of the outsourced salary packaging administration industry in Australia since that time. Mr Podesta is a fellow of the Taxation Institute of Australia, a member of the Australian Institute of Company Directors and holds a public practice certiﬁ cate with the Association of Taxation. Mr Podesta stepped down from all of his executive responsibilities effective 17 August 2010 but remains on the Board as a Non-Executive Director. John Bennetts B Ec, LLB Name: Appointed: 1 December 2003 Positions: Non-Executive Director Member of the Audit Committee Member of the Remuneration Committee 47 Age: Mr Bennetts is an experienced investor and a founder and director of a number of companies, including Cellestis Limited (since 2001) and private equity investment ﬁ rm, Mooroolbark Investments Pty Limited (M-Group). He has also provided advisory services to a range of companies in Australia and Asia. Prior to the establishment of the M-Group, he was Group Legal Counsel and Company Secretary of Datacraft Limited. Before joining Datacraft Limited, he practised as a solicitor. Ross Chessari LLB, M Tax Name: Appointed: 1 December 2003 Positions: Non-Executive Director Member of the Audit Committee Member of the Remuneration Committee 49 Age: Mr Chessari is a founder and director of the investment manager, SciVentures Investments Pty Limited (Sciventures). Prior to founding SciVentures, Mr Chessari was the Managing Director of ANZ Asset Management and the General Manager of ANZ Trustees. Graeme McMahon FCPA, FRAS, FCIT Name: Appointed: 18 March 2004 Positions: Non Executive Director Member of the Audit Committee Member of the Remuneration Committee 70 Age: A member of the Council at La Trobe University, Mr McMahon was formerly a director of SSSR Holdings Pty Limited and Expo Hire (Aust.) Pty Limited, and a member of the Queensland Australian Football League Commission. Mr McMahon held the position as Chairman of the Essendon Football Club for seven years and was the Managing Director and Chief Executive Ofﬁ cer of Ansett Australia Group until 1996. He is a Fellow of the CPA of Australia, a Fellow of the Royal Aeronautical Society and a Fellow of the Chartered Institute of Logistics and Transport. Under the Company’s deﬁ nition of independence, Mr McMahon is considered to be independent. COMPANY SECRETARY Mr Mark Cansdale BEc, CA held the position of the Chief Financial Ofﬁ cer and Company Secretary of the Company during the year. Mr Cansdale tendered his resignation to the Board on 26 July 2010 and ﬁ nished with the Group on 31 August 2010. Mr Paul McCluskey CA, B Bus, Grad Dip Bus Admin, has been appointed Interim Chief Financial Ofﬁ cer and Company Secretary while the recruitment of the Chief Financial Ofﬁ cer and Company Secretary is ﬁ nalised. Mr McCluskey previously held this position with the Group from May 2005 to May 2008. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 5 REMUNERATION REPORT Overview The Group’s remuneration policies and practices are designed to align staff and shareholder interests and attract and retain staff members who are critical to its growth and success. The Board maintains a Remuneration Committee whose objectives are to oversee the formulation and implementation of remuneration policy and make recommendations to the Board on remuneration policies and packages applicable to the Directors and executives. For further details of the composition and responsibilities of the Remuneration Committee, please refer to the Corporate Governance Statement. Remuneration Structure – Executives Overview In setting its remuneration arrangements, reference is made to the current employment market in which the Group operates. The components of remuneration for each executive comprise ﬁ xed remuneration (including superannuation and beneﬁ ts) and long-term equity-linked performance incentives (in the form of options). Some executives are also offered cash based short-term incentives. The Remuneration Committee reviews the ﬁ xed remuneration component and, if applicable, the short-term cash incentive component of each executive’s remuneration each year (or on promotion). The executives speciﬁ ed in the Remuneration Report as key management personnel have, either directly or indirectly, authority and responsibility for planning, directing and controlling the activities of the Group (and are the only company executives and relevant group executives of the Group as those terms are deﬁ ned in the Corporations Act 2001 (Cth)). The Directors do not believe that any other employees of the Company or its controlled entities are required to be identiﬁ ed. Fixed Remuneration The ﬁ xed remuneration component comprises salary, superannuation and, in some cases, non-cash beneﬁ ts, such as motor vehicle lease payments, investment loan repayments, education expenses, travel beneﬁ ts and car parking beneﬁ ts. Retirement beneﬁ ts may be provided by the Company to executives (including executive directors) from time to time if approved by shareholders (or otherwise provided in accordance with the Corporations Act 2001 (Cth)). Fixed remuneration reﬂ ects the duties, responsibilities and performance levels of the relevant executive, general market conditions and comparable remuneration offered in related industry sectors. No element of the ﬁ xed remuneration component is at risk. Some executives have guaranteed salary increases of not less than a percentage equal to the rise in the consumer price index (all groups) (CPI) over the preceding ﬁ nancial year. Increases in salary beyond CPI (and increases in salary for executives not entitled to receive the guaranteed CPI increase) are subject to market conditions and the achievement of Company and individual objectives. Neither the Chief Executive Ofﬁ cer nor the Chief Financial Ofﬁ cer are remunerated separately for acting as an ofﬁ cer of the Company or any of its controlled entities. Short-term Incentives The Company offers a cash bonus to certain executives primarily responsible for the achievement of the ﬁ nancial targets of the Group. Each applicable executive becomes entitled to receive a cash bonus only once the targets are met or exceeded, ensuring that a reward is only available once a reward has been created for shareholders. Any bonus payable can, at the discretion of the executive, be sacriﬁ ced as superannuation. The targets are set annually by the Remuneration Committee (and approved by the Board), in consultation with the Chief Executive Ofﬁ cer, for the forthcoming ﬁ nancial year. Satisfaction of the targets is assessed annually by the Remuneration Committee measured against the audited ﬁ nancial statements for the Group and reports from executive management. The Remuneration Committee also has the authority to issue discretionary cash bonuses as a reward for outstanding performance. Several such bonuses were paid to individual executives in relation to the year ended 30 June 2010. Long-term Incentives From time to time the Company issues options to certain executives and employees under the McMillan Shakespeare Limited Employee Option Plan (Plan). The Company has had the Plan in place since 2004 and, as at 30 June 2010, there were 27 participants in the Plan (2009: 25). Under the Plan, options over unissued ordinary shares in the Company are issued for no consideration and are, other than as disclosed in this Annual Report, granted at or above market prices prevailing when the Board approved the issue. Options granted under the Plan carry no dividend or voting rights. Once exercised, each option is converted into one fully paid ordinary share in the Company. The Remuneration Committee determines the number of options to be granted on the basis of the position, duties and responsibilities of the relevant executive. 6 As at 30 June 2010, the Company had made nine offers under the Plan in March 2004, December 2004, April 2005, August 2005, February 2007, December 2007, July 2008, November 2008, August 2009 and May 2010. Options issued in March 2004, December 2004, April 2005 and August 2005 have expired or have been exercised prior to 1 July 2008. All options in the February 2007 offer were issued subject to the following exercise conditions: • • • 50% of the options vested and are exercisable in equal proportions on or after 15 September 2007, 15 September 2008 and 15 September 2009, but the entitlement to exercise is subject to continuity of employment. 25% of the options vested and are exercisable in equal proportions on or after 15 September 2007, 15 September 2008 and 15 September 2009, but the entitlement to exercise is subject to continuity of employment and achievement of predetermined targets. For the ﬁ nancial years ended 30 June 2007, 2008 and 2009 the targets centred on the achievement of budgeted NPAT. 25% of the options vested and are exercisable in equal proportions on or after 15 September 2007, 15 September 2008 and 15 September 2009, but the entitlement to exercise is subject to continuity of employment and satisfaction of individual performance indicators for the ﬁ nancial years ended 30 June 2007, 30 June 2008 and 30 June 2009, other than with respect to 50,000 options that are exercisable on or after 15 September 2009 subject to continuity of employment until that date. The December 2007 offer was made on varying terms. 165,000 options were issued subject to the following exercise conditions: • • • 50% of those options vested and are exercisable in equal proportions on or after 15 September 2008, 15 September 2009 and 15 September 2010, but the entitlement to exercise is subject to continuity of employment. 25% of those options vested and are exercisable in equal proportions on or after 15 September 2008, 15 September 2009 and 15 September 2010, but the entitlement to exercise is subject to continuity of employment and achievement of predetermined targets. For the ﬁ nancial years ended 30 June 2008, 2009 and 2010, the targets centred on the achievement of budgeted NPAT. 25% of those options vested and are exercisable in equal proportions on or after 15 September 2008, 15 September 2009 and 15 September 2010, but the entitlement to exercise is subject to continuity of employment and satisfaction of individual performance indicators for the ﬁ nancial years ending 30 June 2008, 30 June 2009 and 30 June 2010. A further 90,000 options of the December 2007 offer vested and are exercisable on or after 15 September 2009 subject to continuity of employment until that date. In July 2008, the Company issued 4,375,000 options. The entitlement to exercise is subject to continuity of employment and the achievement of predetermined targets, of which 75% is based on earnings per share (“EPS”) targets over three years, including a cumulative EPS target over three years in the event that the maximum target is not achieved in any one year. The balance is based on other Company targets established by the Board. The entire issue vests and is exercisable (subject to the achievement of the conditions) upon the adoption of the Company’s Annual Report for the ﬁ nancial year ended 30 June 2011. A further 2,600,114 options were issued in November 2008. The entitlement to exercise is subject to continuity of employment and the achievement of predetermined targets, of which 100% is based on EPS targets over three years, including a cumulative EPS target over three years in the event that the maximum target is not achieved in any one year. The entire issue vests and is exercisable (subject to the achievement of the conditions) upon the adoption of the Company’s Annual Report for the ﬁ nancial year ended 30 June 2011. A further 327,273 options were issued in August 2009. The entitlement to exercise is subject to continuity of employment and the achievement of predetermined EPS targets over three years, including a cumulative EPS target over three years in the event that the maximum target is not achieved in any one year. The entire issue vests and is exercisable (subject to the achievement of the conditions) upon the adoption of the Company’s Annual Report for the ﬁ nancial year ended 30 June 2011. A further 698,924 options were issued in May 2010. The entitlement to exercise is subject to a further offer by the Company of a 36 month employment contract following completion of an 18 month ﬁ xed term employment contract. The entitlement is also subject to continuity of employment and the achievement of predetermined EPS targets over three years, including a cumulative earnings per share target over the three years in the event that the maximum target is not achieved in any one year. The entire issue vests and is exercisable (subject to the achievement of the conditions) on 1 October 2014. The Board believes that the use of options is the most appropriate form of long-term equity-based performance incentive to reinforce alignment with shareholder interests. All options issued have an exercise price (or strike price) and only become valuable to the extent that the share price rises above the exercise price. Given that options are issued at or above the prevailing market price at the date that the Board approved the grant (other than as disclosed in this Annual Report), it is implied that increased shareholder wealth is required. The use of earnings per share growth targets for the option entitlements has been adopted to align the long term interests of the executives with shareholders and ensure appropriate behaviours are adopted for the long term beneﬁ t of all stakeholders. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 7 Given the size of the Group, the Board believes that it is appropriate for 50% of the options granted under the February 2007 offer and approximately 35% of the options granted under the December 2007 offer not to be subject to performance hurdles (and for no individual performance hurdles to be imposed on 50,000 options under the February 2007 offer) in order to retain experienced executives critical to the Group’s success and provide the eligible executives with a sense of ownership in the Company. No executive can enter into a transaction that is designed or intended to hedge the executive’s exposure to any unvested Company option. Executives will be required to provide declarations to the Board on their compliance with this policy from time to time. Remuneration Structure – Non-Executive Directors The Non-Executive Directors are remunerated for their services from the maximum aggregate amount approved by the shareholders of the Company on 16 October 2007 for that purpose ($450,000 per annum). The Board sets the fees for the Chairman and the other Non-Executive Directors. No additional fees are paid for participation in Board committees. The Board’s policy is to remunerate the Chairman and the Non-Executive Directors at market rates for comparable companies for the time and commitment involved in meeting their obligations. Neither the Chairman nor the other Non-Executive Directors received any performance related remuneration or options with respect to the ﬁ nancial years ended 30 June 2009 and 30 June 2010. There is no direct link between the remuneration of the Chairman or any other Non-Executive Director and the short term results of the Group because the primary focus of the Board is on the long term strategic direction and performance of the Group. There are no termination payments made to the Chairman or the other Non-Executive Directors on their retirement from ofﬁ ce other than payments relating to the accrued superannuation entitlements included in their remuneration. Remuneration Details Details of the remuneration of the Directors, other key management personnel of the Group (as deﬁ ned in AASB124 Related Party Disclosures) and speciﬁ ed executives of the Company and the Group are set out in the following tables. The key management personnel of the Group are the Directors of McMillan Shakespeare Limited and the following executives: • Mr M. Cansdale – Group CFO and Company Secretary (until 31 August 2010) • Mr G. Kruyt – Group Executive, Fleet and Novated Sales & Service • Mr P. Lang – Group Executive, Salary Packaging • Mr M. Salisbury – Managing Director, Remuneration Services (Qld) Pty Ltd • Mr A. Suckling – Group Executive, Insurance and Emerging Business • Mr A. Tomas – Group Executive, Fleet and Novated Leasing (commenced 1 April 2010) 8 Short-term beneﬁ ts Post-employment beneﬁ ts Long-term beneﬁ ts Share-based payments Cash salary/ fees1 $ Cash Bonus $ Other Beneﬁ ts2 $ Super $ Termination Beneﬁ ts3 $ Long Service Leave $ Options4 $ Total Remuneration $ Percentage of Remuneration as options % 2010 Non-Executive Directors Mr R. Pitcher, AM (Chairman) 124,771 75,000 Mr J. Bennetts (Non-Executive Director) Mr R. Chessari (Non-Executive Director) Mr G. McMahon (Non-Executive Director) Executive Directors Mr M. Kay (CEO6 and Managing Director) Mr A. Podesta Other key management personnel Mr M. Cansdale (Group CFO and Company Secretary)7 Mr G. Kruyt (Group Executive, Fleet and Novated Sales & Service)8 Mr P. Lang (Group Executive, Salary Packaging)9 Mr M. Salisbury (Managing Director, Remuneration Services (Qld) Pty Ltd)10 Mr A. Suckling (Group Executive, Insurance and Emerging Business)11 Mr A Tomas (Group Executive, Fleet and Novated Leasing.) 12 2009 Non-Executive Directors Mr R. Pitcher, AM (Chairman) Mr J. Bennetts (Non-Executive Director) Mr R. Chessari (Non-Executive Director) Mr G. McMahon (Non-Executive Director) Executive Directors Mr M. Kay (CEO6 and Managing Director) Mr A. Podesta Other key management personnel Mr M. Cansdale (CFO and Company Secretary)7 Mr G. Kruyt (Group Executive, Novated Leasing and Fleet Services)8 Mr P. Lang (Group Executive, Salary Packaging)9 Mr M. Salisbury (General Manager, Remuneration Services)10 Mr A. Suckling (General Manager, Insurance Services)11 50,459 50,459 46,147 855,909 130,000 - - - - - - - 75,000 - 4,259 - 11,229 4,541 4,541 36,853 50,000 50,000 269,056 25,000 25,942 14,308 111,715 80,000 165,930 20,442 133,500 25,000 124,356 22,249 170,139 50,000 28,203 16,297 167,650 15,000 - 14,015 95,507 - 18,217 5,480 - - - - - - - - - - - - - - - - 182 - - - - - 211,000 55,000 55,000 83,000 282,702 1,268,052 - 180,000 59 50,353 384,718 12,125 20,228 410,440 7,673 23,483 336,261 8,827 273,525 17,113 213,799 59 21 10 27,778 146,992 19 Short-term beneﬁ ts Post-employment beneﬁ ts Long-term beneﬁ ts Share-based payments Cash salary/ fees1 $ Cash Bonus $ Other Beneﬁ ts2 $ Super $ Termination Beneﬁ ts3 $ Long Service Leave $ Options4 $ Total Remuneration $ Percentage of Remuneration as options % 110,000 40,000 40,000 65,000 777,558 120,000 - - - - - - - - 9,900 3,600 3,600 5,850 50,000 7,066 100,000 - - 60,000 256,667 20,000 30,583 19,477 60,370 125,872 184,520 24,675 55,011 15,000 188,266 22,192 163,867 25,000 25,348 14,871 52,474 10,000 - 4,471 - - - - - - - - - - - - - - - 177 - - - - - 119,900 43,600 43,600 70,850 282,702 1,217,503 - 180,000 50 49,050 375,827 8,537 21,925 425,899 6,458 33,517 320,444 50 16 5,272 234,408 - 66,961 - - - - 22 - 13 5 7 3 8 - - - - 23 - 13 5 10 2 - 9 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 1 2 3 4 5 6 7 8 9 10 11 12 The amounts shown for the Non-Executive Directors reﬂ ect directors’ fees only. The amounts shown for the executives reﬂ ect cash salary and annual leave entitlements. Other beneﬁ ts reﬂ ect motor vehicle lease payments, investment loan repayments, education expenses, travel beneﬁ ts and/or car parking beneﬁ ts. Other than as disclosed in this Annual Report, termination beneﬁ ts include all annual leave and, where applicable, long service leave entitlements that accrued during the ﬁ nancial years ended 30 June 2009 and 30 June 2010. The equity value comprises the value of options issued. No shares were issued to any Director (and no options were granted to any Director) during the ﬁ nancial years ended 30 June 2009 and 30 June 2010. The value of options issued to executives (as disclosed above) are the assessed fair values at the date that the options were granted to the executives, allocated equally over the period from when the services are provided to vesting date. Fair values at grant date are determined using a binomial option pricing model that takes into account the exercise price, the expected term of the option, the share price at grant date, the expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option. The model inputs for options granted to executives during the ﬁ nancial years ended 30 June 2009 and 30 June 2010 included: Model input Consideration payable upon grant Exercise price Grant date Expected life Share price at grant date Expected price volatility Expected dividend yield Risk-free interest rate 30 June 2009 (July 2008) Nil $4.70 1/7/08 4 years $2.59 34.6% 4.85% 6.73% 30 June 2009 (November 2008) Nil 30 June 2010 (August 2009) Nil $3.40, $4.70 $3.40,$4.70 24/11/08 4 years $2.10 36% 6.60% 3.78% 14/8/09 3 years $3.23 37% 6.6% 5.0% 30 June 2010 (May 2010) Nil $3.42 28/5/10 4.5 years $3.42 37% 5.0% 5.47% The employment agreement entered into between Mr Podesta and the Company dated 10 March 2004, pursuant to which Mr Podesta served as Managing Director and Chief Executive Ofﬁ cer, terminated (by mutual agreement) on 4 May 2008. On 15 July 2008 Mr Podesta entered into an employment agreement with the Company for a ﬁ xed 12 month term with a commencement date of 5 May 2008, pursuant to which Mr Podesta served as an Executive Director. This contract was extended by the Board for a further 15 months. The employment agreement may be terminated for poor performance or health on the provision of three months’ written notice (or, with respect to the Company, payment in lieu) or, in the event of cause (excluding poor performance or health), without notice or any payment. Mr Podesta has resigned as an executive director with effect from 17 August 2010, but continues in the role of a non-executive director. The employment agreement between Mr Kay and the Company is for a ﬁ ve year ﬁ xed term, which commenced on 4 February 2008. The agreement provides for termination of employment by either party without cause on the provision of six months’ written notice (or, with respect to the Company, payment in lieu). The agreement may also be terminated by the Company for cause without notice or any payment. Mr Kay served as an executive at all times during the ﬁ nancial year ended 30 June 2010. The employment agreement between Mr Cansdale and the Company was for a 3.5 year ﬁ xed term, commencing on 26 May 2008. The agreement provided for termination of employment by either party without cause on the provision of three months’ written notice (or, with respect to the Company, payment in lieu). The employment agreement may also be terminated by the Company for cause without notice or any payment. Mr Cansdale served as an executive at all times during the ﬁ nancial year ended 30 June 2010. Mr Cansdale resigned from his position effective 31 August 2010. The employment agreement between Mr Kruyt and the Company is for 18 months ﬁ xed term expiring on 30 September 2011. The agreement provides for termination of employment by either party on the provision of six months’ written notice (or, with respect to the Company, payment in lieu). The agreement may, however, be terminated by the Company for cause without notice or any payment. Mr Kruyt served as an executive at all times during the ﬁ nancial year ended 30 June 2010. The employment agreement between Mr Lang and the Company commenced on 1 October 2006 and is ongoing. The agreement provides for termination of employment by the Company for poor performance or health on the provision of three months’ written notice or without cause on the provision of six months’ written notice (or payment in lieu). The agreement may, however, be terminated by the Company for cause (excluding poor performance or health) without notice or any payment. Mr Lang served as an executive at all times during the ﬁ nancial year ended 30 June 2010. The employment agreement between Mr Salisbury and the Company commenced on 1 July 2008 and is ongoing. The agreement provides for termination of employment by either party with 12 weeks’ notice. The agreement may, however, be terminated by the Company for cause without notice or any payment. Mr Salisbury served as an executive at all times during the ﬁ nancial year ended 30 June 2010. The employment agreement between Mr Suckling and the Company commenced on 18 February 2009 and is ongoing. The agreement provides for termination of employment by either party with one month’s notice. The agreement may, however, be terminated by the Company for cause without notice or any payment. Mr Suckling served as an executive at all times during the ﬁ nancial year ended 30 June 2010. The employment agreement between Mr Tomas and the Company commenced on 1 April 2010 and is for an initial term of 18 months. The agreement provides for termination of employment by either party without cause with three month’s notice in writing (in the case of the Company, subject to a termination payment). The agreement may, however, be terminated by the Company for cause without notice or any payment. Mr Tomas served as an executive at all times during the period from 1 April 2010 until 30 June 2010. 10 Remuneration at risk The relevant proportions of remuneration that are linked to performance and those that are ﬁ xed are as follows: Executive Directors Mr M. Kay Mr A. Podesta Other key management personnel Mr M. Cansdale Mr G. Kruyt Mr P. Lang Mr M. Salisbury Mr A. Suckling Mr A Tomas Fixed remuneration At risk - STI At risk - LTI 2010 2009 2010 2009 2010 2009 76% 100% 81% 76% 86% 79% 85% 81% 73% 100% 82% 65% 85% 87% 85% - - - 6% 19% 7% 18% 7% - 4% - 5% 30% 5% 11% 15% - 24% - 13% 5% 7% 3% 8% 19% 23% - 13% 5% 10% 2% - - Consequences of performance on shareholders’ wealth In addition to the links between remuneration and shareholder value discussed above, when reviewing the Group’s performance and beneﬁ ts for shareholder wealth, and the link to the remuneration policy, the following indices are generally considered: Indices 2010 2009 2008 2007 2006 Net proﬁ t attributable to Company members $44,959,784 $20,522,752 $17,368,000 $13,237,000 $11,305,000 Dividends paid Share price as at 30 June Earnings per share $13,854,603 $11,827,100 $10,451,000 $7,697,000 $3,240,000 $4.69 $2.92 $2.46 $5.31 $3.35 66.5 cents 30.4 cents 25.8 cents 19.8 cents 17.1 cents Net proﬁ t is considered as part of the ﬁ nancial performance targets in setting short term incentives. Dividends, changes in share price, return on equity and earnings per share are all taken into account when setting the ‘at risk’ components of executive remuneration. The overall level of executive compensation takes into account the performance of the Group over a number of years. The Group’s proﬁ t from ordinary activities after tax and earnings per share has grown at a compound annual growth rate (CAGR) of 39.9% per annum over the period from 1 July 2005 until 30 June 2010 (excluding the gain on business combination). Over the same period return on equity (RoE) exceeded 20% (and, in the ﬁ nancial years ended 30 June 2006 to 30 June 2010, RoE actually exceeded 35%). McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 11 Cash Bonus and Option Details Cash Bonus No contracted cash based short-term incentives were paid to (or were forfeited by) any Non-Executive Director or executives during the ﬁ nancial year 30 June 2010. Discretionary bonuses have been issued by the Board as reported in the remuneration details shown on page 9. Options No options were granted to, exercised by or lapsed with respect to the Directors during the ﬁ nancial years ended 30 June 2009 or 30 June 2010 (the options granted to Mr Kay were issued prior to his appointment as Managing Director). The terms and conditions of each grant of options to executives affecting their remuneration in the ﬁ nancial year ended 30 June 2010 and each relevant previous or future ﬁ nancial year are as follows: Grant Date Expiry Date 4 February 2007 4 February 2011 4 February 2007 4 February 2011 21 December 2007 21 December 2011 21 December 2007 21 December 2011 21 December 2007 21 December 2011 1 July 2008 30 June 2012 24 November 2008 24 November 2012 24 November 2008 24 November 2012 14 August 2009 14 August 2012 14 August 2009 14 August 2012 28 May 2010 1 October 2015 Share price at valuation date Exercise Price Value per option at grant date1 Date Exercisable $3.80 $3.80 $4.00 $4.00 $4.00 $2.59 $2.10 $2.10 $3.23 $3.23 $3.42 $3.80 $3.80 $4.52 $4.52 $4.52 $4.70 $4.70 $3.40 $3.40 $4.70 $3.42 $0.726 $0.726 $0.525 $0.525 $0.525 $0.240 $0.090 $0.180 $0.60 $0.33 $0.93 One third after each of 15 September 2007, 15 September 2008 & 15 September 2009 100% after 15 September 2009 100% after 15 September 2008 One third after each of 15 September 2008, 15 September 2009 & 15 September 2010 100% after 15 September 2010 100% after 16 September 2011 100% after 24 November 2011 100% after 24 November 2011 100% after 14 August 2011 100% after 14 August 2011 100% after 1 October 2014 1 Reﬂ ects the value at grant date for options granted as part of remuneration calculated in accordance with AASB 2: Share-based Payment. Details of the options granted, vested and exercised during the ﬁ nancial years ended 30 June 2009 and 30 June 2010 with respect to the executives are set out in the table below. No amounts are unpaid on any shares issued on the exercise of options. Options granted Options vested Ordinary shares issued on exercise of options 2010 2009 2010 2009 2010 2009 - - - - - - 66,667 537,634 3,750,000 - 725,000 625,000 625,000 136,364 - - - - - - 64,583 - - - - - - 90,000 55,625 - - - - - - 94,549 - - - - - - - - - - Executive Directors Mr M. Kay Mr A Podesta Other key management personnel Mr M. Cansdale Mr G. Kruyt Mr P. Lang Mr M. Salisbury Mr A. Suckling Mr A. Tomas 12 The percentage of options granted to executives that have vested or were forfeited during the ﬁ nancial year ended 30 June 2010 is set out below: Financial year granted Vested % Forfeited % Financial year(s) in which options may vest Executive Directors Mr M. Kay Mr A. Podesta Other key management personnel Mr M. Cansdale Mr G. Kruyt Mr P. Lang Mr M. Salisbury Mr A. Suckling Mr A. Tomas 2009 - 2009 2008 & 2009 2007, 2008 & 2009 2009 2010 2010 - - - - 7.9 - - - - - - - 2011 - 2011 2010 & 2011 0.25 2009, 2010 & 2011 - - - 2011 2011 2014 Details of the value of options granted, exercised and lapsed during the ﬁ nancial year ended 30 June 2010 with respect to the executives are as follows: Executive Directors Mr M. Kay Mr A. Podesta Other key management personnel Mr M. Cansdale Mr G. Kruyt Mr P. Lang Mr M. Salisbury Mr A. Suckling Mr A. Tomas (i) Value at grant date1 (ii) Value at exercise date2 (iii) Value at lapse date3 Minimum value of option to vest Maximum value of option to vest $ - - - - - - 40,000 500,000 $ - - - - $ - - - - $ - - - - 50,375 1,625 52,000 - - - - - - - 40,000 500,000 $ 334,596 - 59,596 23,941 23,941 10,447 22,888 472,222 1 2 3 Reﬂ ects the value at grant date for options granted as part of remuneration during the ﬁ nancial year ended 30 June 2010 calculated in accordance with AASB 2: Share-based Payment. Reﬂ ects the value at exercise date for options that were granted as part of remuneration and were exercised during the ﬁ nancial year ended 30 June 2010 Reﬂ ects the value at lapse date for options that were granted as part of remuneration and lapsed during the ﬁ nancial year ended 30 June 2010. DIRECTORS’ INTERESTS At the date of this Annual Report, the relevant interest of each Director in the securities issued by the Company and its controlled entities, as notiﬁ ed by the Directors to the Australian Stock Exchange Limited (ASX) in accordance with section 205G(1) of the Corporations Act 2001 (Cth), is as follows: Director Mr R. Pitcher, AM (Chairman) Mr M. Kay (Managing Director) Mr J. Bennetts Mr R. Chessari Mr G. McMahon Mr A. Podesta McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES Options Ordinary shares - 3,750,000 - - - - 105,100 4,164 4,718,025 6,425,063 122,000 11,235,000 13 No Director has, during the ﬁ nancial year ended 30 June 2010, become entitled to receive any beneﬁ t (other than a beneﬁ t included in the aggregate amount of remuneration received or due and receivable by the Directors shown in the Remuneration Report or the ﬁ xed salary of a full time employee of the Company) by reason of a contract made by the Company or a controlled entity with the Director or an entity in which the Director has a substantial ﬁ nancial interest or a ﬁ rm in which the Director is a member. OPTIONS GRANTED During or since the end of the ﬁ nancial year ended 30 June 2010, the Company has granted options only to the executives as part of their remuneration as follows: Name Other key management personnel Mr A. Suckling Mr A. Tomas Number granted Date of grant Exercise price Expiry date 66,667 14 August 2009 537,634 28 May 2010 $3.40 $3.42 14 August 2012 1 October 2015 The options will vest subject to satisfaction of the exercise conditions set out on pages 7 and 8. No person holding an option has or had, by virtue of the option, a right to participate in a share issue of any other corporation. UNISSUED SHARES At the date of this Annual Report, unissued ordinary shares of the Company under option are: Option plan Employee Option Plan Employee Option Plan Employee Option Plan Employee Option Plan Employee Option Plan Employee Option Plan Employee Option Plan Employee Option Plan No. of unissued ordinary shares Exercise price 95,522 425,001 3,750,000 306,819 1,988,750 133,334 193,939 698,924 $3.80 $4.52 $4.70 $3.40 $4.70 $3.40 $4.70 $3.42 Expiry date 4 February 2011 21 December 2011 1 July 2012 24 November 2012 24 November 2012 14 August 2012 14 August 2012 1 October 2015 ENVIRONMENTAL REGULATIONS The Directors believe that the Company and its controlled entities have adequate systems in place for the management of relevant environmental requirements and are not aware of any breach of those environmental requirements as they apply to the Company and its controlled entities. INDEMNIFICATION AND INSURANCE Under the Company’s Constitution, the Company indemniﬁ es the Directors and ofﬁ cers of the Company and its wholly-owned subsidiaries to the full extent permitted by law against any liability and all legal costs in connection with proceedings incurred by them in their respective capacities. The Company has also entered into a Deed of Access, Indemnity and Insurance with each Director and the Company Secretary (Deed), which protects individuals acting as ofﬁ ceholders during their term of ofﬁ ce and after their resignation. Under the Deed, the Company also indemniﬁ es each ofﬁ ceholder to the full extent permitted by law. The Company has a Directors & Ofﬁ cers Liability Insurance policy in place for all current and former ofﬁ cers of the Company and its controlled entities. The policy affords cover for loss in respect of liabilities incurred by Directors and ofﬁ cers where the Company is unable to indemnify them and covers the Company for indemnities provided to its Directors and ofﬁ cers. This does not include liabilities that arise from conduct involving dishonesty. The Directors have not included the details of premium paid with respect to this policy as such disclosure is not permitted under the terms of the policy. 14 NON-AUDIT SERVICES Details of the amounts paid or payable to the auditor of the Company, Grant Thornton and its related practices, for non-audit services provided, during the ﬁ nancial year ended 30 June 2010, is disclosed in Note 4 to the Financial Statements. The Company’s policy is that the external auditor is not to provide non-audit services unless the Audit Committee has approved that work in advance, as appropriate. The Audit Committee has reviewed a summary of non-audit services provided during the ﬁ nancial year ended 30 June 2010 by Grant Thornton. Given that the only non-audit services related to client contract audits, the Audit Committee has conﬁ rmed that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001 (Cth). This has been formally advised to the Board. Consequently, the Directors are satisﬁ ed that the provision of non-audit services during the year by the auditor and its related practices did not compromise the auditor independence requirements of the Corporations Act 2001 (Cth). AUDITOR’S INDEPENDENCE DECLARATION A copy of the auditor’s independence declaration, as required under section 307C of the Corporations Act 2001 (Cth), is set out on page 63 of this Annual Report. CORPORATE GOVERNANCE PRACTICES A Corporate Governance Statement is set out on pages 16 to 19 of this Annual Report. Signed in accordance with a resolution of the Directors. Ronald Pitcher, AM Chairman 6 September 2010 Melbourne, Australia Michael Kay Managing Director McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 15 CORPORATE GOVERNANCE STATEMENT INTRODUCTION This statement outlines the corporate governance policies and practices formally adopted by the Company. These policies and practices are in accordance with the ASX Corporate Governance Council’s ‘Corporate Governance Principles and Recommendations’ (ASX Principles), unless otherwise stated. ROLE OF THE BOARD The role of the Board is to provide strategic guidance for the Group and effective oversight of management. The Board operates in accordance with the Company’s Constitution, Board Charter and Delegated Authority Matrix, which describe the Board’s composition, functions and responsibilities and designates authority reserved to the Board and that delegated to management. The charter can be accessed on the Company’s website (www.mcms.com.au). COMPOSITION OF THE BOARD As at the date of this Annual Report, the Directors are as follows: Name Mr R. Pitcher, AM Mr M. Kay Mr J. Bennetts Mr R. Chessari Mr G. McMahon Mr A. Podesta Position Independent Chairman Managing Director and Chief Executive Ofﬁ cer Non-Executive Director Non-Executive Director Independent Non-Executive Director Non-Executive Director Appointment 4 February 2004 15 July 2008 1 December 2003 1 December 2003 18 March 2004 1 December 2003 Each Director is a senior executive with the skills and experience necessary for the proper supervision and leadership of the Company. As a team, the Board brings together a broad range of qualiﬁ cations and experience in remuneration services, ﬁ nancial services, ﬁ nance, accounting, law, sales and marketing and public company affairs. Details of the Directors, their experience and their special responsibilities with respect to the Company are set out in the Directors’ Report. The Board considers a Director independent if that person is free of management and other business relationships that could materially interfere, or could reasonably be perceived to materially interfere, with the exercise of objective and independent judgement. More information can be obtained from the Group’s Policy on the Independence of Directors which can be accessed on the Company’s website. The Chairman determines the relevant materiality thresholds on a case by case basis with reference to both quantitative and qualitative bases. The ASX Guidelines recommend that a listed company should have a majority of directors who are independent. The Board, as currently composed, does not comply with this recommendation. Mr Chessari and Mr Bennetts currently hold, through their controlled entities, approximately 16.5% of the shares in the Company. These Directors have participated in the growth and development of McMillan Shakespeare and have a signiﬁ cant interest in the Company’s continued success. Given their history and skills, the Board believes that it is appropriate for each of these Directors to be appointed to the Board. Despite stepping down as CEO in the year ended 30 June 2008 Mr Podesta continues as a Director of the Company. As the founder of the Company, and with over 20 years experience in the remuneration services industry, Mr Podesta brings a wealth of experience and an in-depth knowledge of the Group’s operations and customers to the Board. As the Company’s largest shareholder, he also has a signiﬁ cant interest in the Company’s continued success. As such, the Board believes that it is appropriate for Mr Podesta to remain on the Board as a non-independent Director. The Company believes that the Board, as currently composed, has the necessary skills and motivation to ensure that it continues to perform strongly, notwithstanding that its overall composition does not speciﬁ cally meet the ASX Principles. Details of the experience of the Directors is contained in the Directors’ Report. The Chairman is responsible for leading the Board ensuring Directors are properly briefed in all matters relevant to their role and responsibilities, facilitating Board discussions and managing the Board’s relationships with the Company’s senior executives. The Chief Executive Ofﬁ cer is responsible for implementing Group strategies and policies. The Board charter speciﬁ es that these are separate roles to be undertaken by separate people. 16 BOARD PRACTICES The Board meets regularly to evaluate, control, review and implement the Company’s operations and objectives. The Directors receive monthly reports from the Chief Executive Ofﬁ cer, the Chief Financial Ofﬁ cer and operational managers. A Director, subject to prior approval of the Chairman or, in the absence of that approval, the Board may seek independent professional advice (including legal advice) at the Company’s expense to assist them in carrying out their duties and responsibilities. PERFORMANCE REVIEW The Board has delegated the responsibility for evaluating the performance of the Board and the Directors to the Chairman. The performance evaluation includes the examination of the performance of the Board and the individual Directors as against the Board Charter. The evaluation may establish goals and objectives for the Board and provide any recommendations for improvement to Board performance as it sees ﬁ t. The Chairman undertook the performance appraisal of the Board with respect to the ﬁ nancial year ended 30 June 2010 in July 2010. The Board has delegated the responsibility for evaluating the performance of executive management to the Remuneration Committee and CEO. Given the size of the Company’s operations, the Board has decided against the establishment of a separate nomination committee at this time. As such, the responsibility for the selection and nomination of new Directors remains with the full Board. REMUNERATION COMMITTEE The Board has established a Remuneration Committee, which is structured so that the committee is chaired by an independent director and consists of at least three members all of whom are non-executive directors. Details of names and relevant qualiﬁ cations of the Directors appointed to the Remuneration Committee, the number of meetings of the committee held during the year ended 30 June 2010 and the attendance record for each relevant member can be found in the Directors’ Report. The Remuneration Committee is empowered to investigate any matter brought to its attention and has direct access to any employee or any independent expert and adviser as it considers appropriate in order to ensure that its responsibilities can be carried out effectively. The Remuneration Committee has a documented charter approved by the Board. The charter can be accessed on the Company’s website. The CEO carries out quarterly performance reviews with each member of the senior executive team, comparing the individual’s performance against their agreed performance targets. This process was completed for the year ended 30 June 2010 with the CEO’s report to the July meeting of the Remuneration Committee. The Remuneration Committee has evaluated the performance of the Chief Executive Ofﬁ cer for the year ended 30 June 2010, taking account of the performance of the Group and other non-ﬁ nancial outcomes. The ASX Principles recommend that the majority of members of the Remuneration Committee should be independent. The Remuneration Committee, as currently composed, does not comply with this recommendation. At present, the Remuneration Committee is comprised of four members, two of whom are not independent. Mr Chessari and Mr Bennetts have participated in the growth and development of McMillan Shakespeare and have a signiﬁ cant interest in the Company’s continued success. Given their management experience and skills, the Board believes that it is appropriate for each of these Directors to be appointed to the Remuneration Committee. AUDIT COMMITTEE The Board has established an Audit Committee, which is structured so that the committee is chaired by an independent director and consists of at least three members, all of whom are non-executive directors. Details of the names and relevant qualiﬁ cations of the Directors appointed to the Audit Committee, the number of meetings of the committee held during the year ended 30 June 2010 and the attendance record for each relevant member can be found in the Directors’ Report. The Audit Committee is empowered to investigate any matter brought to its attention and has direct access to any employee, the independent auditors or any other independent experts and advisers as it considers appropriate in order to ensure that its responsibilities can be performed effectively. The Audit Committee has a documented charter approved by the Board. The charter can be accessed on the Company’s website. The ASX Principles recommend that the majority of members of the Audit Committee should be independent and that a person who is not the Chairman of the Board should chair the committee. The Audit Committee, as currently composed, does not comply with these recommendations. The Audit Committee has appropriate ﬁ nancial expertise and all members are ﬁ nancially literate and have a deep understanding of the industry in which the Company operates. At present, however, the Audit Committee is comprised of four members, only two of whom are independent. Mr Chessari and Mr Bennetts have participated in the growth and development of McMillan Shakespeare and have a signiﬁ cant interest in the Company’s continued success. Given their management experience, skills and the size of their investment in the Company, the Board believes that it is appropriate for each of these Directors to be appointed to the Audit Committee. In addition, the Audit Committee is chaired by Mr Pitcher who, while independent, is also the Chairman of the Board. Mr Pitcher is a chartered accountant with over 45 years experience in the accounting profession and the provision of business advisory services. Given the Company’s highly specialised McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 17 activities and Mr Pitcher’s extensive accounting and business experience, the Board believes that Mr Pitcher is the most appropriate person to chair the Audit Committee. The external auditor together with the Chief Executive Ofﬁ cer, Chief Financial Ofﬁ cer and Mr Podesta are invited to attend the meetings. The Audit Committee also meets with the external auditor twice a year without management to provide the auditor the opportunity to provide feedback on the conduct of the audit and management. The Company has adopted procedures for the selection and appointment of the external auditor, and the rotation of external audit engagement partners, in line with the Corporations Act 2001 (Cth). FINANCIAL REPORTING & RISK MANAGEMENT Given the nature and size of the Company’s operations, the Board has decided against the establishment of a separate Board risk management committee at this time, and risk management remains a direct responsibility of the full Board. As such, the Board has ultimate responsibility for the integrity of the Company’s ﬁ nancial reporting. As part of the Group’s risk management processes, senior management attend a monthly Risk and Compliance Committee, which is supported by internal control processes for identifying, evaluating and managing signiﬁ cant ﬁ nancial, operational and compliance risks to the achievement of the Company’s objectives, which are subject to Board oversight from time to time. In addition, an independent external party has been appointed to provide internal audit services as required from time to time. The Company has reviewed its formal Risk Management Policy and Framework during the year. The Risk Management Policy and Framework are accessible to all staff on the Group’s intranet and identify the material risks affecting the Company and the manner in which each of those risks will be managed. A copy of the Company’s Risk Management Policy can be accessed on the Company’s website. Considerable importance is placed on maintaining a strong control environment. There is an organisation structure with clear lines of accountability and delegation of authority. Adherence to the Director and Employee Codes of Conduct is required at all times and the Board actively promotes a culture of quality and integrity. The Directors have received and considered written representations from the Chief Executive Ofﬁ cer and the Chief Financial Ofﬁ cer in accordance with the ASX Principles. The written representations conﬁ rmed that: • • the ﬁ nancial reports are complete and present a true and fair view, in all material respects, of the ﬁ nancial condition and operating results of the Company and its controlled entities and are in accordance with all relevant accounting standards; and the above statement is founded on a sound system of risk management and internal compliance and control that implements the policies adopted by the Board and that compliance and control is operating efﬁ ciently and effectively in all material respects. The Company’s external auditor has been invited to attend the Annual General Meeting and be available to answer questions from the members of the Company about the conduct of the audit and the preparation and content of the Independent Audit Report. REMUNERATION POLICY The Company’s remuneration policy is structured to ensure that the reward for performance is competitive and appropriate for the results delivered. Further, it aims to ensure that remuneration packages properly reﬂ ect the duties and responsibilities and level of performance of the staff member and that the remuneration is competitive in attracting, retaining and motivating people of the highest quality. Non-executive Directors are remunerated by way of fees and do not participate in proﬁ t or incentive schemes and do not receive options, incentive payments or retirement beneﬁ ts other than statutory superannuation. Executive remuneration generally comprises the following elements: • • • ﬁ xed remuneration, including superannuation and beneﬁ ts, which is set at a level that reﬂ ects the marketplace for each position; short term performance incentives, in the form of cash bonuses, which incorporate eligibility restrictions based on continuity of employment, and the achievement of certain ﬁ nancial performance hurdles; long-term equity-linked performance incentives, in the form of share options, which incorporate exercise restrictions based on continuity of employment and the achievement of certain individual and ﬁ nancial performance hurdles. Further details of the Company’s remuneration policies and practices in relation to the Directors and executives can be found in the Directors’ Report under the heading ‘Remuneration Report’. 18 COMMUNICATION WITH SHAREHOLDERS AND THE MARKET The Company’s commitment to communicating with its shareholders is embodied in its Continuous Disclosure Policy, which contains policies and procedures on information disclosure that focus on continuous disclosure of any information concerning the Group that a reasonable person would expect to have a material effect on the price of the Company’s securities. The Company’s Continuous Disclosure Policy can be accessed on the Company’s website. In addition to the distribution of the Annual Report, information is communicated to shareholders via the announcements section of the Company’s website. Given the size of the Company and the number of shareholders, the Board does not believe that it is appropriate for the Company to adopt a formal Communications Policy at this time. ETHICS AND CODES OF CONDUCT The Company has adopted a Director Code of Conduct that applies to the directors of the Company. The Director Code of Conduct reﬂ ects the commitment of the Company to ethical standards and practices. The Director Code of Conduct can be reviewed on the Company’s website. The Company has also adopted an extensive Employee Code of Conduct that applies to all employees of the Company, which acknowledges the need for, and continued maintenance of, the highest standard of ethics and seeks to ensure that employees act honestly, transparently, diligently and with integrity. A summary of the Employee Code of Conduct can be accessed on the Company’s website. The Company has also implemented a policy on securities trading that binds all of the Group’s ofﬁ cers and employees. In addition to ensuring that all ofﬁ cers and employees are aware of the legal restrictions on trading in the Company’s securities whilst in possession of unpublished price-sensitive information, the policy also places restrictions on when Directors and employees can deal in the Company’s securities and requires the Directors and certain employees to notify the Company Secretary upon dealing in the Company’s securities. The policy can be accessed on the Company’s website. The Group has adopted a Whistleblower Policy, which is designed to ensure that employees of the Group can raise concerns in good faith regarding actual or suspected improper conduct or malpractice in the Group, without fear of reprisal or feeling threatened by doing so. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 19 STATEMENTS OF COMPREHENSIVE INCOME FOR THE FINANCIAL YEAR ENDED 30 JUNE 2010 Revenue and other income Employee and director beneﬁ t expenses Depreciation and amortisation expenses and impairment Vehicle expenses Consulting expenses Marketing expenses Property and corporate expenses Technology and communication expenses Other expenses Finance costs Note 3 4 4 Proﬁ t before income tax and business combination 29 Gain on business combination 29 Acquisition costs Proﬁ t before income tax Income tax (expense)/beneﬁ t 5 Proﬁ t attributable to members of the parent entity Other comprehensive income Other comprehensive income/(loss) for the period after tax Economic Entity Parent Entity 2010 $’000 132,022 (41,347) (19,307) (13,063) (1,278) (2,573) (2,698) (3,422) (5,282) (3,149) 39,903 20,991 (5,707) 55,187 (10,227) 44,960 2009 $’000 77,259 (34,309) (1,857) - (1,034) (1,111) (2,298) (3,163) (4,575) - 28,912 - - 28,912 (8,389) 20,523 2010 $’000 26,281 (544) - - - - (169) - - (791) 24,777 - (4,430) 20,347 1,623 21,970 2009 $’000 12,826 (484) - - - - (93) - (2) - 12,247 - - 12,247 (14) 12,233 - - - - Total comprehensive income for the period 44,960 20,523 21,970 12,233 Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 6 6 66.5 66.5 30.4 30.4 The above statements of comprehensive income should be read in conjunction with the accompanying notes. 20 STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 2010 Economic Entity Parent Entity Current assets Cash and cash equivalents Trade and other receivables Inventory Prepayments Total current assets Non-current assets Trade and other receivables Other ﬁ nancial assets Property, plant and equipment Deferred tax assets Intangible assets Total non-current assets TOTAL ASSETS Current liabilities Trade and other payables Current tax liability Provisions Borrowings Other liabilities Total current liabilities Non-current liabilities Deferred tax liabilities Provisions Borrowings Total non-current liabilities TOTAL LIABILITIES NET ASSETS EQUITY Contributed equity Reserves Retained earnings TOTAL EQUITY Note 8 9 9 10 12 13 14 15 16 17 18 13 17 18 19 20 2010 $’000 16,757 10,247 1,809 2,122 30,935 6,269 - 209,829 126 38,905 255,129 286,064 42,544 8,431 3,184 7,949 117 62,225 - 458 133,964 134,422 196,647 89,417 23,066 1,284 65,067 89,417 2009 $’000 28,047 4,353 - 1,380 33,780 - - 2,007 - 39,018 41,025 74,805 12,325 2,471 2,234 - 122 17,152 82 168 - 250 17,402 57,403 22,637 804 33,962 57,403 2010 $’000 1,405 - - - 1,405 - 100,381 - 1,427 - 101,808 103,213 17,194 8,431 - 7,949 - 33,574 - - 21,866 21,866 55,440 47,733 23,066 1,284 23,383 47,733 The above statements of ﬁ nancial position should be read in conjunction with the accompanying notes. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 2009 $’000 11,764 49 - 17 11,830 - 44,832 - 2 - 44,834 56,664 15,484 2,471 - - - 17,955 - - - - 17,955 38,709 22,637 804 15,268 38,709 21 STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2010 2010 Equity as at beginning of year Proﬁ t attributable to members of the parent entity Other comprehensive income after tax Total comprehensive income for the period Issue of shares Transfer on exercise of options Option expense Dividends paid Equity as at 30 June 2010 2009 Equity as at beginning of year Proﬁ t attributable to members of the parent entity Other comprehensive income after tax Total comprehensive income for the period Option expense Dividends paid Equity as at 30 June 2009 2010 Equity as at beginning of year Proﬁ t attributable to members of the parent entity Other comprehensive income after tax Total comprehensive income for the period Issue of shares Transfer on exercise of options Option expense Dividends paid Equity as at 30 June 2010 2009 Equity as at beginning of year Proﬁ t attributable to members of the parent entity Other comprehensive income after tax Total comprehensive income for the period Option expense Dividends paid Note Ordinary Shares $’000 Retained Earnings $’000 Option Reserve $’000 Economic Entity 22,637 - - - 360 69 - - 23,066 22,637 - - - - - 22,637 33,962 44,960 - 44,960 - - - (13,855) 65,067 25,266 20,523 - 20,523 - (11,827) 33,962 804 - - - - (69) 549 - 1,284 304 - - - 500 - 804 7 7 Note Ordinary Shares $’000 Retained Earnings $’000 Option Reserve $’000 Parent Entity 22,637 - - - 360 69 - - 23,066 22,637 - - - - - 15,268 21,970 - 21,970 - - - (13,855) 23,383 14,862 12,233 - 12,233 - (11,827) 7 7 804 - - - - (69) 549 - 1,284 304 - - - 500 - 804 Equity as at 30 June 2009 22,637 15,268 The above statements of changes in equity should be read in conjunction with the accompanying notes. 22 Total $’000 57,403 44,960 - 44,960 360 - 549 (13,855) 89,417 48,207 20,523 - 20,523 500 (11,827) 57,403 Total $’000 38,709 21,970 - 21,970 360 - 549 (13,855) 47,733 37,803 12,233 - 12,233 500 (11,827) 38,709 STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2010 Economic Entity Parent Entity Note 2010 $’000 2009 $’000 Cash ﬂ ows from operating activities Receipts from customers Payments to suppliers and employees Proceeds from sale of assets under lease Payments for assets under lease Interest received Interest paid Dividends received Income taxes paid Net cash from operating activities Cash ﬂ ows from investing activities Acquisition of subsidiary, net of cash Acquisition expenses Payment for contract rights Payment for capitalised software Proceeds from sale of plant and equipment Acquisition of plant and equipment Net cash used in investing activities Cash ﬂ ows from ﬁ nancing activities Equity contribution Dividends paid by parent entity Proceeds from borrowings Proceeds from controlled entities 21 29 14(b) 14(b) 12(b) 7 29 132,863 (74,232) 11,792 (25,261) 1,050 (914) - (9,156) 91,356 (55,474) - - 1,315 - - (8,354) 36,142 28,843 (166,143) (4,744) - (1,629) 30 (3,457) (175,943) 360 (13,855) 142,006 - - - (5,151) (740) - (1,047) (6,938) - (11,827) - - 2010 $’000 - (119) - - 572 (196) 25,758 (14) 26,001 (55,000) (4,218) - - - - (59,218) 360 (13,855) 29,280 7,073 2009 $’000 - (215) - - 683 - 12,200 (8,354) 4,314 - - - - - - - - (11,827) - 8,906 Net cash provided by/(used in) ﬁ nancing activities Net cash (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 8 128,511 (11,827) 22,858 (2,921) (11,290) 28,047 16,757 10,078 17,969 28,047 (10,359) 11,764 1,405 1,393 10,371 11,764 The above statements of cash ﬂ ows should be read in conjunction with the accompanying notes. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 23 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) General information The ﬁ nancial report of McMillan Shakespeare Limited and its controlled entities for the year ended 30 June 2010 was authorised for issue in accordance with a resolution of the directors on 6 September 2010 and covers McMillan Shakespeare Limited (‘the Company” or the “parent entity”) as an individual entity as well as “the economic entity”, consisting of McMillan Shakespeare Limited and its subsidiaries (‘the Group”) as required by the Corporations Act 2001. The ﬁ nancial report is presented in Australian currency, which is the economic entity’s functional and presentation currency. McMillan Shakespeare Limited is a company limited by shares and domiciled in Australia, whose shares are publicly traded on the Australian Stock Exchange. (b) Basis of preparation The ﬁ nancial report is a general purpose ﬁ nancial report which has been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Australian Accounting Interpretations and the Corporations Act 2001. The ﬁ nancial report has been prepared on an accruals basis and is based on historical costs. Cost is based on fair values of the consideration given in exchange for assets. The Group has applied the revised AASB 101 Presentation of Financial Statements which became effective 1 January 2009. The revised standard requires the separate presentation of a Statement of Comprehensive Income and a Statement of Changes in Equity. All non-owner changes in equity must now be presented in the Statement of Comprehensive Income. As a consequence, the Group had to change the presentation of its ﬁ nancial statements. Comparative information has been re-presented so that it also conforms with the new standard. Compliance with IFRS Australian Accounting Standards include International Financial Reporting Standards as adopted in Australia (AIFRS). Compliance with AIFRS ensures that the ﬁ nancial report complies with International Financial Reporting Standards (IFRS). (c) Principles of consolidation The consolidated ﬁ nancial statements comprise the ﬁ nancial statements of the Company and its subsidiaries as at 30 June each year. Subsidiaries are entities over which the Group has the power to govern the ﬁ nancial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. Potential voting rights that are currently exercisable or convertible are considered when assessing control. Consolidated ﬁ nancial statements include all subsidiaries from the date that control commences until the date that control ceases. The ﬁ nancial statements of subsidiaries are prepared for the same reporting period as the parent entity, using consistent accounting policies. All inter-company balances and transactions, including unrealised proﬁ ts arising from intra-group transactions have been eliminated. Unrealised losses are also eliminated unless costs cannot be recovered. Investments in subsidiaries are accounted for at cost in the individual ﬁ nancial statements of the parent entity, adjusted for the value of options expensed. (d) Business combinations The purchase method of accounting is used to account for all business combinations. Cost is measured as the fair value of the assets given, shares issued or liabilities incurred or assumed at the date of exchange. Acquisition costs including advisory, legal, accounting, valuation and other professional consulting fees directly attributable to the acquisition are expensed. Where equity instruments are issued, the value of the equity instruments is their published market price on the date of exchange unless, in rare circumstances, it can be demonstrated that the published price on the date of exchange is an unreliable indicator of fair value and that other evidence and valuation methods provide a more reliable measure of fair value. Transaction costs arising on the issue of equity instruments are recognised directly in equity. Identiﬁ able assets acquired and liabilities and contingent liabilities assumed in the business combinations are initially measured at their fair values at acquisition date. The excess of the cost of acquisition over the fair value of the economic entity’s share of the identiﬁ able net assets acquired is recorded as goodwill (refer Note 1(g)(i)). If the cost of acquisition is less than the economic entity’s share of the fair value of the net assets acquired, the difference is recognised in the Statement of Comprehensive Income, but only after a reassessment of the identiﬁ cation and measurement of the net assets acquired. If the initial accounting for a business combination is incomplete by the time of reporting the period in which the business combination occurred, preliminary estimates are used for items for which accounting is incomplete. These provisional estimates are adjusted in a measurement period that is not to exceed 12 months from the date of acquisition to reﬂ ect new information about facts and circumstances that existed at the date of acquisition that had they been known would have affected the amounts recognised at that date. Where settlement of any part of the cash consideration is deferred, the amounts payable in the future are discounted to the present value at the date of the exchange using the entity’s incremental borrowing rate as the discount rate. 24 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 (e) Income tax (i) Income tax expense The income tax expense for the period is the tax payable on the current period’s taxable income based on the Australian income tax rate adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. (ii) Deferred tax Deferred tax assets and liabilities are recognised for all temporary differences between the carrying amounts of assets and liabilities for ﬁ nancial reporting purposes and their respective tax bases, at the tax rates expected to apply when the assets are recovered or liabilities settled, based on those rates which are enacted or substantially enacted. Deferred tax assets are only recognised for deductible temporary differences and unused tax losses if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax assets and liabilities are not recognised for temporary differences between the carrying amounts and tax bases of investments in subsidiaries where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Current and deferred tax balances relating to amounts recognised directly in equity are also recognised directly in equity. (iii) Tax consolidation The Company and its wholly-owned Australian resident entities are members of a tax consolidated group under Australian taxation law. The Company is the head entity in the tax consolidated group. Entities within the tax consolidated group have entered into a tax funding agreement and a tax-sharing agreement with the head entity. Under the terms of the tax funding arrangement, the Company and each of the entities in the tax consolidated group have agreed to pay a tax equivalent payment to or from the head entity, based on current tax liability or current tax asset of the head entity. (iv) Investment allowances Companies within the group may be entitled to claim special tax deductions for investments in qualifying assets (investment allowances). The Group accounts for such allowances as tax credits, which means that the allowance reduces income tax payable and current tax expense. A deferred tax asset is recognised for unclaimed tax credits that are carried forward as deferred tax assets. (f) Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and impairment losses. Cost includes expenditure that is directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation on assets is calculated on a straight-line basis over the estimated useful life of the asset as follows: Class of Fixed Asset Plant and equipment Software Motor vehicles under operating lease Depreciation Rate 20% – 40% 20% – 33% 25% – 33% The assets’ residual values and useful lives are reviewed and adjusted, if appropriate at each balance sheet date. Motor vehicles no longer held under an operating lease are classiﬁ ed as inventory. (g) Intangible assets (i) Goodwill Goodwill represents the excess of the cost of the business combination over the Group’s share of the net fair value of the identiﬁ able assets, liabilities and contingent liabilities. Goodwill is not amortised but is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying value may be impaired (refer Note 14(c)). Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Any impairment is recognised immediately in the Statement of Comprehensive Income and cannot be subsequently reversed. (ii) Capitalised software development costs Software development costs are recognised when it is probable that future economic beneﬁ ts attributable to the software will ﬂ ow to the entity and the cost of the development can be measured reliably. Capitalised software development costs are amortised on a straight line basis over three to ﬁ ve years, during which the beneﬁ ts are expected to be realised. Capitalised software development costs are reviewed annually for indicators of impairment, and if indicators are identiﬁ ed an impairment test is performed (refer Note 1(h)). McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 25 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 (iii) Contract rights Contract rights acquired and amounts paid for contract rights are recognised at the value of any consideration paid plus any expenditure directly attributable to the transactions. Contracts are amortised over the life of the contract, and reviewed annually for indicators of impairment in line with the economic entity’s impairment policy (refer Note 1(h)). (iv) Intangible assets acquired in a business combination Any potential intangible assets acquired in a business combination are identiﬁ ed and recognised separately from goodwill where they satisfy the deﬁ nition of an intangible asset and their fair value can be measured reliably. (h) Impairment of non-ﬁ nancial assets At each reporting date, the economic entity reviews the carrying amounts of its tangible (including operating lease assets) and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset being the higher of the asset’s fair value less costs to sell and value in use is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash ﬂ ows that are independent from other assets, the economic entity estimates the recoverable amount of the cash-generating unit to which the asset belongs. Goodwill is tested for impairment annually and whenever there is an indication that the asset may be impaired. An impairment of goodwill is not subsequently reversed. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash ﬂ ows are discounted to their present value using a pretax discount rate that reﬂ ects current market assessments of the time value of money and the risks speciﬁ c to the asset for which the estimates of future cash ﬂ ows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised in proﬁ t or loss immediately, unless the relevant asset is carried at fair value, in which case the impairment loss is treated as a revaluation decrease, except where it exceeds a previous revaluation increment, in which case it is recognised in the proﬁ t or loss. Where an impairment loss, other than one relating to goodwill, subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised in proﬁ t or loss immediately, unless the relevant asset is carried at fair value, in which case the reversal of the impairment loss is treated as a revaluation increase. Operating lease assets are reviewed for impairment on an ongoing basis and at reporting date using both internal and external sources of information. (i) Financial instruments Recognition and derecognition Regular purchases and sales of ﬁ nancial assets and liabilities are recognised on trade date, the date on which the economic entity commits to the ﬁ nancial assets or liabilities. Financial assets are derecognised when the rights to receive cash ﬂ ows from the ﬁ nancial assets have expired or have been transferred and the economic entity has transferred substantially all the risks and rewards of ownership. (i) Cash and cash equivalents For statement of cash ﬂ ow purposes, cash and cash equivalents includes cash on hand, deposits held at call with ﬁ nancial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash which are subject to an insigniﬁ cant risk of changes in value. (ii) Trade and other receivables All receivables are classiﬁ ed as ‘loans and receivables’ under the requirements of AASB 139 Financial Instruments: Recognition and Measurement and are recognised initially at fair value, and subsequently at amortised cost, less provision for impairment. All trade and other receivables are classiﬁ ed as current as they are due for settlement no more than 30 days from the date of recognition. Cash ﬂ ows relating to short-term receivables are not discounted if the effect of discounting is immaterial. The Directors establish an allowance for impairment when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The provision consists of allowances for speciﬁ c doubtful amounts. The allowance account for receivables is used to record impairment losses unless the Group is satisﬁ ed that there is no possible recovery of the amount, at which point it is written off directly against the amount owing. The impairment loss and any subsequent reversal thereof, is recognised in the Statement of Comprehensive Income within other expenses. There have been no amounts recorded for impairment for the parent entity. 26 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 (iii) Other ﬁ nancial assets Investments in subsidiaries Investments in subsidiaries are carried at cost and adjusted for any share based payments in the separate ﬁ nancial statements of the Company, under AASB 127: Consolidated and Separate Financial Statements. (iv) Other ﬁ nancial liabilities Trade and other payables Trade and other payables, including accruals, are recorded initially at fair value, and subsequently at amortised cost. Trade and other payables are non-interest bearing. (j) Employee beneﬁ ts (i) Wages and salaries, annual leave and long service leave Provision is made for the economic entity’s liability for employee beneﬁ ts arising from services rendered by employees to balance date. Employee beneﬁ ts expected to be settled within one year together with beneﬁ ts arising from wages and salaries and annual leave which will be settled after one year, have been measured at amounts expected to be paid when the liability is settled plus related oncosts. Other employee beneﬁ ts payable later than one year have been measured at the present value of the estimated future cash outﬂ ows to be made for those beneﬁ ts. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using interest rates attaching to national government guaranteed securities with terms to maturity that match, as closely as possible, the estimated future cash outﬂ ows. (ii) Superannuation The amount charged to the Statement of Comprehensive Income in respect of superannuation represents the contributions made by the economic entity to superannuation funds. (iii) Bonuses A liability for employee beneﬁ ts in the form of bonuses is recognised in employee beneﬁ ts. This liability is based upon predetermined plans tailored for each participating employee and is measured on an ongoing basis during the ﬁ nancial period. The amount of bonuses is dependent on the outcomes for each participating employee. An additional amount is included where the Board has decided to pay discretionary bonuses for exceptional performance. (k) Revenue Revenue is recognised at the fair value of consideration received or receivable. Amounts disclosed as revenue are shown net of returns, trade allowances and duties, and taxes paid. The following speciﬁ c criteria must also be met before revenue is recognised: (i) Rendering of services Revenue from services provided is recognised when the service is provided to the customer. (ii) Interest Revenue from interest is recognised as interest accrues using the effective interest rate method. The effective interest rate method uses the rate that exactly discounts the estimated future cash ﬂ ows over the expected life of the ﬁ nancial asset. (iii) Dividends Revenue from dividends is recognised when the economic entity’s right to receive payment is established. (iv) Lease revenue (property, plant and equipment) Operating lease revenue is made up of operating lease interest and revenue from the principal that forms the net investment in the leased asset. Interest included in operating lease instalments is calculated on a straight-line basis for each customer contract based on the effective rate method using the interest rate in the lease contract and the net investment value of the leased asset. The principal portion upon receipt reduces the net investment in the leased asset. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 27 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 (v) Sale of leased assets Revenue includes the proceeds from the routine sale of motor vehicles previously leased and included within property, plant and equipment following the cessation of the rental of these assets by a customer. (vi) Vehicle maintenance services Revenues from maintenance service contracts are recognised for services rendered when it is probable that economic beneﬁ ts from the transaction will ﬂ ow to the Group. When amounts are uncollectable or recovery is not considered probable, an expense is recognised immediately. Revenue is recognised for each reporting period by reference to the stage of completion when the outcome of the service contracts can be estimated reliably. The stage of completion of service contracts is based on the proportion that costs incurred to date bear to total estimated costs. When the outcome cannot be measured reliably, revenue is deferred and recognised 60 days after the contract terminates. (l) Goods and services tax Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the Australian Taxation Ofﬁ ce (ATO). In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of expense. Receivables and payables in the Statement of Financial Position are shown inclusive of GST. The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the Statement of Financial Position. (m) Leasing Leases are classiﬁ ed as ﬁ nance leases whenever the terms of the contract transfers substantially all the risk and rewards of ownership to the lessee. All other contracts are classiﬁ ed as operating leases. (i) Finance lease receivable portfolio Lease contracts with customers are recognised as ﬁ nance lease receivables at the Group’s net investment in the lease which equals the net present value of the future minimum lease payments. Finance lease income is recognised as income in the period to reﬂ ect a constant periodic rate of return on the Group’s remaining net investment in respect of the lease. (ii) Operating lease portfolio – the Group as lessor Lease contracts with customers other than ﬁ nance leases are recognised as operating leases. The Group’s initial investment in the lease is added as a cost to the carrying value of the leased assets and recognised as lease income on a straight line basis over the term of the lease. Operating lease assets are amortised as an expense on a straight line over the term of the lease based on the cost less residual value of the lease. (n) Share-based payments The fair values of options granted are recognised as an employee beneﬁ t expense with a corresponding increase in equity (share option reserve). The fair value is measured at grant date and recognised over the period during which the employees become unconditionally entitled to the options. Fair value is determined using a binomial option pricing model. In determining fair value, no account is taken of any performance conditions other than those related to the share price of the Company (“market conditions”). The cumulative expense recognised between grant date and vesting date is adjusted to reﬂ ect the Directors’ best estimate of the number of options that will ultimately vest because of internal conditions attached to the options, such as the employees having to remain with the Group until vesting date, or such that employees are required to meet internal targets. No expense is recognised for options that do not ultimately vest because internal conditions were not met. An expense is still recognised for options that do not ultimately vest because a market condition was not met. (o) Contributed equity Ordinary shares are classiﬁ ed as equity. Costs directly attributable to the issue of new shares or options are shown as a deduction from the equity proceeds, net of any income tax beneﬁ t. Costs directly attributable to the issue of new shares or options associated with the acquisition of a business are included as part of the business combination. (p) Dividends Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the economic entity, on or before the end of the ﬁ nancial year but not distributed at balance date. 28 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 (q) Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the proﬁ t attributable to members of the Company by the weighted average number of ordinary shares outstanding during the ﬁ nancial year, adjusted for bonus elements in ordinary shares during the year. Diluted earnings per share The earnings used to calculate diluted earnings per share is calculated by adjusting the basic earnings by the after-tax effect of interest and any other ﬁ nancing costs associated with dilutive potential ordinary shares. (r) Segment reporting Operating segments are reported in a manner consistent with internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing the performance of the operating segments, has been identiﬁ ed as the Chief Executive Ofﬁ cer. (s) Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event and where it is probable that the Group is required to settle the obligation, and the obligation can be reliably estimated. Restructurings A restructuring provision is recognised when the Group has developed a plan for the restructuring and has communicated with those affected that it will carry out the plan. The provision is measured based on the direct cost arising from and necessary to undertake the restructuring plan and not with the ongoing activities of the Group. (t) Inventories The inventory of motor vehicles is stated at the lower of cost and net realisable value. Following termination of the lease or rental contract the relevant assets are transferred from Assets under Operating Lease to Inventories at their carrying amount. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs to make the sale. (u) Operating cash ﬂ ow All cash ﬂ ows other than investing or ﬁ nancing cash ﬂ ows are classiﬁ ed as operating cash ﬂ ows. As the asset ﬁ nance segment provides operating and ﬁ nance leases for motor vehicles and equipment, the cash outﬂ ows to acquire the lease assets are classiﬁ ed as operating cash outﬂ ows. Similarly interest received and interest paid in respect of the asset ﬁ nance segment is classiﬁ ed as operating cash ﬂ ows. (v) Borrowings Borrowings are initially recorded at fair value, net of transaction costs and subsequently measured at amortised cost using the effective interest rate method. The effective interest rate method exactly discounts the estimated cash ﬂ ows through the expected life of the borrowing. (w) Derivative ﬁ nancial instruments The economic entity has not used any derivative ﬁ nancial instruments to manage its interest rate exposure during the year. However, with the acquisition of Interleasing and the inherent exposure to interest rate volatility and its impact on leasing product margins, the Group will employ greater use of derivative instruments to mitigate the exposure. The economic entity will balance the spread between interest rates charged to lease contracts and interest rates and the level of borrowings assumed in its ﬁ nancing as required. In accordance with the economic entity’s treasury policy, derivative interest rate products that can be entered into include interest rate swaps, forward rate agreements and options as cash ﬂ ow hedges to mitigate both current and future interest rate volatility that may arise from changes in the fair value of its borrowings. Derivative ﬁ nancial instruments are recognised at fair value at the date of inception and subsequently remeasured at fair value at reporting date. The resulting gain or loss is recognised in proﬁ t or loss unless the derivative or amount thereof is designated and effective as a hedging instrument, in which case the gain or loss is taken to equity and subsequently recognised in proﬁ t or loss to match the timing and relationship with the amount that the instrument was intended to hedge. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 29 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 (x) Critical judgements and signiﬁ cant accounting estimates The preparation of ﬁ nancial statements requires the Board to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. All signiﬁ cant judgements, estimates and assumptions made during the year have been considered for signiﬁ cance. Key assumptions used for value-in-use calculations to determine the recoverable amount of assets in impairment tests are discussed in Note 14(d). Estimates of signiﬁ cance are used in determining the residual values of operating lease and rental assets at the end of the contract date and income from maintenance services, which is recognised on a percentage stage of completion. In determining residual values, critical judgements include the future value of the asset lease portfolio at the time of sale, economic and vehicle market conditions and dynamics. For income from maintenance contracts, judgement is made in relation to expected costs that can affect margins. The estimates and underlying assumptions are reviewed on an ongoing basis. No other judgements, estimates or assumptions are considered signiﬁ cant. (y) New accounting standards and interpretations The following new accounting standards, amendments to standards and interpretations (standards) have been issued, but are not mandatory for 30 June 2010 reporting periods. They may impact the economic entity in the period of initial application. They are available for early adoption, but have not been applied in preparing this ﬁ nancial report. No other new standards will impact the ﬁ nancial report. AASB 9 Financial Instruments and AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 (effective from 1 January 2013) AASB 9 Financial Instruments addresses the classiﬁ cation and measurement of ﬁ nancial assets and is likely to affect the Group’s accounting for its ﬁ nancial assets. The standard is not applicable until 1 January 2013 but is available for early adoption. The Group is yet to assess its full impact. However, initial indications are that it may affect the Group’s accounting for its available-for-sale ﬁ nancial assets, since AASB 9 only permits the recognition of fair value gains and losses in other comprehensive income if they relate to equity investments that are not held for trading. Fair value gains and losses on available-for-sale debt investments, for example, will therefore have to be recognised directly in proﬁ t or loss. The Group has not yet decided when to adopt AASB 9. (z) Changes in accounting policies In the current year, the economic entity has adopted all of the new and revised Standards and Interpretations issues by the Australian Accounting Standards Board that are relevant to its operations and effective for the current annual reporting period. Signiﬁ cant effects on current, prior or future periods arising from the ﬁ rst-time application of the standards discussed above in respect of presentation, recognition and measurement of accounts are described in the following notes. AASB 8: Operating Segments The Group has adopted AASB 8 Operating Segments from 1 July 2009. AASB 8 replaces AASB 114 Segment Reporting. The new standard requires a management approach, under which segment information is presented on the same basis as that used for internal reporting purposes. This has resulted in an increase in the number of reportable segments presented. In addition, the segments are reporting in a manner that is consistent with the internal reporting provided to the chief operating decision maker. There has been no impact on the measurement of the Group’s assets and liabilities. Comparatives for 2009 have been restated. AASB 3: Business Combinations The Group has applied the new standard to the business combination completed during the year. As a result, acquisition-related costs including advisory, legal, accounting, valuation, and other professional consulting; and costs of registering and issuing debt and equity securities were expensed in the period in which the costs were incurred and the services received. (aa) Rounding of amounts The Company is of a kind referred to in Class order CO98/100, issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the ﬁ nancial report. Amounts in the ﬁ nancial report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. (ab) Parent entity accounts In accordance with Class order CO10/654 the Group will continue to include parent entity ﬁ nancial statements in the ﬁ nancial report. 30 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 2 FINANCIAL RISK MANAGEMENT The Group’s overall risk management approach is to identify the risks and implement safeguards which seek to proﬁ t from and minimise potential adverse effects on the ﬁ nancial performance of the Group. The Board is responsible for monitoring and managing the ﬁ nancial risks of the Group. The Board monitors these risks through the monthly board meetings, via regular reports from the Risk and Compliance Committee and ad hoc discussions with senior management, should the need arise. A risk register is presented to the Board at least quarterly and Credit and Treasury reports are provided by the Group Treasurer and Credit Manager and discussed at Board meetings monthly, along with management accounts. All exposures to risk and management strategies are consistent with prior year, other than as noted below. (a) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its ﬁ nancial obligations as they fall due. Liquidity management strategy The acquisition of the Interleasing business and the resultant borrowings have heightened the requirement to manage the Group’s exposure to potential mismatches between the reﬁ nancing of its assets and liabilities. The Group’s objective is to maintain continuity and ﬂ exibility of funding through the use of revolving bank facilities, asset subordination and surplus cash as appropriate to match asset and liability requirements. The Group’s policy is to ensure that there is sufﬁ cient liquidity through access to available funds to meet at least six months of average net asset funding requirements. This level is expected to cover any short term ﬁ nancial market constraint for funds. The Group monitors monthly positive operating cash ﬂ ows and forecasts cash ﬂ ows for each six month period. Signiﬁ cant cash deposits have been maintained which enable the Group to settle obligations as they fall due without the need for short term ﬁ nancing facilities. The Chief Financial Ofﬁ cer and the newly appointed Treasurer monitor the cash position of the Group weekly. Financing arrangements During the year, the Group secured $215m of borrowing facilities of which $72.3m was left undrawn at 30 June 2010 after the initial drawdown to fund the acquisition of the Interleasing business. The level and type of funding will be reviewed on an ongoing basis to ensure they meet the Group’s on-going requirements. The facilities may be drawn at any time within the following periods from April 2010 and the details of each facility are as follows: Facility A: $30m amortising facility, fully drawn; expiry 31 March 2013 with $4m amortisation payments required every six months beginning December 2010. Facility B: $5m revolving facility, undrawn; expiry 31 March 2011. Facility C: $180m revolving facility, drawn to $112.7m; expiry 31 March 2012. Maturities of ﬁ nancial liabilities The table below analyses the Group’s and the parent entity’s ﬁ nancial liabilities into relevant maturity groupings based on their contractual maturities and based on the remaining period to the expected settlement date. The amounts disclosed in the table are the contractual undiscounted cash ﬂ ows. Balances due within 12 months equal their carrying value as the impact of discounting is not signiﬁ cant. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 31 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 Group – at 30 June 2010: Contractual maturities of ﬁ nancial liabilities Trade payables Borrowings Less than 6 mths $’000 42,544 9,282 51,826 6-12 mths 1-2 years 2-5 years Over 5 years Total contractual cash ﬂ ows Carrying amount (assets)/ liabilities $’000 - 9,048 9,048 $’000 - 128,405 128,405 $’000 - 15,341 15,341 $’000 - - - $’000 42,544 162,076 204,620 $’000 42,544 141,913 184,457 Parent – at 30 June 2010: Contractual maturities of ﬁ nancial liabilities Less than 6 mths $’000 17,194 4,157 5,125 26,476 6-12 mths 1-2 years 2-5 years Over 5 years Total contractual cash ﬂ ows Carrying amount (assets)/ liabilities $’000 - 4,089 4,959 9,048 $’000 - 118,913 9,492 128,405 $’000 - - 15,341 15,341 $’000 - $’000 17,194 - - - 127,159 34,917 179,270 $’000 17,194 - 29,815 47,009 Trade payables Financial guarantee contracts Borrowings (b) Credit risk Credit risk is the risk of ﬁ nancial loss to the Group if a customer or counter-party to a ﬁ nancial instrument fails to meet its contractual obligations. The Company and economic entity have exposure to credit risk through the receivables balances, customer leasing commitments and deposits with banks. Credit risk for the economic entity arising from total receivables is $16,516,000 (2009: $4,353,000) and $16,754,000 (2009: $28,045,000) arising from total deposits with banks. Credit risk for the parent entity arising from total receivables is $nil (2009: $49,000) and $1,405,000 (2009: $11,764,000) arising from total deposits with banks. Following the acquisition of Interleasing, there is an increased exposure to credit risk from assets leased to customers, mainly from possible payment defaults as they impact ﬁ nance lease receivables ($9,226,000) and the amortisation of leased vehicles ($202,471,000) that have yet to be invoiced as future lease rentals. Credit risk management strategy Credit risk arises from cash and cash equivalents and deposits with banks as well as exposure from outstanding receivables and unbilled rentals for leased vehicles. For deposits with banks, only independently rated institutions with a minimum rating of A-1+ are used. Credit risk relating to the leasing of assets is managed pursuant to the Board approved Credit Policy by the Group CFO and the Group Treasurer and Credit Manager. The policy is reviewed annually and prescribes minimum criteria in the credit assessment process that includes credit risk of the customer, type and intended use of the asset under lease and the value of the exposure. A two tiered Credit Committee structure is in place to stratify credit applications for assessment; a Local Credit Committee and an Executive Credit Committee reviewing applications based on volume and value of the application. All minutes of Credit Committee meetings are reported to the Board. Additionally, the Board and the Credit Committee meet at least quarterly to review and set concentration limits to effectively spread the risks as widely as possible across asset classes, client base, industries and asset manufacturer. Where customers are independently rated, these ratings are taken into account. If there is no independent rating, management assesses the credit quality of the customer, taking into account its ﬁ nancial position, business segment, past experience and other factors. The overall debtor aging position is reviewed monthly by the Board as is the provision for any impairment in the trade receivables balance. (c) Market risk (i) Interest rate risk In addition to the Group’s surplus cash and new borrowings, the acquisition of Interleasing has increased the Group’s exposure to movements in interest rates where movements could directly affect the margins from existing contracts for assets leased and income earned from surplus cash. Exposure to interest rate volatility is managed via the Group’s Treasury and pricing policies. The policies aim to minimise mismatches between the amortised value of lease contracts and the sources of ﬁ nancing to mitigate repricing and basis risk. Mismatch and funding graphs are reported monthly to the Board along with the minutes of the monthly Interest Committee meetings. 32 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 Interest rate risk arises where movements in interest rates affect the margins on existing contracts for assets leased. As the Group carries signiﬁ cant cash and borrowings, movements in interest rates can affect net income to the Group. The Group’s main interest rate risk arises from long term borrowings. Borrowings issued at variable rates expose the Group to repricing interest rate risk. As at the end of the reporting period, the Group had $142,727,000 (2009: nil) variable rate borrowings under long-term revolving facilities. The weighted average interest rate was 5.07% which is used as an input to asset repricing decisions. An analysis of maturities is provided in note 2(a). The Group’s interest rate risk also arises from cash at bank and deposits, which are at ﬂ oating interest rates. The Group has an interest rate swap facility which was unused at 30 June 2010. Sensitivity analysis – ﬂ oating interest rates At 30 June 2010, the Group’s and parent entity’s cash and cash equivalents give rise to credit interest rate risk. If the Australian interest rate weakened or strengthened by 50 basis points and all other variables were held constant, the Group’s post-tax proﬁ t for the year would have been $630,000 (parent entity: $142,975) higher or lower depending on which way the interest rates moved based on the cash and cash equivalents and borrowings balances at 30 June (2009: Group: $83,443; parent entity: $41,174, higher or lower depending on which way the interest rates moved based on the cash and cash equivalents balances at 30 June). (ii) Foreign currency risk The economic entity does not engage in any transactions that are denominated in a currency other than Australian dollars, the functional and presentation currency. As such, the economic entity is not exposed to foreign currency risk. (iii) Other market price risk The economic entity does not engage in any transactions that give rise to any other market risks. (d) Asset risk The Group’s exposure to asset risk is mainly from the residual value of assets under lease and the maintenance and tyre obligations to meet claims for these services sold to customers. Residual value is an estimate of the value of an asset at the end of the lease and this estimate, which is formed at the inception of the lease and any subsequent impairment, exposes the Group to potential loss from resale where the market price is lower than the value as recorded in the books. The risk relating to maintenance and tyre services arises where the costs to meet customer claims over the contracted period exceed estimates made at inception. Risk mitigation options contractually available are also monitored and utilised where appropriate. The Group continuously reviews the portfolio’s residual values via a Residual Value Committee comprising experienced senior staff, who measure and report all matters of risk that could potentially affect residual values and maintenance costs and matters that can mitigate the Group from these exposures. The policy sets out a framework to measure and factor into their assessment such critical variables as used car market dynamics, economic conditions, government policies, the credit market and the condition of assets under lease. At reporting date, the portfolio of motor vehicles under operating lease of $202,471,000 included a residual value provision of $266,000. (e) Fair value measurements The fair value of ﬁ nancial assets and ﬁ nancial liabilities must be estimated for recognition and measurement for disclosure purposes. Refer to notes 8 to 14 for details of the fair value of assets and 15 to 18 for the fair value of liabilities. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 33 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 Economic Entity Parent Entity 2010 $’000 2009 $’000 2010 $’000 2009 $’000 92,139 26,656 12,226 - 1,001 132,022 76,000 - - - 1,259 77,259 - - - 25,758 523 26,281 - - - 12,200 626 12,826 7,538 7,781 - 3,149 - 791 14(b) 14(b) 12 12 14(b) 659 1,083 15,723 1,576 266 19,307 - 1,931 341 387 - 1,093 - 1,821 36 1,424 2,557 2,224 - - - - - - - - - - - - - - - - - - - - 84,290 20,000 17,500 75,000 83,000 13,000 4,000 - 5,000 - - - 5,000 - - - 3 REVENUE Revenue from continuing operations Remuneration services1 Lease rental services Proceeds from sale of leased assets Dividends received Interest – other persons Total revenue 1 Included in remuneration services revenue is fee income derived from the holding of trust funds 4 EXPENSES (a) Proﬁ t before income tax includes the following speciﬁ c expenses Finance costs Interest – ﬁ nancial institutions Depreciation and amortisation expense Software development Contract rights acquired Assets under operating lease Plant and equipment Residual value impairment loss Impairment Goodwill Rental expense on operating leases Minimum lease payments Superannuation Deﬁ ned contribution superannuation expense (b) Auditor’s remuneration Remuneration of the auditor (Grant Thornton) of the parent entity for: Auditing the Financial Reports Audits for customer contracts Review of subsidiary Remuneration of other auditors for: Auditing the Financial Reports 34 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 INCOME TAX EXPENSE/(BENEFIT) 5 (a) Components of tax expense/(beneﬁ t) Current tax expense/(beneﬁ t) Deferred tax Income tax expense/(beneﬁ t) (b) The prima facie tax payable on proﬁ t before income tax is reconciled to the income tax expense/(beneﬁ t) as follows: Proﬁ t before income tax expense Prima facie tax payable on proﬁ t before income tax at 30% (2009: 30%) Add tax effect of: - gain on business acquisition - non-assessable income - sharebased payments - non-deductible costs - investment allowance - research & development - (over)/under provision from prior year Less tax effect of: - dividends received Economic Entity Parent Entity 2010 $’000 14,215 (3,988) 10,227 55,187 16,556 (6,357) - 159 10 (28) (110) (3) 10,227 2009 $’000 7,619 770 8,389 28,912 8,674 - (15) 150 20 (17) (338) (85) 8,389 2010 $’000 2009 $’000 (198) (1,425) (1,623) 15 (1) 14 20,347 12,247 6,104 - - - - - - - 6,104 3,674 - - - - - - - 3,674 - - (7,727) (3,660) Income tax expense/(beneﬁ t) 10,227 8,389 (1,623) 14 6 EARNINGS PER SHARE Reconciliation of earnings to proﬁ t Net proﬁ t Earnings used to calculate basic earnings per share (EPS) Weighted average number of ordinary shares outstanding during the year used in calculation of basic EPS Weighted average number of options on issue outstanding Weighted average number of ordinary shares outstanding during the year used in calculation of diluted EPS ’000 $44,960 ’000 $20,523 $44,960 $20,523 67,592 67,583 - - 67,592 67,583 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 35 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 7 DIVIDENDS Final fully franked ordinary dividend for the year ended 30 June 2009 of $0.105 (2008: $0.090) per share franked at the tax rate of 30% (2009: 30%) Interim fully franked ordinary dividend for the year ended 30 June 2010 of $0.10 (2009: $0.085) per share franked at the tax rate of 30% (2009: 30%) Economic Entity Parent Entity 2010 $’000 2009 $’000 2010 $’000 2009 $’000 7,097 6,082 7,097 6,082 6,758 13,855 5,745 11,827 6,758 13,855 5,745 11,827 Franking credits available for subsequent ﬁ nancial years based on a tax rate of 30% (2009 – 30%) 22,631 13,728 22,631 13,728 The above amounts represent the balance of the franking account at the end of the ﬁ nancial year end adjusted for: (a) franking credits that will arise from the payment of the amount of the provision for income tax, (b) franking debits that will arise from the payment of dividends recognised as a liability at the reporting date, and (c) franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date. The consolidated amounts include franking credits that would be available to the parent entity if distributable proﬁ ts of subsidiaries were paid as dividends. The impact on the franking account of the dividends recommended by the Directors since year end, but not recognised as a liability at year end, will be a reduction in the franking account of $4,060,679 (2009: $3,041,254). 8 CASH AND CASH EQUIVALENTS Cash on hand Bank balances Short term deposits Economic Entity Parent Entity 2010 $’000 3 15,844 910 16,757 2009 $’000 2 13,005 15,040 28,047 2010 $’000 - 1,405 - 1,405 2009 $’000 - 1,055 10,709 11,764 Cash and cash equivalents are subject to interest rate risk as they earn interest at ﬂ oating rates. Cash at bank is invested at ﬂ oating rates. In 2010, the ﬂ oating interest rates for the economic entity and parent entity were between 1.50% and 5.28% (2009: 2.85% and 7.10%). The short term deposits are also subject to ﬂ oating rates, which in 2010 were between 3.64% and 4.96% (2009: 3.5% and 7.34%). These deposits have an average maturity of 90 days (2009: 75 days). 36 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 9 TRADE AND OTHER RECEIVABLES Current Trade receivables Finance lease receivables Other receivables Non-Current Finance lease receivables Economic Entity Parent Entity 2010 $’000 1,948 2,957 5,342 10,247 6,269 2009 $’000 1,678 - 2,675 4,353 - 2010 $’000 2009 $’000 - - - - - - - 49 49 - The carrying amount of all current receivables are equal to their fair values as they are short term. The fair value of non-current receivable is $7,160,000. The fair values are based on cash ﬂ ows discounted using a lending rate of 10.5% (2009: nil). (a) Ageing and impairment losses The ageing of trade receivables for the economic entity at reporting date was: Economic Entity Not past due Past due 30 days Past due 31-60 days Past due 61-90 days Past due >90 days Total (b) Concentration of risk 2010 Amount impaired $’000 - (34) (86) (16) (108) (244) Amount not impaired $’000 1,735 43 170 - - 1,948 Total $’000 1,735 77 256 16 108 2,192 2009 Amount impaired $’000 - - - (15) (123) (138) Amount not impaired $’000 1,415 191 30 18 24 1,678 Total $’000 1,415 191 30 33 147 1,816 The Group’s maximum exposure to credit risk at the reporting date by geographic region is limited to Australia only, as the economic entity mainly trades within the boundaries of the Australian continent. Approximately 82% (2009: 72%) of the Group’s trade receivables relate to customers for the supply of petroleum products. Management have assessed this concentration of risk and are satisﬁ ed with the strategies employed in ensuring the exposure to this risk is minimal. Management considers that no other signiﬁ cant concentrations of risk within trade receivables exist. (c) Other receivables These amounts generally arise from transactions outside the usual operating activities of the economic entity. None of the other current receivables are impaired or past due. (d) Doubtful debts policy Refer Note 1(i). McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 37 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 Economic Entity Parent Entity Note 2010 $’000 2009 $’000 2010 $’000 2009 $’000 10 OTHER FINANCIAL ASSETS Non-current Shares in subsidiaries at cost 11 - - 100,381 44,832 11 SUBSIDIARIES The consolidated ﬁ nancial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in Note 1(c). Name Parent Entity McMillan Shakespeare Limited Subsidiaries of Parent Entity Maxxia Pty Limited (formerly known as McMillan Shakespeare Australia Pty Ltd)* Remuneration Services (Qld) Pty Limited * Easilease Pty Limited Interleasing (Australia) Ltd * CARILA Pty Ltd * TVPR Pty Ltd * Country of Incorporation Percentage Owned 2010 Percentage Owned 2009 Australia Australia Australia Australia Australia Australia Australia 100% 100% 100% 100% 100% 100% 100% 100% 100% - - - *These subsidiaries have been granted relief from the necessity to prepare ﬁ nancial reports in accordance with Class Order 98/1418 issued by the Australian Securities and Investments Commission. For further information refer to Note 28. 12 PROPERTY, PLANT AND EQUIPMENT (a) Plant and equipment At cost Less accumulated depreciation Assets under operating lease At cost Less accumulated depreciation Total plant and equipment Economic Entity Parent Entity 2010 $’000 2009 $’000 2010 $’000 2009 $’000 13,130 (5,772) 7,358 218,460 (15,989) 202,471 209,829 11,058 (9,051) 2,007 - - - 2,007 - - - - - - - - - - - - - - 38 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 (b) Movements in cost and accumulated depreciation Consolidated entity Year ended 30 June 2010 Balance at the beginning of year Additions(1) Assets classiﬁ ed as held for sale Additions as part of a business combination Impairment loss Depreciation expense Plant and equipment Assets under operating lease $’000 $’000 2,007 6,948 (91) 70 - (1,576) - 23,701 (8,560) 203,319 (266) (15,723) Total $’000 2,007 30,649 (8,651) 203,389 (266) (17,299) Balance at 30 June 7,358 202,471 209,829 Year ended 30 June 2009 Balance at the beginning of year Additions Assets classiﬁ ed as held for sale Additions as part of a business combination Depreciation expense Balance at 30 June 2,053 1,047 - - (1,093) 2,007 - - - - - - 2,053 1,047 - - (1,093) 2,007 1 Net cash outﬂ ow was $3,457,000 after receiving $3,400,000 as tenancy incentives. (c) Security None of the above assets have been pledged as security. (d) Property, plant and equipment held for sale Property, plant and equipment no longer held under operating leases are classiﬁ ed as inventory. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 39 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 13 DEFERRED TAX ASSETS AND LIABILITIES (a) Asset/(Liability) The balance comprises temporary differences attributable to: Amounts recognised in proﬁ t or loss Doubtful debts Provisions Property, plant and equipment Accrued expenses Costs incurred as a result of business combination Other receivables/prepayments Finance leases Other Contract rights Deferred tax arising on acquisition Closing balance at 30 June (b) Movement Opening balance at 1 July Credited/(Charged) to Statement of Comprehensive Income Deferred tax arising on acquisition Closing balance at 30 June (c) Taxation of Financial Arrangements (TOFA) Economic Entity Parent Entity 2010 $’000 2009 $’000 2010 $’000 2009 $’000 46 869 (6,644) 1,929 1,263 (442) 7,862 130 (1,107) (3,780) 126 (82) 3,988 (3,780) 126 41 720 (11) 308 - (53) - - (1,087) - (82) 688 (770) - (82) - - - 164 1,263 - - - - - 1,427 2 1,425 - 1,427 - - - 2 - - - - - - 2 1 1 - 2 Legislation is in place which changes the tax treatment of ﬁ nancial arrangements. The Group is in the process of assessing the potential impact of these changes on the Group’s tax position. No impact has been recognised and no adjustments have been made to the deferred tax and income balances at reporting date. 40 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 Economic Entity Parent Entity 2010 $’000 2009 $’000 2010 $’000 2009 $’000 14 INTANGIBLE ASSETS (a) Carrying values Goodwill Cost Impairment loss Net carrying value Software development costs Cost Accumulated amortisation Net carrying value Contract rights Cost Accumulated amortisation Net carrying value 33,328 (36) 33,292 6,299 (4,413) 1,886 7,672 (3,945) 3,727 33,328 (36) 33,292 4,715 (3,753) 962 7,636 (2,872) 4,764 Total Intangibles 38,905 39,018 (b) Reconciliation of net book amount - - - - - - - - - - 2010 Net book amount Balance beginning of year Additions Amortisation Balance at end of year 2009 Net book amount Balance beginning of year Additions Impairment loss Amortisation Balance at end of year Economic Entity Goodwill $’000 Software development costs $’000 Contract rights $’000 33,292 - - 33,292 33,328 - (36) - 33,292 962 1,583 (659) 1,886 563 740 - (341) 962 4,764 46 (1,083) 3,727 - 5,151 - (387) 4,764 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES - - - - - - - - - - Total $’000 39,018 1,629 (1,742) 38,905 33,891 5,891 (36) (728) 39,018 41 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 (c) Impairment test for goodwill Goodwill is allocated to the economic entity’s cash-generating units (CGUs) identiﬁ ed arising from the acquisition of subsidiaries. The carrying amount of goodwill allocated to each CGU: Maxxia Pty Limited (formerly McMillan Shakespeare Australia Pty Ltd) Remuneration Services (Qld) Pty Limited Economic Entity 2010 $’000 24,190 9,102 33,292 2009 $’000 24,190 9,102 33,292 The recoverable amount of each CGU above is determined based on value-in-use calculations. These calculations use the present value of cash ﬂ ow projections based on ﬁ nancial budgets approved by management covering a ﬁ ve-year period. (d) Key assumptions used for value-in-use calculations Maxxia Pty Limited (formerly McMillan Shakespeare Australia Pty Ltd) Remuneration Services (Qld) Pty Limited Discount rate 2010 % 17.8 17.84 17.84 2009 % 19.14 19.14 The budgets use historical average growth rates to project revenue. Costs are determined taking into account historical margins and estimated cost increases. Cash ﬂ ows beyond the ﬁ ve-year period are extrapolated using a zero growth rate for conservatism. The growth rate does not exceed the long-term average growth rate for the business in which the CGU operates. In performing the value-in-use calculations for each CGU, the economic entity has applied pre-tax discount rates to discount the forecast future attributable pre-tax cash ﬂ ows. The equivalent pre-tax discount rates are disclosed above. The discount rates used reﬂ ect speciﬁ c risks relating to the relevant business each subsidiary is operating in. These assumptions have been used for the analysis of each CGU within each subsidiary. The recoverable amounts of the CGUs exceed the carrying amounts by substantial margins. Consequently, a sensitivity analysis of possible changes in key assumptions is not considered necessary. 15 TRADE AND OTHER PAYABLES Unsecured liabilities Trade payables GST payable Sundry creditors and accruals Maintenance instalments received in advance Amounts payable to wholly owned entities Economic Entity Parent Entity 2010 $’000 2009 $’000 2010 $’000 2009 $’000 10,766 1,129 21,996 8,653 - 42,544 5,364 461 6,500 - - 12,325 - - 817 - 16,377 17,194 5 - 462 - 15,017 15,484 Trade and other payables are non-interest bearing. These are short-term liabilities and the carrying value is representative of the fair value. 42 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 16 CURRENT TAX LIABILITY Income tax 17 PROVISIONS Current Employee beneﬁ ts Non-current Employee beneﬁ ts Aggregate employee beneﬁ ts liability 18 BORROWINGS Current Bank loans Non-current Bank loans (a) Security Economic Entity Parent Entity 2010 $’000 2009 $’000 2010 $’000 2009 $’000 8,431 2,471 8,431 2,471 3,184 458 3,642 7,949 133,964 2,234 168 2,402 - - - - - 7,949 21,866 - - - - - The parent entity guarantees a bank loan of a subsidiary of $112,727,000. Fixed and ﬂ oating charges are also provided by the Group in respect to ﬁ nancing facilities. (b) Fair value disclosures The fair value of ﬁ nancial liabilities for disclosure purposes is estimated by discounting the future contractual cash ﬂ ows at the current market interest rate that is available to the group for similar ﬁ nancial instruments. The fair value of current borrowings approximates the carrying amount, as the impact of discounting is not signiﬁ cant. (c) Risk exposures Details of the Group’s exposure to risks arising from current and non-current borrowings are set out in note 2. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 43 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 19 CONTRIBUTED EQUITY (a) Share capital 67,677,977 (2009: 67,538,428) fully paid ordinary shares (b) Reconciliation of movement in equity Balance at 1 July 2009 Options exercised during the year 4 May 2010 Transfer from option reserve Total shares issued Balance at 30 June 2010 Balance at 1 July 2008 Balance at 30 June 2009 Economic Entity Parent Entity 2010 $’000 2009 $’000 2010 $’000 2009 $’000 23,066 22,637 23,066 22,637 Number of shares 67,583,428 Issue price $ Ordinary shares $’000 22,637 94,549 - 94,549 67,677,977 67,583,428 67,583,428 3.80 360 69 429 23,066 22,637 22,637 Ordinary shares participate in dividends and the proceeds on winding up of the parent entity in proportion to the number of members’ shares held. At members’ meetings, each fully paid ordinary share is entitled to one vote when a poll is called, otherwise each shareholder has one vote on a show of hands. (c) Options At 30 June 2010, there were 8,317,289 (2009: 7,728,145) unissued ordinary shares for which options were outstanding. The Company issued the following options over ordinary shares to speciﬁ ed executives during the year. Date of issue 14 August 2009 14 August 2009 28 May 2010 Number of options 133,334 193,939 698,924 Exercise price $3.40 $4.70 $3.42 Option expiry date 14 August 2012 14 August 2012 1 October 2015 (d) Capital management strategy The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern, so that it can continue to provide returns for shareholders and beneﬁ ts 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. The Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as long and short term borrowings (excluding derivatives and ﬁ nancial guarantees) less cash and cash equivalents. Total capital is calculated as equity as shown in the balance sheet plus net debt. On 1 April 2010 the composition of the Group’s capital structure changed materially from the prior ﬁ nancial year due to the acquisition of Interleasing (Australia) Ltd as detailed in note 29. The Group’s gearing ratio at 30 June 2010 was 58% (Net debt $125,156,000 divided by total capital of $214,573,000). The Group’s banking facility agreement includes covenants that require the total equity of the group to exceed $55,000,000 and the dividend payout to earnings after tax ratio is not to exceed 65%. During the ﬁ nancial year the Group met these requirements. Total equity of the Group as at 30 June was $89,417,000. No banking facility covenants were breached during the ﬁ nancial year. The Group’s Risk and Compliance Committee reviews the capital structure of the Group on an ongoing basis. As part of this review the committee considers the cost of capital and the risks associated with each class of capital. 44 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 20 RESERVES Option reserve Movements in the reserve are detailed in the Statements of Changes in Equity. The reserve records amounts for the fair value of options granted and recognised as an employee beneﬁ ts expense but not exercised. Economic Entity Parent Entity 2010 $’000 2009 $’000 2010 $’000 2009 $’000 21 CASH FLOW INFORMATION Reconciliation of cash ﬂ ow from operations with proﬁ t from operating activities after income tax Proﬁ t for the year Non-cash ﬂ ows in proﬁ t from operating activities Amortisation Impairment loss Depreciation Option expense Net loss on disposal of plant and equipment Gain from business combination Acquisition expenses Reclassiﬁ cation of capitalised operating lease asset payments as operating cash ﬂ ow Carrying value of operating lease assets Changes in assets and liabilities, net of the effects of purchase of subsidiaries Decrease/(increase) in trade and other receivables Increase/(decrease) in trade payables and accruals (Decrease)/increase in income taxes payable Increase/(decrease) in deferred taxes (Decrease)/increase in deferred revenue Increase in provisions 44,960 20,523 21,970 12,233 1,742 266 17,299 549 30 (20,991) 5,707 (25,261) 10,386 (6,880) 6,859 (1,298) 2,279 - 495 728 36 1,093 500 - - - - - 3,103 2,551 (735) 770 (148) 422 - - - - - - 4,430 - - 66 (253) (212) - - - Net cash from operating activities 36,142 28,843 26,001 22 COMMITMENTS (a) Capital expenditure commitments Capital expenditure commitments contracted for: Property, plant and equipment Payable: Not later than 12 months 1,447 1,447 - - - - McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES - - - - - - - - - 77 (7,260) (735) (1) - - 4,314 - - 45 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 (b) Operating lease commitments Non-cancellable operating leases contracted for but not capitalised in the ﬁ nancial statements: Payable - minimum lease payments - Not later than 12 months - Between 12 months and 5 years - Greater than 5 years Economic Entity Parent Entity 2010 $’000 3,809 14,773 15,502 34,084 2009 $’000 2,066 8,636 13,893 24,595 2010 $’000 2009 $’000 - - - - - - - - The property leases are non-cancellable leases with varying terms, with rent payable monthly in advance. Individual rental agreements specify each rental adjustment. A new lease was entered into during the prior year securing ofﬁ ce premises for 11 years, with an option of a further 5 years. The equipment leases are non-cancellable leases with varying terms, with rent payable quarterly in arrears. (c) Financing commitments During the year, the Group entered into an interest rate swap arrangement for $88m at a ﬁ xed rate of 5.4% to commence on 9 July 2010. The ﬂ oating interest rates on the swaps is based on the local BBSY rate and the Group will settle the difference between the ﬁ xed and ﬂ oating interest rate on a net basis. The interest rate swap arrangements are prospectively designated as cash ﬂ ow hedges to reduce the Group’s cash ﬂ ow exposure resulting from variable interest rate on borrowings. 23 SEGMENT INFORMATION Reportable segments (a) Description of segments The Group has identiﬁ ed its operating segments based on the internal reports reviewed and used by the Group’s chief decision maker (the CEO) to determine business performance and resource allocation. Operating segments have been identiﬁ ed after considering the nature of the products and services, nature of the production processes, type of customer and distribution methods. Two reportable segments have been identiﬁ ed “Remuneration Services” and “Asset Finance”, in accordance with AASB8 “Operating Segments” based on aggregating operating segments taking into account the nature of the business services and products sold and the associated business and ﬁ nancial risks and how they affect the pricing and rates of return. Remuneration Services - This segment provides administrative services in respect of salary packaging and facilitates the settlement of motor vehicle novated leases for customers, but does not provide ﬁ nancing. The segment also provides ancillary services associated with motor vehicle novated lease products. Asset Finance - This segment provides ﬁ nancing and ancillary management services associated with motor vehicles, commercial vehicles and equipment. 46 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 (b) Segment information provided to the Chief Decision Maker The following is an analysis of the Group’s revenue and results from operations by reportable segment. Remuneration Services Asset Finance Total for segment operations Corporate administration and directors’ fees Net ﬁ nance income Proﬁ t before tax from continuing operations Net gain on business combination before tax Segment revenue Segment proﬁ t 2010 $’000 92,139 38,882 131,021 2009 $’000 76,000 - 76,000 2010 $’000 35,830 4,573 40,403 (710) 210 39,903 15,284 2009 $’000 28,137 - 28,137 (484) 1,259 28,912 - Proﬁ t before tax for the year 55,187 28,912 The Group operates in and its customers are located predominantly in Australia. (c) Other segment information (i) Segment revenue Segment revenue is reconciled to the Statement of Comprehensive Income as follows: Total segment revenue Interest revenue Total revenue per Consolidated Statement of Comprehensive Income 2010 $’000 131,021 1,001 132,022 2009 $’000 76,000 1,259 77,259 Segment revenue above represents sales to external customers and excludes inter-segment sales, consistent with the basis by which the ﬁ nancial information is presented to the Chief Decision Maker. The accounting policies of the reportable segments are the same as the Group’s policies. Segment proﬁ t includes the segment’s share of centralised general management and operational support services which are shared across segments based on the lowest unit of measurement available to allocate shared costs that reasonably measure each segment’s service level requirements and consumption. Segment proﬁ t does not include corporate costs of the parent entity, including listing and company fees, director’s fees and ﬁ nance costs relating to borrowings not speciﬁ cally sourced for segment operations or interest revenue not directly attributable to a segment. Included in the revenue for the Remuneration Services segment are revenues of $33,600,000 (2009: $25,500,000) from the Group’s largest customer. The Group operates in and its customers are located predominantly in Australia. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 47 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 (ii) Segment assets and liabilities The segment information with respect to total assets is measured in a consistent manner with that of the ﬁ nancial statements. These assets are allocated based on the operations of the segment and the physical location of the asset. The Group’s borrowings are not considered to be segment liabilities. The reportable segments’ assets and liabilities are reconciled to total assets as follows: Segment assets Remuneration Services Asset Finance Segment assets Non-segment assets Unallocated assets(1) Consolidated assets per statement of ﬁ nancial position Segment liabilities Remuneration Services Asset Finance Segment liabilities Non-segment liabilities Unallocated liabilities(2) Consolidated liabilities per statement of ﬁ nancial position All assets and liabilities are located in Australia. 2010 $’000 63,594 205,587 269,181 16,883 286,064 25,010 133,911 158,921 37,726 196,647 1 2 Unallocated assets comprise cash and bank balances of the Group, maintained as part of the centralised treasury and funding function. Unallocated liabilities comprise tax liabilities of the Group and corporate loans that are employed by the whole group. Additions to non-current assets Remuneration Services Asset Finance 2010 $’000 8,577 23,701 32,278 2009 $’000 46,758 - 46,758 28,047 74,805 14,931 - 14,931 2,471 17,402 2009 $’000 1,047 - 1,047 Only one comparative period for the statement of ﬁ nancial position was required for the current year, as the application of the new AASB Operating Segments Accounting Standard did not impact the historical ﬁ nancial position which the Group had previously reported wholly within the Remuneration Services segment. 48 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 24 CONTINGENT LIABILITIES AND CONTINGENT ASSETS Estimates of the potential ﬁ nancial effect of contingent liabilities that may become payable: Guarantees provided for the performance of contractual obligations. A term deposit supports the contractual guarantees. Guarantee provided for the performance of a contractual obligation not supported by term deposit. Guarantees provided in respect of property leases. 25 RELATED PARTY TRANSACTIONS (a) Wholly owned group Economic Entity Parent Entity 2010 $’000 573 20 4,118 4,711 2009 $’000 310 20 3,558 3,888 2010 $’000 - - 380 380 2009 $’000 - - 380 380 Transactions between the Company and other entities within the wholly owned group during the years ended 30 June 2010 and 2009 consisted of: (a) loans advanced to the Company; and (b) the payment of dividends to the Company. Aggregate amounts included in the determination of proﬁ t from ordinary activities before income tax that resulted from transactions with entities in the wholly owned group: Dividend revenue Aggregate amounts payable to entities within the wholly owned group at balance date: Current payables (b) Key management personnel compensation Compensation Short-term employment beneﬁ ts Post-employment beneﬁ ts Long-term employment beneﬁ ts Termination beneﬁ ts Share-based payments Economic Entity Parent Entity 2010 $’000 - - $ 2,917,219 249,955 20,129 - 430,484 2009 $’000 - - $ 2,422,602 268,637 15,287 - 392,466 2010 $’000 25,578 2009 $’000 12,200 16,377 15,017 $ $ 1,657,002 171,472 241 - 333,056 1,516,874 202,427 227 - 331,752 3,617,787 3,098,992 2,161,771 2,051,280 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 49 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 (c) Equity instrument disclosures relating to key management personnel Shareholding The number of shares in the Company held during the ﬁ nancial year ended 30 June 2010 and 30 June 2009 by each Director and each of the speciﬁ ed executives of the economic entity, including their personally related parties, are set out below: Balance at the start of the year Shares acquired through option exercise Other changes during the year Balance held at balance date 105,100 100,000 4,718,025 6,425,063 12,935,000 4,164 24,287,352 - 364,348 406,138 - - - 770,486 105,100 100,000 5,045,546 6,425,063 12,935,000 4,164 24,614,873 - 359,348 399,138 - - 758,486 - - - - - - - - - 94,549 - - - 94,549 - - - - - - - - - - - - - - 22,000 - - 105,100 122,000 4,718,025 6,425,063 (1,700,000) - 11,235,000 4,164 (1,678,000) 22,609,352 - 6,000 (399,686) - - - - 370,348 101,001 - - - (393,686) 471,349 - - (327,521) - 105,100 100,000 4,718,025 6,425,063 - - 12,935,000 4,164 (327,521) 24,287,352 - 5,000 7,000 - - - 364,348 406,138 - - 12,000 770,486 Year ended 30 June 2010 Non-Executive Directors R Pitcher G McMahon J Bennetts R Chessari Executive Directors A Podesta M Kay Other key management personnel M Cansdale (until 31 August 2010) G Kruyt P Lang M Salisbury A Suckling A Tomas (commenced 1 April 2010) Year ended 30 June 2009 Non-Executive Directors R Pitcher G McMahon J Bennetts R Chessari Executive Directors A Podesta M Kay Other key management personnel M Cansdale G Kruyt P Lang M Salisbury A Suckling 50 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 (c) Equity instrument disclosures relating to key management personnel Options The number of options to acquire shares in the Company held during the ﬁ nancial year ended 30 June 2010 and 30 June 2009 by each of the other key management personnel of the Group, including their personally related parties, are set out below. No options are held by Non-Executive Directors. Year ended 30 June 2010 M Kay M Cansdale (until 31 August 2010) G Kruyt P Lang M Salisbury A Suckling A Tomas (commenced 1 April 2010) Balance at the start of the year 3,750,000 725,000 715,000 761,634 136,364 - - Issued - - - - - 66,667 537,634 Exercised - - - (94,549) - - - Lapsed - - - (2,083) - - - Balance held at balance date 3,750,000 725,000 715,000 665,002 136,364 66,667 537,634 6,087,998 604,301 (94,549) (2,083) 6,595,667 64,583 options issued to PA Lang had vested at 30 June 2010. Year ended 30 June 2009 M Kay M Cansdale (until 31 August 2010) G Kruyt P Lang M Salisbury A Suckling - - 90,000 137,675 - - 3,750,000 725,000 625,000 625,000 136,364 - 227,675 5,861,364 - - - - - - - - - - (1,041) - - 3,750,000 725,000 715,000 761,634 136,364 - (1,041) 6,087,998 55,625 options issued to PA Lang and 90,000 options issued to G Kruyt had vested at 30 June 2009. 26 SHARE-BASED PAYMENTS The Company established the Employee Option Plan in 2004. The Remuneration Committee determines the number of options to be granted on the basis of the position, duties and responsibilities of the relevant employees. Options are granted under the plan for no consideration over unissued ordinary shares in the Company. Options are generally granted for a four year period and the exercise price is based on prevailing market prices when the issue is approved by the Board, at a minimum. Options granted under the plan carry no dividend or voting rights. As at 30 June 2010, the Company had made nine offers under the Plan in March 2004, December 2004, April 2005, August 2005, February 2007, December 2007, July 2008, November 2008, August 2009 and May 2010. Options issued in March 2004, December 2004, April 2005 and August 2005 have expired or have been exercised prior to 1 July 2008. All options in the February 2007 offer were issued subject to the following exercise conditions:   50% of the options would vest and were exercisable in equal proportions on or after 15 September 2007, 15 September 2008 and 15 September 2009, but the entitlement to exercise was subject to continuity of employment. 25% of the options would vest and were exercisable in equal proportions on or after 15 September 2007, 15 September 2008 and 15 September 2009, but the entitlement to exercise was subject to continuity of employment and achievement of predetermined targets. For the ﬁ nancial years ended 30 June 2007, 30 June 2008 and 30 June 2009 the targets centred on the achievement of budgeted NPAT. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 51 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010  25% of the options would vest and were exercisable in equal proportions on or after 15 September 2007, 15 September 2008 and 15 September 2009, but the entitlement to exercise was subject to continuity of employment and satisfaction of individual performance indicators for the ﬁ nancial years ended 30 June 2007, 30 June 2008 and 30 June 2009, other than with respect to 50,000 options that are exercisable on or after 15 September 2009 subject to continuity of employment until that date. The December 2007 offer was made on varying terms. 165,000 options were issued subject to the following exercise conditions:    50% of those options would vest and are exercisable in equal proportions on or after 15 September 2008, 15 September 2009 and 15 September 2010, but the entitlement to exercise is subject to continuity of employment. 25% of those options would vest and are exercisable in equal proportions on or after 15 September 2008, 15 September 2009 and 15 September 2010, but the entitlement to exercise is subject to continuity of employment and achievement of predetermined targets. For the ﬁ nancial year ended 30 June 2010, the targets centred on the achievement of budgeted NPAT. 25% of those options would vest and are exercisable in equal proportions on or after 15 September 2008, 15 September 2009 and 15 September 2010, but the entitlement to exercise is subject to continuity of employment and satisfaction of individual performance indicators for the ﬁ nancial years ending 30 June 2008, 30 June 2009 and 30 June 2010. A further 90,000 options of the December 2007 offer would vest and were exercisable on or after 15 September 2009 subject to continuity of employment until that date. In July 2008, the Company issued 4,375,000 options. The entitlement to exercise is subject to continuity of employment and the achievement of predetermined targets, of which 75% is based on earnings per share targets over three years, including a cumulative earnings per share target over three years in the event that the maximum target is not achieved in any one year. The balance is based on other Company targets established by the Board. The entire issue vests and is exercisable (subject to the achievement of the conditions) upon the adoption of the Company’s Annual Report for the ﬁ nancial year ended 30 June 2011. A further 2,600,114 options were issued in November 2008. The entitlement to exercise is subject to continuity of employment and the achievement of predetermined targets, of which 100% is based on earnings per share targets over three years, including a cumulative earnings per share target over three years in the event that the maximum target is not achieved in any one year. The entire issue vests and is exercisable (subject to the achievement of the conditions) upon the adoption of the Company’s Annual Report for the ﬁ nancial year ended 30 June 2011. A further 327,273 options were issued in August 2009. The entitlement to exercise is subject to continuity of employment and the achievement of predetermined targets, of which 100% is based on earnings per share targets over three years, including a cumulative earnings per share target over three years in the event that the maximum target is not achieved in any one year. The entire issue vests and is exercisable (subject to the achievement of the conditions) upon the adoption of the Company’s Annual Report for the ﬁ nancial year ended 30 June 2011. A further 698,924 options were issued in May 2010. The entitlement to exercise is subject to a further offer by the Company of a 36 month contract following completion of an 18 month ﬁ xed term contract, and is subject to continuity of employment and the achievement of predetermined targets, based on earnings per share targets over three years, including a cumulative earnings per share target over the three years in the event that the maximum target is not achieved in any one year. The entire issue vests and is exercisable (subject to the achievement of the conditions) on 1 October 2014. 52 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 Set out below are summaries of options granted under the plan: Economic and Parent Entity - 2010 Grant date 4 February 2007 21 December 2007 1 July 2008 24 November 2008 24 November 2008 14 August 2009 14 August 2009 28 May 2010 Expiry date 4 February 2011 21 December 2011 1 July 2012 24 November 2012 24 November 2012 14 August 2012 14 August 2012 1 October 2015 Exercise price $3.80 $4.52 $4.70 $3.40 $4.70 $3.40 $4.70 $3.42 Balance at start of the year 289,971 463,063 4,375,000 511,364 2,088,750 - - - Granted during the year - - - - - 133,334 193,939 698,924 Exercised during the year (94,549) - - - - - - - Forfeited during the year (99,900) (38,062) (204,545) - - - - Balance at end of the year 95,522 425,001 4,375,000 306,819 2,088,750 133,334 193,939 698,924 Exercisable at end of the year 95,522 136,938 - - - - - - Weighted average exercise price 7,728,148 $4.57 1,026,197 $3.66 (94,549) $3.80 (342,507) $3.64 8,317,289 $4.50 232,460 $4.22 Economic and Parent Entity - 2009 4 February 2007 21 December 2007 1 July 2008 24 November 2008 24 November 2008 4 February 2011 21 December 2011 1 July 2012 24 November 2012 24 November 2012 $3.80 $4.52 $4.70 $3.40 $4.70 Weighted average exercise price 304,580 475,000 - - - - - 4,375,000 511,364 2,088,750 779,580 $4.24 6,975,114 $4.60 - - - - - - (14,609) (11,937) - - - 289,971 463,063 4,375,000 511,364 2,088,750 149,735 263,063 - - - (26,546) $4.12 7,728,148 $4.57 412,798 $4.26 Of the forfeited options, 70,851 with a value of $45,404 (2009: none) represented expired options. The weighted average share price at the date of exercise of options during the year ended 30 June 2010 was $4.22 (2009: $4.26). The weighted average remaining contractual life of options outstanding at the end of the year was 2.4 years (2009: 3.1 years). Fair value of options granted The assessed fair value at grant date of options granted during the year is disclosed in the table below. The fair value at grant date is determined using a binomial option pricing model that takes into account the exercise price, the term of the option, the share price at the grant date, the expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option. 30 June 2010 30 June 2009 Fair value Exercise price Grant date Expiry date Share price at grant date Expected price volatility of the Company’s shares Expected dividend yield Risk-free interest rate August $0.60 and $0.33 $3.40 and $4.70 14 August 2009 14 August 2012 $3.23 37% 6.6% 5.0% May $0.93 $3.42 28 May 2010 1 October 2015 $3.42 37% 5.0% 5.47% July $0.24 $4.70 1 July 2008 1 July 2012 $2.59 34.6% 4.85% 6.73% November $0.18 and $0.09 $3.40 and $4.70 14 November 2008 14 November 2012 $2.10 36% 6.60% 3.78% The expected price volatility is based on historic volatility (based on the remaining life of the options), adjusted for any expected changes to future volatility due to publicly available information. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 53 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 Expenses arising from share-based payment transactions Total expenses arising from share-based payment transactions recognised during the year as part of employee and Director beneﬁ ts expense were as follows: Options issued under Employee Option Plan 27 EVENTS AFTER THE BALANCE SHEET DATE Economic Entity Parent Entity 2010 $’000 549 2009 $’000 500 2010 $’000 - 2009 $’000 - Since the end of the ﬁ nancial year ended 30 June 2010, the Directors have not become aware of any matter or circumstance not otherwise dealt with in the ﬁ nancial statements that has signiﬁ cantly affected or may signiﬁ cantly affect the operations of the Company or the economic entity, the results of those operations or the state of affairs in subsequent ﬁ nancial years. 28 DEED OF CROSS GUARANTEE McMillan Shakespeare Limited, Maxxia Pty Ltd (formerly known as McMillan Shakespeare Australia Pty Ltd) and Remuneration Services (Qld) Pty Ltd are parties to a deed of cross guarantee entered into during the year ended 30 June 2009. During the current year, Interleasing (Australia) Ltd, CARILA Pty Ltd and TVPR Pty Ltd joined the deed of cross guarantee. Under this deed, each company guarantees the debts of the others and is relieved from the requirement to prepare a ﬁ nancial report and directors’ report under Class Order 98/1418 (as amended) issued by the Australian Securities and Investments Commission. The above companies represent a ‘Closed Group’ for the purposes of the Class Order, and as there are no other parties to the Deed of Cross Guarantee that are controlled by McMillan Shakespeare Limited, they also represent the ‘Extended Closed Group’. Set out below is a statement of comprehensive income, statement of ﬁ nancial position and a summary of movements in consolidated retained proﬁ ts for the year ended 30 June 2010 of the Closed group consisting of McMillan Shakespeare Limited, Maxxia Pty Ltd (formerly known as McMillan Shakespeare Australia Pty Ltd) and Remuneration Services (Queensland) Pty Ltd, Interleasing (Australia) Ltd, CARILA Pty Ltd and TVPR Pty Ltd. 54 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 (a) Consolidated Statement of Comprehensive Income and summary of movements in consolidated retained proﬁ ts Statement of Comprehensive Income Revenue and other income Employee and director beneﬁ ts expenses Depreciation and amortisation expenses and impairment Vehicle expenses Consulting cost expenses Marketing expenses Property and corporate expenses Technology and communication expenses Finance costs Other expenses Proﬁ t before business combination and income tax Gain on business combination Acquisition costs Proﬁ t before income tax Income tax expense 2010 $’000 132,016 (41,511) (19,308) (13,064) (1,278) (2,573) (2,698) (3,422) (3,149) (5,115) 39,898 20,991 (5,707) 55,182 (10,226) 2009 $’000 77,251 (34,309) (1,823) - (1,033) (1,111) (2,298) (3,163) - (4,576) 28,938 - - (8,387) Proﬁ t attributable to members of the parent entity 44,956 20,551 Other comprehensive income Other comprehensive income/(loss) for the period after tax Total comprehensive income for the period Summary of movements in consolidated retained proﬁ ts Retained proﬁ ts at the beginning of the ﬁ nancial year Proﬁ t for the year Dividends provided for or paid Retained proﬁ ts at the end of the ﬁ nancial year - - 44,956 20,551 33,733 44,956 (13,855) 25,009 20,551 (11,827) 64,834 33,733 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 55 2010 $’000 16,562 12,308 1,809 30,679 209,829 38,904 135 6,269 255,137 285,816 42,529 8,431 3,184 7,949 116 62,209 133,964 - 459 134,423 196,632 89,184 23,066 1,284 64,834 89,184 2009 $’000 27,857 5,732 - 33,589 2,007 39,020 - - 41,027 74,616 11,965 2,479 2,634 - 122 17,200 - 74 168 242 17,442 57,174 22,637 804 33,733 57,174 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 (b) Consolidated Statement of Financial Position Current assets Cash and cash equivalents Trade and other receivables Inventory Total current assets Non-current assets Plant and equipment Intangible assets Deferred tax asset Other assets Total non-current assets TOTAL ASSETS Current liabilities Trade and other payables Current tax liability Provisions Borrowings Other liabilities Total current liabilities Non-current liabilities Borrowings Deferred tax liability Provisions Total non-current liabilities TOTAL LIABILITIES NET ASSETS EQUITY Contributed equity Reserves Retained earnings TOTAL EQUITY 56 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 29 BUSINESS COMBINATION The Group acquired 100% of Interleasing (Australia) Limited (“Interleasing”) and its subsidiaries on 1 April 2010, being unlisted companies based in Australia. The acquisition was made to facilitate brand expansion, cross selling opportunities, increased vehicles under management and scalability. Consideration for the acquisition was $208,390,000 (less cash assumed of $1,507,000), funded mainly by a combination of surplus cash ($25,000,000), debt ($142,727,000) and the sale of a portfolio of novated ﬁ nance lease receivables that were acquired as part of Interleasing’s net assets ($40,740,000). The value of the consideration was determined based on an 11.3% discount to recorded net assets at the date of acquisition as a result of the vendor’s global restructuring plans. The assets and liabilities acquired have been fair valued in accordance with AASB 3 “Business Combinations”, which resulted in a Gain on Business Combination of $20,991,000. Acquisition-related expenses of $5,707,000 were incurred resulting in a net gain from the acquisition of $17,055,000 after tax. This has been recognised in the Consolidated Income Statement as “Gain on Business Combination”. Purchase consideration – cash outﬂ ow Cash paid for shares Cash paid to discharge loan from vendor Total cash consideration Cash acquired with Interleasing Net cash outﬂ ow for consideration transferred Reconciliation to the Statement of Cash Flows Net cash outﬂ ow transferred to vendor Cash inﬂ ow from sale of novated lease book on acquisition Net cash outﬂ ow for acquisition There were no acquisitions for the year ended 30 June 2009. Net assets assumed at the date of acquisition Cash Trade and ﬁ nance receivables Other assets Inventories Operating lease assets Assets acquired Trade payables and accrued expenses Maintenance instalments paid in advance Employee entitlements Tax liabilities1 Liabilities assumed Net assets acquired $’000 1,507 206,883 208,390 (1,507) 206,883 206,883 (40,740) 166,143 Fair value at acquisition date Carrying value at acquisition date $’000 1,507 48,154 673 1,850 203,319 255,503 12,076 8,622 745 4,679 26,122 $’000 1,507 49,527 854 1,850 203,319 257,057 12,076 8,382 745 901 22,104 229,381 234,953 1 Tax liabilities comprise an income tax liability of $901,000 and the tax effect of temporary differences of $3,778,000. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 57 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2010 Trade and ﬁ nance receivables of $49,527,000 acquired with the business have resulted from trade sales with customers and included $42,114,000 of ﬁ nance leases which were sold for $40,740,000. The remaining amounts are considered fair value and their collection and conversion to cash are expected in full consistent with customer terms. The net gain arising from the acquisition is as follows: Total cash consideration Fair value of net assets acquired Gain on Business Combination Acquisition expenses Net gain on business combination before tax $’000 208,390 229,381 20,991 (5,707) 15,284 The consolidated Statement of Comprehensive Income includes sales revenue of $39,028,000 and net proﬁ t for the year ended 30 June 2010 of $3,267,000, as a result of the acquisition of Interleasing. Revenue and proﬁ t for the full year of $143,428,000 and $11,300,000 respectively, would have been included in the Statement of Comprehensive Income of the Group had the acquisition occurred effective 1 July 2009. 58 DIRECTORS’ DECLARATION The Directors are of the opinion that: 1. the ﬁ nancial statements and notes on pages 20 to 58 and the audited remuneration disclosures on pages 6 to 14 are in accordance with the Corporations Act 2001(Cth) and: (a) (b) comply with Accounting Standards, the Corporations Regulations 2001 (Cth) and other mandatory professional reporting requirements; give a true and fair view of the consolidated entity’s ﬁ nancial position as at 30 June 2010 and ﬁ nancial performance for the ﬁ nancial year ended on that date; and (c) comply with International Financial Reporting Standards as disclosed in Note 1. 2. there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. The Directors have been given the declarations by the Chief Executive Ofﬁ cer and Chief Financial Ofﬁ cer required by section 295A of the Corporations Act 2001 (Cth). This declaration is made in accordance with a resolution of the Directors. Ronald Pitcher, AM Chairman 6 September 2010 Melbourne, Australia Michael Kay Managing Director McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 59 INDEPENDENT AUDIT REPORT AS AT 30 JUNE 2010 Grant Thornton ABN 13 871 256 387 Level 2 215 Spring Street Melbourne Victoria 3000 GPO Box 4984WW Melbourne Victoria 3001 T +61 3 8663 6000 F +61 3 8663 6333 E info.vic@au.gt.com W www.grantthornton.com.au Independent Auditor’s Report To the Members of McMillan Shakespeare Limited Report on the financial statements We have audited the accompanying financial statements of McMillan Shakespeare Limited (the company), which comprises the statement of financial position as at 30 June 2010, and the statement(cid:83) of comprehensive income, statement(cid:83) of changes in equity and statement(cid:83) of cash flows for the year ended on that date, a summary of significant accounting policies, other explanatory notes to the financial statements and the directors’ declaration of the consolidated entity comprising the company and the entities it controlled at the year’s end or from time to time during the financial year. s Directors’ responsibility for the financial statements The directors of the company are responsible for the preparation and fair presentation of the financial statements in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal controls relevant to the preparation and fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. The directors also state, in the notes to the financial statements, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that compliance with the Australian equivalents to International Financial Reporting Standards ensures that the financial statements, comprising the financial statements and notes, complies with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in accordance with Australian Auditing Standards which require us to comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. Grant Thornton Australia Limited is a member firm within Grant Thornton International Ltd. Grant Thornton International Ltd and the member firms are not a worldwide partnership. Grant Thornton Australia Limited, together with its subsidiaries and related entities, delivers its services independently in Australia. Liability limited by a scheme approved under Professional Standards Legislation 60 INDEPENDENT AUDIT REPORT AS AT 30 JUNE 2010 In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements. The financial statements have been prepared for distribution to members for the purpose of fulfilling the directors’ financial reporting requirements under the Corporations Act 2001. We disclaim any assumption of responsibility for any reliance on this report or on the financial statements to which it relates to any person other than the members, or for any purpose other than that for which it was prepared. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Electronic presentation of audited financial statements This auditor’s report relates to the financial statements of McMillan Shakespeare Limited consolidated entity for the year ended 30 June 2010 included on McMillan Shakespeare Limited’s web site. The company’s directors are responsible for the integrity of McMillan Shakespeare Limited’s web site. We have not been engaged to report on the integrity of McMillan Shakespeare Limited’s web site. The auditor’s report refers only to the statements named above. It does not provide an opinion on any other information which may have been hyperlinked to/from these statements. If users of this report are concerned with the inherent risks arising from electronic data communications they are advised to refer to the hard copy of the audited financial statements to confirm the information included in the audited financial statements presented on this web site. Independence In conducting our audit, we complied with applicable independence requirements of the Corporations Act 2001. Auditor’s opinion In our opinion: a the financial statements of McMillan Shakespeare Limited is in accordance with the Corporations Act 2001, including: i ii giving a true and fair view of the company’s and consolidated entity’s financial position as at 30 June 2010 and of their performance for the year ended on that date; and complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and b the financial statements also comply with International Financial Reporting Standards as disclosed in the notes to the financial statements. Report on the remuneration report We have audited the Remuneration Report included in pages (cid:22)(cid:0)(cid:84)(cid:79)(cid:0)(cid:17)(cid:20) of the directors’ report for the year ended 30 June 2010. The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Grant Thornton Australia Limited is a member firm within Grant Thornton International Ltd. Grant Thornton International Ltd and the member firms are not a worldwide partnership. Grant Thornton Australia Limited, together with its subsidiaries and related entities, delivers its services independently in Australia. Liability limited by a scheme approved under Professional Standards Legislation McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 61 INDEPENDENT AUDIT REPORT AS AT 30 JUNE 2010 Auditor’s Opinion In our opinion the Remuneration Report of McMillan Shakespeare Limited for the year ended 30 June 2010, complies with section 300A of the Corporations Act 2001. GRANT THORNTON Chartered Accountants Simon Trivett Partner Melbourne, Australia Dated this 6th day of September 2010 Grant Thornton Australia Limited is a member firm within Grant Thornton International Ltd. Grant Thornton International Ltd and the member firms are not a worldwide partnership. Grant Thornton Australia Limited, together with its subsidiaries and related entities, delivers its services independently in Australia. Liability limited by a scheme approved under Professional Standards Legislation 62 AUDITOR’S INDEPENDENCE DECLARATION Grant Thornton ABN 13 871 256 387 Level 2 215 Spring Street Melbourne Victoria 3000 GPO Box 4984WW Melbourne Victoria 3001 T +61 3 8663 6000 F +61 3 8663 6333 E info.vic@au.gt.com W www.grantthornton.com.au Auditor’s Independence Declaration To the Directors of McMillan Shakespeare Limited In accordance with the requirements of section 307C of the Corporations Act 2001, as lead auditor for the audit of McMillan Shakespeare Limited for the year ended 30 June 2010, I declare that, to the best of my knowledge and belief, there have been: c no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and d no contraventions of any applicable code of professional conduct in relation to the audit. GRANT THORNTON Chartered Accountants Simon Trivett Partner Melbourne, Australia Dated this 6th day of September 2010 Grant Thornton Australia Limited is a member firm within Grant Thornton International Ltd. Grant Thornton International Ltd and the member firms are not a worldwide partnership. Grant Thornton Australia Limited, together with its subsidiaries and related entities, delivers its services independently in Australia. Liability limited by a scheme approved under Professional Standards Legislation McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 63 SHAREHOLDER INFORMATION Additional information required by the ASX Listing Rules and not disclosed elsewhere in this Annual Report is set out below: SUBSTANTIAL SHAREHOLDINGS As at 25 August 2010, the number of shares held by substantial shareholders and their associates is as follows: Chessari Holdings Pty Ltd J P Morgan Nominees Australia Limited National Nominees Limited Asia Pac Technology Pty Ltd Percentage of Ordinary Shares1 No. Name 15.96 1. Meddiscope Pty Ltd 9.49 2. 8.64 3. 8.38 4. 6.97 5. 6.07 6. HSBC Custody Nominees (Aust) Ltd 3.85 Cogent Nominees Pty Limited 7. Meddiscope Pty Limited is a company associated with Mr Anthony Podesta, an executive Director. Meddiscope Pty Limited has a deemed relevant interest in the shares held by Cobax Pty 1 Limited, as both entities are controlled by Mr Podesta. Number of Ordinary Shares 10,800,000 6,425,063 5,845,997 5,671,538 4,718,025 4,109,800 2,602,677 2 3 Chessari Holdings Pty Limited is a company associated with Mr Ross Chessari, a non-executive Director. Asia Pac Technology Pty Limited is a company associated with Mr John Bennetts, a non-executive Director. NUMBER OF SHARE & OPTION HOLDERS As at 25 August 2010, the number of holders of ordinary shares and options in the Company was as follows: Class of Security Fully paid ordinary shares Options exercisable at $3.80 and expiring on 4 February 2011 Options exercisable at $4.52 and expiring on 21 December 2011 Options exercisable at $4.70 and expiring on 1 July 2012 Options exercisable at $3.40 and expiring on 24 November 2012 Options exercisable at $4.70 and expiring on 24 November 2012 Options exercisable at $3.40 and expiring on 14 August 2012 Options exercisable at $4.70 and expiring on 14 August 2012 Options exercisable at $3.42 and expiring on 1 October 2015 VOTING RIGHTS Number of Holders 2,687 4 11 2 2 5 2 2 2 In accordance with the Constitution of the Company and the Corporations Act 2001 (Cth), every member present in person or by proxy at a general meeting of the members of the Company has: • • on a vote taken by a show of hands, one vote; and on a vote taken by a poll, one vote for every fully paid ordinary share held in the Company. A poll may be demanded at a general meeting of the members of the Company in the manner permitted by the Corporations Act 2001 (Cth). DISTRIBUTION OF SHARE & OPTION HOLDERS As at 25 August 2010, the distribution of share and option holders in the Company was as follows: Distribution of Shares & Options 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,000+ Number of Holders of Ordinary Shares 723 1,268 394 272 30 As at 25 August 2010 there were 2,687 shareholders who held less than a marketable parcel of 33 fully paid ordinary shares in the Company. 64 TOP 20 SHAREHOLDERS As at 25 August 2010, the details of the top 20 shareholders in the Company are as follows: Name Meddiscope Pty Ltd Chessari Holdings Pty Ltd J P Morgan Nominees Australia Limited National Nominees Limited Asia Pac Technology Pty Ltd HSBC Custody Nominees (Aust) Ltd Cogent Nominees Pty Limited ANZ Nominees Limited RBC Dexia Investor Services Australia Nominees Pty Limited Aust Executor Trustees NSW Ltd Ann Leslie Ryan Citicorp Nominees Pty Limited Perpetual Trustees Consolidated Limited Cobax Pty Ltd MF Custodians Ltd Mohl Invest Pty Ltd Bond Street Custodians Limited Bond Street Custodians Limited Thaw Nominees Pty Limited UBS Wealth Management Australia Nominees Pty Ltd No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Totals: Top 20 Holders of Issued Capital Total Remaining Holders Balance Number of Ordinary Shares 10,800,000 6,425,063 5,845,997 5,671,538 4,718,025 4,109,800 2,602,677 2,414,517 2,313,292 2,155,132 1,358,418 827,333 773,545 435,000 350,000 345,455 328,958 275,000 271,559 213,790 52,235,099 15,442,878 Percentage of Ordinary Shares1 15.96 9.49 8.64 8.38 6.97 6.07 3.85 3.57 3.42 3.18 2.01 1.22 1.14 0.64 0.52 0.51 0.49 0.41 0.40 0.32 77.18 22.82 1 2 3 4 As at 25 August 2010, 67,677,977 fully paid ordinary shares have been issued by the Company. Meddiscope Pty Limited is a company associated with Mr Anthony Podesta, an Executive Director. Meddiscope Pty Limited has a deemed relevant interest in the shares held by Cobax Pty Limited, as both entities are controlled by Mr Podesta. Chessari Holdings Pty Limited is a company associated with Mr Ross Chessari, a non-executive Director. Asia Pac Technology Pty Limited is a company associated with Mr John Bennetts, a non-executive Director. RESTRICTED SECURITIES As at the date of this Annual Report, there are no securities in the Company subject to voluntary escrow or any other restrictions. UNQUOTED SECURITIES As at the date of this Annual Report, the details of unquoted securities in the Company are as follows: Class Options exercisable at $3.80 and expiring on 4 February 2011 Options exercisable at $4.52 and expiring on 21 December 2011 Options exercisable at $4.70 and expiring on 1 July 2012 Options exercisable at $3.40 and expiring on 24 November 2012 Options exercisable at $4.70 and expiring on 24 November 2012 Options exercisable at $3.40 and expiring on 14 August 2012 Options exercisable at $4.70 and expiring on 14 August 2012 Options exercisable at $3.42 and expiring on 1 October 2015 ON-MARKET BUY BACK The Company does not have a current on-market buy-back. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES Number of Securities 95,522 425,001 3,750,000 306,819 1,988,750 133,334 193,939 698,924 Number of Holders 4 11 1 2 4 2 2 2 65 This page has been left intentionally blank 66 This page has been left intentionally blank McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 67 This page has been left intentionally blank 68 McMi llan Shakespeare Limited A.B.N. 74 107 233 983 A.F.S.L. No. 299054 Level 19, 360 Elizabeth Street Melbourne, Victoria 3000 www.mcms.com.au

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