McMillan Shakespeare Limited - Australia and New Zealand’s leading provider of workplace benefits. All of the benefits, none of the hassles. Annual Report 2011 McMillan Shakespeare Limited A.B.N. 74 107 233 983 A.F.S.L. No. 299054 Level 19, 360 Elizabeth Street Melbourne, Victoria 3000 www.mmsg.com.au MCMS_MAKG_Rebrand_AnnReport2011.indd 1-2 11/08/11 12:38 PM 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 17 21 22 23 24 25 60 61 64 65 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 25 October 2011 at 10:00 am at the State Library of Victoria, Ground Floor, 328 Swanston St, Melbourne, Victoria in the Experimedia Room. 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 Auditor Grant Thornton Audit Pty Ltd 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.mmsg.com.au DIRECTORS’ REPORT The directors of McMillan Shakespeare Limited (Company or MMS) present this report on the consolidated entity, consisting of the Company and the entities that it controlled at the end of, and during, the financial year ended 30 June 2011 (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 Officer), 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 office as a Director throughout the financial year ended 30 June 2011. Details of the qualifications, 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 definition of independence, have been independent at all times throughout the financial year ended 30 June 2011. 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 financial year ended 30 June 2011 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 10 10 10 10 10 10 10 10 9 10 10 10 4 - 4 4 4 - 4 - 4 4 4 - 7 - 7 7 7 - 7 - 6 7 7 - 1 Mr Kay and Mr Podesta attend 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 financial year ended 30 June 2011 was the provision of remuneration, asset management and finance services to public and private organisations throughout Australia. In the opinion of the Directors, there were no significant changes in the nature of the activities of the Company and its controlled entities during the course of the financial year ended 30 June 2011 that are not otherwise disclosed in this Annual Report. RESULTS Details of the results for the financial year ended 30 June 2011 are as follows: Results Net profit after income tax (NPAT) Basic earnings per share Earnings per share on a diluted basis 2011 2010 $43,460,470 $44,959,784 64.0 cents 61.2 cents 66.5 cents 66.5 cents 1 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES Financial Highlights NPAT Performance Revenue performance 50 45 40 35 30 25 20 15 10 5 0 s n o i l l i m $ 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 s t n e c Profit recognised on ILA business combination 17.1 43.5 Normalised NPAT 5-year CAGR of 30.9% 27.9 17.4 20.5 13.2 11.3 159 55 67 77 39 92 112 49 36 300 280 260 240 220 200 180 160 140 120 100 80 60 40 20 0 s n o i l l i m $ FY06 FY07 FY08 FY09 FY10 FY11 FY05 FY06 FY07 FY08 FY09 FY10 FY11 NPAT (continuing Operations) Acquisition Gain Revenue pre-acquisition Revenue Interleasing Total dividends per share Normalised earnings per share (EPS) (1) 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 s t n e c EPS 5-year CAGR of 30.2% FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 McMillan Shakespeare Limited Share price - March 04 to June 11 Basic EPS Cash EPS $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 4 0 - r a M 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 0 1 - p e S 0 1 - c e D 1 1 - r a M 1 1 - n u J 1. Normalised EPS excludes the profit recognised on acquisition as a result of the business combination of ILA. Cash EPS includes CAPEX but excludes the investment in fleet growth. 2 DIVIDENDS Details of dividends declared and/or paid by the Company during the financial year ended 30 June 2011 are as follows: Dividends Final dividend for the financial year ended 30 June 2010 of 14.0 cents (2009: 9.0 cents) per ordinary share paid on 15 October 2010 fully franked at the tax rate of 30% (2009: 30%) Interim dividend for the financial year ended 30 June 2011 of 16.0 cents (2010: 10.0 cents) per ordinary share paid on 31 March 2011 fully franked at the tax rate of 30% (2010: 30%) Total 2011 $ 2010 $ 9,497,436 7,096,261 10,890,810 6,758,343 20,388,246 13,854,604 Subsequent to the financial year ended 30 June 2011, the Directors declared a final dividend of 22 cents per ordinary share (fully franked at the tax rate of 30%) to be paid on 14 October 2011 out of retained profits as at 30 June 2011, bringing the total dividend to be paid for the financial year ended 30 June 2011 to 38 cents per ordinary share, an increase of 58%. REVIEW OF OPERATIONS MMS again made pleasing progress during the financial year ending 30 June, 2011. In last year’s report, we informed shareholders that FY11 would be a year of consolidation and, in particular, of ensuring a smooth integration of the Interleasing acquisition. In the context of this task and the headwinds experienced in the retail sector of the Australian economy, shareholders can be well pleased with the result delivered by MMS. Here is a selection of the highlights and activities conducted during FY11: • MMS again delivered excellent financial results. Revenue growth over PCP was 105% and NPAT before the profit recognised from the business combination with Interleasing increased by 56%. Both segments performed strongly with Group Remuneration Services delivering revenue growth of 21% and NPAT growth of 26%. Our new segment, Asset Management, exceeded our expectations in delivering NPAT of $13.5 million, aided to some extent by a strong second hand car market. Our growth was engendered by increasing participation rates and cross-sales within our existing customer group as well as the acquisition of numerous new employer customers. • • • The delivery of excellent customer service metrics underpinned our performance. All business units performed in excess of our benchmarks. Interleasing has proved to be a good acquisition and strategic fit as evidenced by its profitability and the number of cross-sell opportunities which have emerged since the acquisition. The performance of our group through the Queensland floods in January 2011 was outstanding. We were forced out of our office for two weeks. Within three hours of evacuation, the business was fully operational at our disaster recovery sites. All salary packaging payments were made and we floated a significant amount of our own funds to assist some of our employer clients whose businesses were similarly disrupted. • Credit and Treasury were well managed. Credit losses for FY11 were less than $25,000 and were fully recovered from asset disposal proceeds i.e net credit losses were nil on a funded fleet book of more than $200m. Additionally, we pursued our finance strategy, extending our funding lines to 2014 and on better terms. We are also well advanced in setting up alternative funding mechanisms, thus ensuring plenty of flexibility and capacity to support our intended growth. • • • The Federal Government’s acceptance of the Henry Review’s recommendations relating to the treatment of FBT on novated leases was reflected in changes announced in the May 2011 Federal Government budget. These changes are not expected to have any deleterious effect on our business. The integration of Interleasing is complete save for IT and telephony. It is expected that the IT & telephony integration will be complete by the end of FY12. Additionally, we are well advanced with the preparations for the upgrade of the asset management system. This work is expected to be completed in the first half of FY13. Supporting all of these activities has been the ongoing development of our people: more sophisticated recruitment and development; comprehensive induction and training programs; leadership development and executive development. Staff numbers increased from 501 to 627 during the course of the year. In summary, the combination of the results achieved, the levels of service delivered to our customers and the investments made in the business and its people should set a platform for another year of profitable growth in FY12. 3 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES Strategy and Prospects FY11 has provided MMS with confirmation of our strategic direction. The Interleasing acquisition has made our value proposition broader and more compelling to current and prospective customers, particularly those in the private sector. It has delivered a pleasing number of new business customers and cross-sales to existing customers. Additionally, there are a number of opportunities currently under development that we believe will make our value proposition even more compelling. FY12 will be a year where we attempt to harvest the benefits of a fully integrated Interleasing. We will benefit from the learnings of the last 12 months and concentrate our efforts on winning new business, gaining the benefits from contracts implemented over the past 12 months and the ongoing task of raising participation rates and cross-sales from existing customers. As always, the fundamental driver of our growth will be continuing to deliver exceptional service. This not only reinforces our customers’ decision to do business with us, but also attracts new customers. Aside from the traditional sensitivities (interest rates; the second hand car market; car sales volumes; key contract tenders), the current issues with the potential to impact the rate of profitable growth of our business in FY12 are consumer confidence and the pressures being felt by the retail sector. That said, as we demonstrated through the global financial crisis, our business seems better placed than most to weather the effects of a slower economy. STATE OF AFFAIRS There were no significant changes in the state of affairs of the Company and its controlled entities that occurred during the financial year ended 30 June 2011 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 significantly affected or may significantly 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 financial years subsequent to 30 June 2011 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 Name: Ronald Pitcher AM, FCA, FCPA Appointed: 4 February 2004 Positions: Chairman of the Board Chairman of the Audit Committee Chairman of the Remuneration Committee Age: 72 Mr Pitcher is a Chartered Accountant with over 45 years experience in the accounting profession and the provision of business advisory services. Mr Pitcher was until recently the Chairman of Cellestis Limited (since 2001) and is a director of National Can Industries Limited (since 1994) and Reece Australia Limited (since 2003). Under the Company’s definition of independence, Mr Pitcher is considered to be independent. Name: Michael Kay LLB Appointed: 15 July 2008 Positions: Managing Director and Chief Executive Officer Age: 53 Before joining the Company in May 2008, Mr Kay was the Chief Executive Officer of Australian Associated Motor Insurers Limited (AAMI). Mr Kay joined AAMI in 1993, and before rising to the position of Chief Executive Officer 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 Officer. 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 Name: Anthony Podesta B Ed (Bus), MTMA, FTIA, MAICD Appointed: 1 December 2003 Positions: Non-Executive Director Age: 55 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. Mr Podesta stepped down from all of his executive responsibilities effective 17 August 2010 but remains on the Board as a Non-Executive Director. Name: John Bennetts B Ec, LLB Appointed: 1 December 2003 Positions: Non-Executive Director Member of the Audit Committee Member of the Remuneration Committee Age: 48 Mr Bennetts is an experienced investor and a founder and director of a number of companies, including until recently Cellestis Limited and private equity investment firm, 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. Name: Ross Chessari LLB, M Tax Appointed: 1 December 2003 Positions: Non-Executive Director Member of the Audit Committee Member of the Remuneration Committee Age: 50 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. Name: Graeme McMahon FCPA, FRAS, FCIT Appointed: 18 March 2004 Positions: Non Executive Director Member of the Audit Committee Member of the Remuneration Committee Age: 71 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 Officer 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 definition of independence, Mr McMahon is considered to be independent. COMPANY SECRETARY Paul McCluskey: Chief Financial Officer and Company Secretary Paul McCluskey CA, B Bus, Grad Dip Bus Admin, Grad Dip Applied Finance and Investment, joined McMillan Shakespeare Group as Chief Financial Officer and Company Secretary in May 2005. Mr McCluskey held this position until May 2008 and resumed these roles in September 2010. Mr McCluskey is a Chartered Accountant with 23 years experience in mergers and acquisitions, company secretarial services, statutory reporting, corporate governance practices, taxation planning and strategic planning. Prior to his employment with McMillan Shakespeare Group, Mr McCluskey was a partner of a leading second tier accounting firm where he was an advisor to the company during its March 2004 IPO and for the acquisition of Remuneration Services (Qld) Pty Ltd. 5 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES REMUNERATION REPORT Overview The Group’s remuneration policies and practices are designed to align the interests of staff and shareholders while attracting and retaining 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 – 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 19 October 2010 for that purpose ($600,000 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. The Chairman was paid a discretionary bonus in the financial year ended 30 June 2011 with respect to the financial year ended 30 June 2010. No Non- Executive Director received or was paid any performance related remuneration or options with respect to the financial year ended 30 June 2010. Neither the Chairman nor the other Non-Executive Directors are entitled to any performance related remuneration or options with respect to the financial year ended 30 June 2011. 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 office other than payments relating to the accrued superannuation entitlements included in their remuneration. Remuneration Structure – Executive Directors and Senior Executives Overview In setting its remuneration arrangements, reference has been made to the current employment market in which the Group operates. The components of remuneration for each executive comprise fixed remuneration (including superannuation and benefits) 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 fixed remuneration component and, if applicable, the short-term cash incentive component of each executive’s remuneration each year (or on promotion). For the financial year commencing July 2011 the Remuneration Committee has reviewed remuneration based on an analysis of the Top 500 Report (Director and Senior Executive Remuneration) 2011, and Hewitt The Australian Top Executive Remuneration Reports for organisations with Annual Revenue $101- 250 Million and 301-1,000 Employees, and for organisations with Annual Revenue $251-500 Million and 301-1,000 Employees. In addition, market comparison using publicly disclosed information was made to broadly comparable Financial Service companies. Fixed Remuneration The fixed remuneration component comprises salary, superannuation and, in some cases, non-cash benefits, such as motor vehicle lease payments, investment loan repayments, education expenses, travel benefits and car parking benefits. Fixed remuneration reflects 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 fixed remuneration component is at risk. One executive has guaranteed salary increases of not less than a percentage equal to the rise in the consumer price index (all groups) (CPI) over the preceding financial year. Increases in salary beyond CPI (and increases in salary for all other 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 Officer nor the Chief Financial Officer are remunerated separately for acting as an officer of the Company or any of its controlled entities. Short-term Incentives The Company does not generally offer contracted cash bonuses as part of a short term incentive program. However, following the acquisition of Interleasing (Australia) Limited in 2010 the Company established a short-term incentive program for three executives. The Remuneration Committee recommended to the Board short term targets to reward business stabilisation, realisation of discount on acquisition, improvement in operating profit and establishment of growth momentum following the acquisition. The specific short term incentives are applicable for an 18 month period commencing on 1 April 2010 with targets focussed as applicable on the realisation of residual value surplus on disposal of vehicles, and to reward responsible executives for short term financial and operating performance of the leasing business and growth in the leasing book. 6 The Remuneration Committee also has the authority to issue discretionary cash bonuses as a reward for out-performance compared to budgeted targets. Any bonus payable can, at the discretion of the executive, be sacrificed as superannuation. Such bonuses were paid to the majority of individual executives in relation to the year ended 30 June 2011. Long-term Incentives From time to time the Company issues options to certain executives and employees under the McMillan Shakespeare Limited Employee Option Plan (First Option Plan). The Company has had the First Option Plan in place since 2004 and, as at 30 June 2011, there were 17 participants in the First Option Plan (2010: 27). All options granted have a performance condition of continuing employment at the time of vesting. Under the First Option Plan, options over unissued ordinary shares in the Company are granted 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 First Option 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 recommends to the Board the number of options to be granted on the basis of the position, duties and responsibilities of the relevant executive. As at 30 June 2011, the Company had made ten offers under the First Option 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 were 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 were 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 financial years ended 30 June 2007, 2008 and 2009 the targets centred on the achievement of budgeted NPAT; 25% of the options vested and were 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 financial 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 financial 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 financial years ending 30 June 2008, 30 June 2009 and 30 June 2010. A further 90,000 options of the December 2007 offer vested and were exercisable on or after 15 September 2009 subject to continuity of employment until that date. 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 senior executives with a sense of ownership in the Company. In July 2008, the Company issued 4,375,000 options, of which 3,750,000 options have been issued to Mr Kay with an expiry of 30 June 2012. 7 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES The entitlement to exercise was subject to continuity of employment to 30 June 2011 and the achievement of predetermined targets, of which 75% was based on earnings per share (“EPS”) targets over three years, including a cumulative EPS target over the three year period in the event that the maximum EPS target was not achieved in any one year. The EPS growth targets were based on the actual FY08 EPS achieved as the base year. The EPS targets were as follows: Performance Hurdles Achievement of FY2009 EPS growth of not less than 15.0% Achievement of FY2009 EPS growth of not less than 17.5% Achievement of FY2009 EPS growth of not less than 20.0% Achievement of FY2010 EPS growth of not less than 15.0% Achievement of FY2010 EPS growth of not less than 17.5% Achievement of FY2010 EPS growth of not less than 20.0% Achievement of FY2011 EPS growth of not less than 15.0% Achievement of FY2011 EPS growth of not less than 17.5% Achievement of FY2011 EPS growth of not less than 20.0% Weighting 12.50% 6.25% 6.25% 12.50% 6.25% 6.25% 12.50% 6.25% 6.25% The balance (25%) is based on the undertaking by the Company of a transformational event resulting in a major diversification for the Company. The transformational event is regarded as having been met through the acquisition of Interleasing (Australia) Ltd. The maximum amount of Mr Kay’s options has vested upon the adoption of this Annual Report. The remaining 625,000 options issued to the former Group CFO in this tranche lapsed during the financial year ended June 2011. A further 2,600,114 options were issued in November 2008 and a further 327,273 options were issued in August 2009. These options all expire four years from the relevant date of issue. The entitlement to exercise these options was subject to continuity of employment and the achievement of predetermined targets, of which 100% was based on EPS targets over three years, including a cumulative EPS target over three years in the event that the maximum target was not achieved in any one year. The EPS growth targets were based on the actual FY08 EPS achieved as the base year. The EPS targets were as follows: Performance Hurdles Achievement of FY2009 EPS growth of not less than 15.0% Achievement of FY2009 EPS growth of not less than 17.5% Achievement of FY2009 EPS growth of not less than 20.0% Achievement of FY2010 EPS growth of not less than 15.0% Achievement of FY2010 EPS growth of not less than 17.5% Achievement of FY2010 EPS growth of not less than 20.0% Achievement of FY2011 EPS growth of not less than 15.0% Achievement of FY2011 EPS growth of not less than 17.5% Achievement of FY2011 EPS growth of not less than 20.0% Weighting 25.00% 5.00% 3.34% 25.00% 5.00% 3.33% 25.00% 5.00% 3.33% Other than options in this tranche which have lapsed due to resignation, the maximum amount of options in this tranche has vested upon the adoption of this Annual Report. 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 fixed term employment contract. The entitlement is subject to continuity of employment and the achievement of predetermined EPS targets over three years. Targets will be established at the commencement of the 36 month employment contract. 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 benefit of all stakeholders. 8 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. In addition, following the end of FY11 the Company has issued further options under a new Employee Option Plan (Second Option Plan) during August 2011. Further details of the Second Option Plan are provided on page 15. Retirement Benefits Retirement benefits 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)). Remuneration Details The senior executives specified in the Remuneration Report as key management personnel (as defined in AASB124 Related Party disclosures) have, either directly or indirectly, authority and responsibility for planning, directing and controlling the activities of the Group. The Directors do not believe that any other senior employees of the Company or its controlled entities are required to be identified. Details of the remuneration of the Directors and other key management personnel of the Group 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 P. McCluskey – Group CFO and Company Secretary (from 1 September 2010) • Mr M. Salisbury – Managing Director, Remuneration Services (Qld) Pty Ltd • Mr A. Tomas – Group Executive, Fleet and Novated Leasing Short-term benefits Post-employment benefits Long-term benefits Share-based payments 2011 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) Mr A Podesta (Non-Executive Director)5 Executive Director Cash salary/ fees1 $ 160,550 64,220 64,220 55,000 38,333 Cash Bonus Other Benefits2 $ - - - - - $ - - - - - Super $ 14,450 5,780 5,780 40,000 50,000 Mr M. Kay (CEO and Managing Director)6 899,103 100,000 5,166 50,000 Termination Benefits3 Long Service Leave Options4 Total Remuneration Percentage of Remuneration as options $ - - - - - - - $ - - - - - $ - - - - - $ % 175,000 70,000 70,000 95,000 88,333 - - - - - 4,290 282,702 1,341,261 21 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 P. McCluskey (Group CFO and Company Secretary)10 Mr M. Salisbury (General Manager, Remuneration Services)11 Mr A Tomas (Group Executive, Fleet and Novated Leasing.) 12 59,224 - 25,942 2,781 196,923 (111) - 284,759 245,619 60,000 39,438 14,944 197,567 40,000 48,521 23,955 404,493 50,000 - 24,023 200,742 50,000 13,021 19,838 399,030 - 74,022 24,999 - - - - - 6,323 20,228 386,552 8,262 20,228 338,533 20,122 - 498,638 1,494 8,827 293,922 - 5 6 - 3 95 111,111 609,257 18 9 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES Short-term benefits Post-employment benefits Long-term benefits Share-based payments Termination Benefits3 Long Service Leave Options4 Total Remuneration Cash salary/ fees1 Cash Bonus Other Benefits2 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) 50,459 50,459 46,147 - - - $ - - - - Super $ 11,229 4,541 4,541 36,853 Executive Directors Mr M. Kay (CEO CEO6 and Managing Director) Mr A. Podesta 5 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)11 Mr A. Suckling (Group Executive, Insurance and Emerging Business)13 Mr A Tomas (Group Executive, Fleet and Novated Leasing.) 12 855,909 130,000 75,000 - 4,259 - 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 $ - - - - $ - - - - $ 211,000 55,000 55,000 83,000 182 - 282,702 1,268,052 - 180,000 59 50,353 384,718 12,125 20,228 410,440 7,673 23,483 336,261 Percentage of Remuneration as options % - - - - 22 - 13 5 7 3 8 8,827 273,525 17,113 213,799 59 21 10 27,778 146,992 19 $ - - - - - - - - - - - - The amounts shown for the Non-Executive Directors reflect directors’ fees only. The amounts shown for the executives reflect cash salary and annual leave entitlements. 1 2 3 4 The amounts shown for the non-executive directors reflect directors’ fees only. The amounts shown for the executives reflect cash salary and annual leave entitlements. Other benefits reflect motor vehicle lease payments, investment loan repayments, education expenses, travel benefits and/or car parking benefits. Other than as disclosed in this Annual Report, termination benefits include all annual leave and, where applicable, long service leave entitlements that accrued during the financial years ended 30 June 2010 and 30 June 2011. 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 financial years ended 30 June 2010 and 30 June 2011. 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 financial 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) 30 June 2009 (November 2008) 30 June 2010 (August 2009) Nil Nil Nil $4.70 1/7/08 4 years $2.59 34.6% 4.85% 6.73% $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% 5 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 Officer, terminated (by mutual agreement) on 4 May 2008. On 15 July 2008 Mr Podesta entered into an employment agreement with the Company 10 for a fixed 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 was able to 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 five year fixed 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 financial year ended 30 June 2011. The employment agreement between Mr Cansdale and the Company was for a 3.5 year fixed 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 was also able to be terminated by the Company for cause without notice or any payment. Mr Cansdale served as an executive at all times during the period from 1 July 2010 to 31 August 2010. Mr Cansdale resigned from his position effective 31 August 2010. The employment agreement between Mr Kruyt and the Company was for 18 months fixed 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 financial year ended 30 June 2011. 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 financial year ended 30 June 2011. The employment agreement between Mr McCluskey and the Company was varied with effect from 1 September 2010 to appoint Mr McCluskey as Group Chief Financial Officer and Company Secretary. The agreement provides for termination of employment by either party with two month’s notice. The agreement is able to be terminated by the Company for cause without notice or any payment. Mr McCluskey served as an executive at all times during the period from 1 September 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 financial year ended 30 June 2011. The employment agreement between Mr Tomas and the Company commenced on 1 April 2010 and was for an initial term of 18 months. The agreement provides for termination of employment by either party without cause with six 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 financial year ended 30 June 2011. 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 financial year ended 30 June 2011. 6 7 8 9 10 11 12 13 Remuneration at risk The relevant proportions of remuneration that are linked to performance and those that are fixed are as follows: Fixed remuneration At risk - STI At risk - LTI 2011 2010 2011 2010 2011 2010 Executive Directors Mr M. Kay Mr A. Podesta1 Other key management personnel Mr M. Cansdale Mr G. Kruyt Mr P. Lang Mr P McCluskey2 Mr M. Salisbury Mr A Tomas 72% - 100% 79% 82% 90% 80% 82% 76% 100% 81% 76% 86% - 79% 81% 7% - - 16% 12% 10% 17% - - - 6% 19% 7% - 18% - 21% - - 5% 6% - 3% 18% 1 2 Mr Podesta has resigned as an executive director with effect from 17 August 2010, but continues in the role of a non-executive director. Mr McCluskey commenced as Group Chief Financial Officer and Company Secretary on 1 September 2010. 24% - 13% 5% 7% - 3% 19% 11 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 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 benefits for shareholder wealth, and the link to the remuneration policy, the following indices are generally considered: Indices 2011 2010 2009 2008 2007 Net profit attributable to Company members $43,460,470 $44,959,784 $20,522,752 $17,368,000 $13,237,000 Dividends paid Share price as at 30 June Earnings per share $20,388,246 $13,854,604 $11,827,100 $10,451,000 $7,697,000 $9.58 $4.69 $2.92 $2.46 $5.31 64.0 cents 66.5 cents 30.4 cents 25.8 cents 19.8 cents Net profit is considered as part of the financial 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 profit from ordinary activities after tax and earnings per share has grown at a compound annual growth rate (CAGR) of 41.6% per annum over the period from 1 July 2005 until 30 June 2011 (excluding the gain on business combination). Over the same period return on equity (RoE) exceeded 20% (and, in the financial years ended 30 June 2006 to 30 June 2011, RoE actually exceeded 35%). Cash Bonus and Option Details Cash Bonus A discretionary cash bonus was paid to the Chairman during the financial year ended 30 June 2011 with respect to the financial year 30 June 2010. No other contracted cash based short-term incentives or other form of cash bonus were paid to (or were forfeited by) any Non-Executive Director or executives during the financial year 30 June 2011. Discretionary bonuses have been issued by the Board on 1 August 2011 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 financial years ended 30 June 2010 or 30 June 2011 (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 financial year ended 30 June 2011 and each relevant previous or future financial year are as follows: Grant Date Expiry Date 21 December 2007 20 December 2011 1 July 2008 30 June 2012 24 November 2008 23 November 2012 24 November 2008 23 November 2012 28 May 2010 1 October 2015 Share price at valuation date Exercise Price Value per option at grant date1 Date Exercisable $4.00 $2.59 $2.10 $2.10 $3.42 $4.52 $4.70 $4.70 $3.40 $3.42 $0.525 $0.240 $0.090 $0.180 $0.930 100% after 15 September 2008 100% after 16 September 2011 100% after 24 November 2011 100% after 24 November 2011 100% after 1 October 2014 1 Reflects the value at grant date for options granted as part of remuneration calculated in accordance with AASB 2: Share-based Payment. 12 Details of the options granted, vested and exercised during the financial years ended 30 June 2010 and 30 June 2011 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. Executive Directors Mr M. Kay Mr A. Podesta1 Other key management personnel Mr M. Cansdale Mr G. Kruyt Mr P. Lang Mr P. McCluskey Mr M. Salisbury Mr A. Tomas Options granted Options vested Ordinary shares issued on exercise of options 2011 2010 2011 2010 2011 2010 - - - - - - - - - - - - - - - 537,634 - - - - - - - - - - - 64,583 - - - - - - 90,000 40,000 - - - - - - - 94,549 - - - 1 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 percentage of options granted to executives that have vested or were forfeited during the financial year ended 30 June 2011 is set out below: Financial year granted Vested % Forfeited % Financial year(s) in which options may vest Executive Directors Mr M. Kay Mr A. Podesta1 Other key management personnel Mr M. Cansdale Mr G. Kruyt Mr P. Lang Mr M. Salisbury Mr P. McCluskey Mr A. Tomas 2009 - 2009 2009 2009 2009 - 2010 - - - - - - - - - - 100 - - - - - 2012 - - 2012 2012 2012 - 2015 1 Mr Podesta has resigned as an executive director with effect from 17 August 2010, but continues in the role of a non-executive director. 13 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES Details of the value of options granted, exercised and lapsed during the financial year ended 30 June 2011 with respect to the executives are as follows: Value at grant date2 Value at exercise date3 Value at lapse date4 Minimum value of option to vest Maximum value of option to vest Executive Directors Mr M. Kay Mr A. Podesta1 Other key management personnel Mr M. Cansdale Mr G. Kruyt Mr P. Lang Mr P. McCluskey Mr M. Salisbury Mr A. Tomas $ - - - - - - - $ - - - 227,700 112,400 - - - $ - - 942,500 - - - - - $ - - - - - - - - $ 51,893 - - 3,713 3,713 - 1,620 361,111 1 2 3 4 Mr Podesta has resigned as an executive director with effect from 17 August 2010, but continues in the role of a non-executive director. Reflects the value at grant date for options granted as part of remuneration during the financial year ended 30 June 2011 calculated in accordance with AASB 2: Share-based Payment. Reflects the value at exercise date for options that were granted as part of remuneration and were exercised during the financial year ended 30 June 2011. Reflects the value at lapse date for options that were granted as part of remuneration and lapsed during the financial year ended 30 June 2011. 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 notified 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 Options Ordinary shares - 3,750,000 - - - - 105,100 4,164 4,568,025 6,225,063 122,000 11,235,000 No Director has, during the financial year ended 30 June 2011, become entitled to receive any benefit (other than a benefit included in the aggregate amount of remuneration received or due and receivable by the Directors shown in the Remuneration Report or the fixed 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 financial interest or a firm in which the Director is a member. 14 OPTIONS GRANTED During the financial year ended 30 June 2011, no options have been granted by the Company to key management personnel as part of their remuneration. Since the end of the financial year ended 30 June 2011, the Company has granted options to key management personnel as part of their remuneration as follows: Name Mr G. Kruyt Mr G. Kruyt Mr P. Lang Mr P. Lang Mr P. McCluskey Mr P. McCluskey Mr M. Salisbury Mr A. Tomas Number granted Date of grant Exercise price Expiry date Issue Price 159,639 37,901 151,655 37,901 42,638 37,901 85,276 37,901 16 August 2011 16 August 2011 16 August 2011 16 August 2011 16 August 2011 16 August 2011 16 August 2011 16 August 2011 $7.31 $7.31 $7.31 $7.31 $7.31 $7.31 $7.31 $7.31 30 September 2015 30 September 2015 30 September 2015 30 September 2015 30 September 2015 30 September 2015 30 September 2015 30 September 2015 Nil $1.32 Nil $1.32 Nil $1.32 Nil $1.32 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 No. of unissued ordinary shares Exercise price Employee First Option Plan Employee First Option Plan Employee First Option Plan Employee First Option Plan Employee First Option Plan Employee First Option Plan Employee First Option Plan Employee Second Option Plan 86,188 3,750,000 306,819 1,988,750 133,334 193,939 698,924 1,487,273 $4.52 $4.70 $3.40 $4.70 $3.40 $4.70 $3.42 $7.31 Expiry date 20 December 2011 30 June 2012 23 November 2012 23 November 2012 13 August 2012 13 August 2012 1 October 2015 30 September 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 indemnifies the Directors and officers 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, each Company Secretary, and each responsible manager under the licenses which the Company holds (Deed), which protects individuals acting as officeholders during their term of office and after their resignation. Under the Deed, the Company also indemnifies each officeholder to the full extent permitted by law. The Company has a Directors & Officers Liability Insurance policy in place for all current and former officers of the Company and its controlled entities. The policy affords cover for loss in respect of liabilities incurred by Directors and officers where the Company is unable to indemnify them and covers the Company for indemnities provided to its Directors and officers. 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. 15 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES NON-AUDIT SERVICES Details of the amounts paid or payable to the auditor of the Company, Grant Thornton Audit Pty Ltd and its related practices, for non-audit services provided, during the financial year ended 30 June 2011, 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 financial year ended 30 June 2011 by Grant Thornton Audit Pty Ltd. Given that the only non-audit services related to client contract audits, the Audit Committee has confirmed 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 satisfied 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 64 of this Annual Report. CORPORATE GOVERNANCE PRACTICES A Corporate Governance Statement is set out on pages 17 to 20 of this Annual Report. Signed in accordance with a resolution of the Directors. Ronald Pitcher, AM Chairman 30 August 2011 Melbourne, Australia Michael Kay Managing Director 16 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.mmsg.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 Officer 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 qualifications and experience in remuneration services, financial services, finance, 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 15.9% of the shares in the Company. These Directors have participated in the growth and development of McMillan Shakespeare and have a significant 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, and resigning as Executive Director on 17 August 2010, 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 significant 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 specifically 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 Officer is responsible for implementing Group strategies and policies. The Board charter specifies that these are separate roles to be undertaken by separate people. 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 Officer, the Chief Financial Officer 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. 17 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 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 fit. The Chairman undertook the performance appraisal of the Board with respect to the financial year ended 30 June 2011 in July 2011. 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 qualifications of the Directors appointed to the Remuneration Committee, the number of meetings of the committee held during the year ended 30 June 2011 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 2011 with the CEO’s report to the 1 August 2011 meeting of the Remuneration Committee. The Remuneration Committee has evaluated the performance of the Chief Executive Officer for the year ended 30 June 2011, taking account of the performance of the Group and other non-financial 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 significant 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 qualifications of the Directors appointed to the Audit Committee, the number of meetings of the committee held during the year ended 30 June 2011 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 financial expertise and all members are financially 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 significant 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 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 Officer, Chief Financial Officer 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). 18 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 financial 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 significant financial, 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, particularly to provide for the creation of a Credit Committee and Interest Committee. 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 Officer and the Chief Financial Officer in accordance with the ASX Principles. The written representations confirmed that: • • the financial reports are complete and present a true and fair view, in all material respects, of the financial 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 efficiently 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 reflect 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 profit or incentive schemes and do not generally receive options, incentive payments or retirement benefits other than statutory superannuation. Executive remuneration generally comprises the following elements: • • fixed remuneration, including superannuation and benefits, which is set at a level that reflects the marketplace for each position; 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 financial performance hurdles. • Cash bonuses may also be issued at the discretion of the Board. The Company does not generally offer contracted cash bonuses as part of a short term incentive program, but may do so in special circumstances. 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’. 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 19 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 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 reflects 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 officers and employees. In addition to ensuring that all officers 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 Company 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. The policy can be accessed on the Company’s website. The Company has issued an Equal Opportunity & Diversity Policy which assists in confirming the Company’s commitment to a diverse workforce, ensuring there is ongoing development and implementation of relevant plans, programs and initiatives to recognise and promote diversity, and in establishing the process for appropriate reporting. The company will report on its progress in the annual report for the financial year ending 30 June 2012. The policy can be accessed on the Company’s website. 20 STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2011 Economic Entity Parent Entity Revenue and other income Employee and director benefit expenses Depreciation and amortisation expenses and impairment Leasing and vehicle management expenses Consulting expenses Marketing expenses Property and corporate expenses Technology and communication expenses Other expenses Finance costs Profit before income tax and business combination Gain on business combination Acquisition costs Profit before income tax Income tax (expense) benefit Note 3 4 4 28 28 5 2011 $’000 271,305 (55,336) (68,061) (52,434) (1,541) (2,671) (4,942) (5,594) (7,250) (11,278) 62,198 - - 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) 2011 $’000 21,133 (1,018) - - (88) - (201) - (131) (1,814) 2010 $’000 26,281 (544) - - - - (169) - - (791) 17,881 24,777 - - - (4,430) 20,347 1,623 62,198 (18,738) 55,187 (10,227) 17,881 (217) Profit attributable to members of the parent entity 43,460 44,960 17,664 21,970 Other comprehensive income Changes in fair value of cash flow hedges Income tax on other comprehensive income (306) 92 - - - - - - Total comprehensive income for the period 43,246 44,960 17,664 21,970 Basic earnings per share (cents) Diluted earnings per share (cents) 6 6 64.0 61.2 66.5 66.5 The above statements of comprehensive income should be read in conjunction with the accompanying notes. 21 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 2011 Current assets Cash and cash equivalents Trade and other receivables Inventory Prepayments Total current assets Non-current assets Trade and other receivables Other financial 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 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 17 18 19 Economic Entity Parent Entity 2011 $’000 15,034 17,779 1,477 1,489 35,779 4,200 - 219,440 1,240 39,849 264,729 2010 $’000 16,757 12,645 1,809 2,122 33,333 6,269 - 209,829 126 38,905 255,129 2011 $’000 506 342 - 72 920 2010 $’000 1,405 - - - 1,405 - - 100,863 100,381 - 71 - - 1,427 - 100,934 101,808 300,508 288,462 101,854 103,213 45,285 44,942 6,752 4,023 2,949 - 8,431 3,184 7,949 117 59,009 64,623 448 126,539 126,987 458 133,964 134,422 30,990 6,752 - 2,949 - 40,691 - 13,917 13,917 17,194 8,431 - 7,949 - 33,574 - 21,866 21,866 185,996 199,045 54,608 55,440 114,512 89,417 47,246 47,733 25,053 1,320 88,139 23,066 1,284 65,067 25,053 1,534 20,659 23,066 1,284 23,383 114,512 89,417 47,246 47,733 The above statements of financial position should be read in conjunction with the accompanying notes. 22 STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2011 Note Ordinary Shares $’000 Economic Entity Retained Earnings $’000 Option Reserve $’000 Cash flow Hedge Reserve $’000 2011 Equity as at beginning of year Profit 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 2011 2010 Equity as at beginning of year Profit 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 23,066 - - - 1,755 232 - - 65,067 43,460 - 43,460 - - - (20,388) 25,053 88,139 22,637 - - - 360 69 - - 33,962 44,960 - 44,960 - - - (13,855) 1,284 - - - - (232) 482 - 1,534 804 - - - - (69) 549 - 7 7 Equity as at 30 June 2010 23,066 65,067 1,284 2011 Equity as at beginning of year Profit 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 2011 2010 Equity as at beginning of year Profit 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 23,066 - - - 1,755 232 - - 23,383 17,664 - 17,664 - - - (20,388) 25,053 20,659 22,637 - - - 360 69 - - 15,268 21,970 - 21,970 - - - (13,855) 1,284 - - - - (232) 482 - 1,534 804 - - - - (69) 549 - 7 7 Equity as at 30 June 2010 23,066 23,383 1,284 The above statements of changes in equity should be read in conjunction with the accompanying notes. Note Ordinary Shares $’000 Parent Entity Retained Earnings $’000 Option Reserve $’000 Cash flow Hedge Reserve $’000 - - (214) (214) - - - - (214) - - - - - - - - - - - - - - - - - - - - - - - - - - - Total $’000 89,417 43,460 (214) 43,246 1,755 - 482 (20,388) 114,512 57,403 44,960 - 44,960 360 - 549 (13,855) 89,417 Total $’000 47,733 17,664 - 17,664 1,755 - 482 (20,388) 47,246 38,709 21,970 - 21,970 360 - 549 (13,855) 47,733 23 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2011 Cash flows 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 flows from investing activities Acquisition of subsidiary, net of cash Acquisition expenses Payment for capitalised software Proceeds from sale of plant and equipment Payments for plant and equipment Net cash used in investing activities Cash flows from financing activities Equity contribution Dividends paid by parent entity Proceeds from borrowings Repayment of borrowings Payment of borrowing costs Proceeds from controlled entities Net cash (used in) / provided by financing activities Net cash decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Economic Entity Parent Entity Note 2011 $’000 2010 $’000 2011 $’000 2010 $’000 264,627 (126,605) 43,646 (113,181) 767 (12,294) - 132,863 (74,232) 11,792 (25,261) 1,050 (914) - (21,438) (9,156) - (1,101) - - 33 (2,302) 9,500 (713) - (119) - - 572 (196) 25,758 (14) 35,522 36,142 5,417 26,001 - (166,143) (216) (2,694) 8 (2,875) (4,744) (1,629) 30 (3,457) - (216) (55,000) (4,218) - - - - - - (5,777) (175,943) (216) (59,218) 1,755 (20,388) 5,000 (17,727) (108) - (31,468) (1,723) 16,757 360 (13,855) 142,006 - - - 128,511 (11,290) 28,047 1,755 (20,388) - (13,000) - 25,533 (6,100) (899) 1,405 360 (13,855) 29,280 - - 7,073 22,858 (10,359) 11,764 21 28 7 Cash and cash equivalents at end of year 8 15,034 16,757 506 1,405 The above statements of cash flows should be read in conjunction with the accompanying notes. 24 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2011 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) General information The financial report of McMillan Shakespeare Limited and its controlled entities for the year ended 30 June 2011 was authorised for issue in accordance with a resolution of the directors on 30 August 2011 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 financial 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 financial report is a general purpose financial 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 financial 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. Compliance with IFRS Australian Accounting Standards include International Financial Reporting Standards as adopted in Australia (AIFRS). Compliance with AIFRS ensures that the financial report complies with International Financial Reporting Standards (IFRS). (c) Principles of consolidation The consolidated financial statements comprise the financial 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 financial 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 financial statements include all subsidiaries from the date that control commences until the date that control ceases. The financial 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 profits 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 financial statements of the parent entity, including the value of options issued by the Company on behalf of its subsidiaries in relation to employee remuneration. (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. Identifiable assets acquired and liabilities and contingent liabilities assumed in 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 identifiable 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 identification 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 reflect 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. 25 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES (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 financial 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% 25% – 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 classified 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 identifiable 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 benefits attributable to the software will flow 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 five years, during which the benefits are expected to be realised. Capitalised software development costs are reviewed annually for indicators of impairment, and if indicators are identified an impairment test is performed (refer Note 1(h)). 26 NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 (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 identified and recognised separately from goodwill where they satisfy the definition of an intangible asset and their fair value can be measured reliably. (h) Impairment of 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 flows 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 flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows 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 profit 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 profit 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 profit 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 de-recognition Regular purchases and sales of financial assets and liabilities are recognised on trade date, the date on which the economic entity commits to the financial assets or liabilities. Financial assets are derecognised when the rights to receive cash flows from the financial 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 flow purposes, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash which are subject to an insignificant risk of changes in value. (ii) Trade and other receivables All receivables are classified 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 classified as current as they are due for settlement no more than 30 days from the date of recognition. Cash flows 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 specific doubtful amounts. The allowance account for receivables is used to record impairment losses unless the Group is satisfied 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. 27 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIESNOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 (iii) Other financial assets Investments in subsidiaries Investments in subsidiaries are carried at cost and adjusted for any share based payments in the separate financial statements of the Company, under AASB 127: Consolidated and Separate Financial Statements. (iv) Other financial 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 benefits (i) Wages and salaries, annual leave and long service leave Provision is made for the economic entity’s liability for employee benefits arising from services rendered by employees to reporting date. Employee benefits expected to be settled within one year together with benefits 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 on-costs. Other employee benefits payable later than one year have been measured at the present value of the estimated future cash outflows to be made for those benefits. 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 outflows. (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 benefits in the form of bonuses is recognised in employee benefits. This liability is based upon predetermined plans tailored for each participating employee and is measured on an ongoing basis during the financial 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 specific 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 flows over the expected life of the financial 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, the net investment value of the leased asset and the residual value. The principal portion upon receipt reduces the net investment in the leased asset. (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. 28 NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 (vi) Vehicle maintenance services Revenues from maintenance service contracts are recognised for services rendered when it is probable that economic benefits from the transaction will flow to the Group. When the amounts are collectable 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 Office (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 classified as finance leases whenever the terms of the contract transfers substantially all the risk and rewards of ownership to the lessee. All other contracts are classified as operating leases. (i) Finance lease receivable portfolio Lease contracts with customers are recognised as finance 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 reflect 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 finance 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 benefit 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 reflect 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 classified 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 benefit. 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 financial year but not distributed at balance date. 29 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIESNOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 (q) Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to members of the Company by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares during the year. Diluted earnings per share Earnings and the weighted average number of shares used in calculating basic earnings per share is adjusted for the following to calculated diluted earnings per share: • • the after-tax effect of interest and any other financing costs associated with dilutive potential ordinary shares; and the weighted average number of additional shares that would have been outstanding assuming the conversion of all 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 identified as the Chief Executive Officer. (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 flow All cash flows other than investing or financing cash flows are classified as operating cash flows. As the asset management segment provides operating and finance leases for motor vehicles and equipment, the cash outflows to acquire the lease assets are classified as operating cash outflows. Similarly interest received and interest paid in respect of the asset management segment are classified as operating cash flows. (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 flows through the expected life of the borrowing. (w) Derivative financial instruments The economic entity uses derivative financial instruments to manage its interest rate exposure to interest rate volatility and its impact on leasing product margins. The process to mitigate against the exposure seek to have more control in balancing the spread between interest rates charged to lease contracts and interest rates and the level of borrowings assumed in its financing 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 flow hedges to mitigate both current and future interest rate volatility that may arise from changes in the fair value of its borrowings. Derivative financial 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 profit 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 profit or loss to match the timing and relationship with the amount that the instrument was intended to hedge. 30 NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 (x) Foreign currency translation The consolidated financial statements of the economic entity are presented in Australian dollars which is the functional and presentation currency. The financial results and affairs of foreign operations are translated into the presentation currency using the closing rate method where assets and liabilities are translated at the closing rate at reporting date and the results for the period at exchange rates at the date of the transactions. Exchange differences arising from the translation at reporting date are recognised in other comprehensive income for monetary items that form part of the net investment in the foreign operation and for differences arising from inter-group balances they are recognised in profit and loss. (y) Critical judgements and significant accounting estimates The preparation of financial 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 significant judgements, estimates and assumptions made during the year have been considered for significance. 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 significance 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 realisable margins. The estimates and underlying assumptions are reviewed on an ongoing basis. No other judgements, estimates or assumptions are considered significant. (z) New accounting standards and interpretations The following new accounting standards, amendments to standards and interpretations (standards) have been issued, but are not mandatory for the 30 June 2011 reporting period. 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 financial report. No other new standards will impact the financial report. i. AASB 9 Financial Instruments and AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 and AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) (effective from 1 January 2013) AASB 9 Financial Instruments addresses the classification and measurement of financial assets and is likely to affect the Group’s accounting for its financial 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 financial 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 profit or loss. In addition, AASB 9 uses a single approach to determine whether a financial asset is measured at amortised cost or fair value, replacing the many different rules in AASB 139 and removes the impairment requirement for financial assets held at fair value. The majority of requirements from AASB 139 for the classification and measurement of financial liabilities has been carried forward unchanged, except in relation to own credit risk where an entity takes the option to measure financial liabilities at fair value. AASB 9 requires the amount of the change in fair value due to changes in the entity’s own credit risk to be presented in other comprehensive income (OCI), unless there is a accounting mismatch in the profit or loss, in which case all gains or losses are to be presented in the profit or loss. The Group has not yet decided when to adopt AASB 9. ii. AASB 124 Related Part Disclosures (effective from 1 January 2011) The amendment clarifies and simplifies the definition of a related party. The Group will apply the amended standard from 1 July 2011 which discloses any transactions between its subsidiaries. iii. AASB 2009-14 Prepayments of a Minimum Funding Requirement As the Group does not have a defined benefit pension plan this amendment to interpretation 14 is not expected to have any impact on the Group’s financial report. iv. AASB 1053 Application of Tiers of Accounting Standards and AASB 2010-2 Amendments to Australian Accounting Standards arising from Reduced Disclosure Requirements As the Group is listed on the ASX it is not eligible to adopt this standard and therefore has no impact on the Group’s financial statements. 31 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIESNOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 v. AASB 2010-6 Amendments to Australian Accounting Standards – Disclosures on Transfers of Financial Assets (effective for annual reporting periods beginning on or after 1 July 2011) This amendment interacts with the amendments made to AASB 7 Financial Instruments: Disclosures to introduce additional disclosures in respect of risk exposures arising from transfers of assets through sale, factorisation, securitisation, lending or otherwise transfer to other parties. The Group intends to apply the amendment from 1 July 2011. vi. AASB 2010-8 Amendments to Australian Accounting Standards – Deferred Tax: Recovery of Underlying Assets (effective from 1 January 2012) This amendment introduces a more practical measurement of deferred taxes on investment property. As the Group has no investment property the amendment is unlikely to have any impact on the financial report. vii. IFRIS 10,11 and 12 Consolidation Suite of Standards to be issued as AASB 10, 11 and 12 (effective from 1 January 2013) IFRIS 10 revises the framework to assess the existence of control in a subsidiary. It introduces a new principle-based definition of control which will determine the scope of consolidation. IFRIS 11 adopts the same principles as IFRIS 10 for determining control in joint ventures. The accounting for a joint arrangement will be dependent on the nature of the rights and obligations arising from the arrangement and will change the presentation of the statement of financial position and consequently, performance ratios. IFRIS 12 introduces new disclosure of judgements made by management to determine whether control exists, and to require summarised information about joint arrangements, associates and structured entities. (aa) 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. There have been no significant effects on current, prior or future periods arising from the first time application of the standards in respect of presentation, recognition and measurement in the current year financial statements. (ab) 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 financial report. Amounts in the financial report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. (ac) Parent entity accounts In accordance with Class order CO10/654 the Group will continue to include parent entity financial statements in the financial report. 2. FINANCIAL RISK MANAGEMENT The Group’s overall risk management approach is to identify the risks and implement safeguards which seek to profit from and minimise potential adverse effects on the financial performance of the Group. The Board is responsible for monitoring and managing the financial risks of the Group. The Board monitors these risks through 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 to the Interest Committee and Credit Committee respectively, by the Group Treasurer and Credit Manager, including sensitivity analysis in the case of interest rate risk and aging / exposure reports for credit risk. These Committee reports are 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 financial obligations as they fall due. Liquidity management strategy The Interleasing business and the resultant borrowings exposes the Group to potential mismatches between the refinancing of its assets and liabilities. The Group’s objective is to maintain continuity and flexibility of funding through the use of committed 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 sufficient liquidity through access to committed available funds to meet at least twelve months of average net asset funding requirements. This level is expected to cover any short term financial market constraint for funds. 32 NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 The Group monitors monthly positive operating cash flows and forecasts cash flows for each twelve month period. Significant cash deposits have been maintained which enable the Group to settle obligations as they fall due without the need for short term financing facilities. The Chief Financial Officer and the Group Treasurer monitor the cash position of the Group weekly. Financing arrangements During the year the Group re-negotiated its borrowing arrangements for Interleasing (Australia) Limited to extend the original facility by a further two years to 31 March 2014 on improved terms. The Group’s total borrowing facilities at reporting date was $147m of which $17m was undrawn. The Group also has facilities that can be stepped up by $20m to $167m on 1 July 2011 and a further $30m to $197m on 1 October 2011. 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. Details of each facility are as follows: Facility A: $17m amortising facility, fully drawn; expiry 31 March 2013 with $4m amortisation payments required every six months in June and December. The scheduled payments of $4m in December 2011 and $1m in June 2012 have been pre-paid at reporting date. Facility C: $130m revolving facility that is drawn to $113m at reporting date can be stepped up by $20m to $150m on 1 July 2011 and by $30m to $180m on 1 October 2011. The facility expires on 31 March 2014. Maturities of financial liabilities The table below analyses the Group’s and the parent entity’s financial 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 flows. Balances due within 12 months equal their carrying value as the impact of discounting is not significant. Group – at 30 June 2011: Contractual maturities of financial liabilities Less than 6 mths 6-12 mths 1-2 years 2-5 years Over 5 years Total contractual cash flows Carrying Amount (assets)/liabilities Trade payables Borrowings $’000 45,285 4,644 49,929 $’000 - 7,593 7,593 $’000 - 22,620 22,620 $’000 - 118,905 118,905 $’000 - - - $’000 45,285 153,762 199,047 $’000 45,285 129,488 174,773 Group – at 30 June 2010: Contractual maturities of financial liabilities Less than 6 mths 6-12 mths 1-2 years 2-5 years Over 5 years Total contractual cash flows Carrying Amount (assets)/liabilities Trade payables Borrowings $’000 44,942 9,282 54,224 $’000 - 9,048 9,048 $’000 - 128,405 128,405 $’000 - 15,341 15,341 $’000 - - - $’000 44,942 162,076 207,018 $’000 44,942 141,913 186,855 Parent – at 30 June 2011: Contractual maturities of financial liabilities Less than 6 mths 6-12 mths 1-2 years 2-5 years Over 5 years Total contractual cash flows Carrying Amount (assets)/liabilities Trade payables Financial guarantee contracts Borrowings $’000 30,990 3,966 678 35,634 $’000 - 3,923 3,670 7,593 $’000 - 7,867 14,753 22,620 $’000 - 118,905 - 118,905 $’000 - - - - $’000 30,990 134,661 19,101 184,752 $’000 30,990 - 16,866 47,856 33 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIESNOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 Parent – at 30 June 2010: Contractual maturities of financial liabilities Less than 6 mths 6-12 mths 1-2 years 2-5 years Over 5 years Total contractual cash flows Carrying Amount (assets)/liabilities $’000 17,194 4,157 5,125 26,476 $’000 - 4,089 4,959 9,048 $’000 - 118,913 9,492 128,405 $’000 $’000 - - 15,341 15,341 - - - - $’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 financial loss to the Group if a customer or counter-party to a financial 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 $21,979,000 (2010: $18,914,000) and $15,031,000 (2010: $16,754,000) arising from total deposits with banks. Credit risk for the parent entity arising from total receivables is $342,000 (2010: nil) and $506,000 (2010: $1,405,000) arising from total deposits with banks. The Asset Management business has exposure to credit risk from assets leased to corporate customers, mainly from finance lease receivables of $7,948,000 (2010: $9,226,000) and the amortisation of operating lease vehicles of $210,661,000 (2010: $202,471,000) that have yet to be invoiced as future lease rentals. Such assets are secured against underlying assets. 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 investment-grade ratings 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 periodically 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 official rating, management assesses the credit quality of the customer, taking into account information from independent national credit bureau, its financial position, business segment, past experience and other factors using an application scorecard or other risk-assessment tools. 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 The Group’s strong cash flow from operations and borrowings exposes the Group to movements in interest rates where movements could directly affect the margins from existing contracts and the pricing of new 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 financing to mitigate repricing and basis risk. Mismatch and funding graphs including sensitivity analysis, are reported monthly to the Board along with the minutes of the monthly Interest Committee meetings. Interest rate risk arises where movements in interest rates affect the net margins on existing contracts for assets leased. As the Group carries significant cash and borrowings, movements in interest rates can affect net income to the Group, particularly for the Group Remuneration services segment. Borrowings issued at variable rates expose the Group to repricing interest rate risk. As at the end of the reporting period, the Group had $113,000,000 (2010: $112,727,000) variable rate borrowings under long-term revolving facilities attributable to the asset management business and $17,000,000 (2010: $30,000,000) for other Group requirements. The weighted average interest rate was 5.06% (2010: 5.07%) for the $113,000,000 which is used as an input to asset repricing decisions. An analysis of maturities is provided in note 2(a). 34 NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 To mitigate the cash flow volatility arising from interest rate movements, the Group has entered into interest rate swaps, to exchange, at specified periods, the difference between fixed and variable rate interest amounts calculated on contracted notional principal amounts. The contracts require settlement of net interest receivable or payable on a quarterly basis. These swaps are designated to hedge underlying borrowing obligations and match the interest-repricing profile of the lease portfolio; in order to preserve the contracted net interest margin. At 30 June 2011, all of the Group’s borrowings for the Asset Management business of $113,000,000 were covered by interest rate swaps at a fixed rate of interest of 5.25%. The Group’s interest rate risk also arises from cash at bank and deposits, which are at floating interest rates. At balance date, the Group had the following variable rate financial assets and liabilities outstanding: Cash and deposits Bank loans (Group other) Bank loans (Asset Management segment) Interest rate swaps (notional amounts) Net exposure to cash flow interest rate risk Sensitivity analysis – floating interest rates 30 June 2011 30 June 2010 Weighted average interest rate 4.19% 5.06% 5.06% 5.25% Weighted average interest rate 4.02% 4.94% 4.94% - Balance $’000 15,034 (17,000) (113,000) 123,000 8,034 Balance $’000 16,757 (30,000) (112,727) - (125,970) At 30 June 2011, the Group’s and parent entity’s cash and cash equivalents give rise to credit and interest rate risk. If the Australian interest rate weakened or strengthened by 100 basis points, being the Group’s view of possible fluctuation and all other variables were held constant, the Group’s post-tax profit for the year would have been $56,238 higher or lower (and the parent entity $115,458) higher or lower depending on which way the interest rates moved based on the cash and cash equivalents and borrowings balances at 30 June (2010: Group: $630,000; parent entity: $142,975, 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’s transactions are pre-dominantly denominated Australian dollars which is the functional and presentation currency. (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. This estimate, which is formed at the inception of the lease and any subsequent impairment, exposes the Group to potential loss from resale if 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. The Group continuously reviews the portfolio’s residual values via a Residual Value Committee comprising experienced senior staff with a balance of disciplines and responsibilities, 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 asset risk 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 $210,661,000 (2010: $202,471,000) included a residual value provision of $1,303,000 (2010: $266,000). (e) Fair value measurements The fair value of financial assets and financial 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. 35 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIESNOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 3 REVENUE Revenue from continuing operations Remuneration services1 Asset management services Proceeds from sale of leased assets Dividends received Interest – other persons Total revenue Economic Entity Parent Entity 2011 $’000 2010 $’000 2011 $’000 2010 $’000 111,797 118,699 40,042 - 767 92,139 26,656 12,226 - 1,001 - - - - - - 21,100 33 25,758 523 271,305 132,022 21,133 26,281 1 Included in remuneration services revenue is fee income derived from the holding of trust funds 11,064 7,538 - - 4 EXPENSES (a) Profit before income tax includes the following specific expenses Finance costs Interest – financial institutions 11,278 3,149 1,814 791 Depreciation and amortisation expense Software development Contract rights acquired Assets under operating lease Plant and equipment Residual value impairment loss Rental expense on operating leases Minimum lease payments Superannuation 14(b) 14(b) 12 12 786 964 62,558 2,716 1,037 68,061 659 1,083 15,723 1,576 266 19,307 3,670 1,931 Defined contribution superannuation expense 3,035 2,557 - - - - - - - - - - - - - - - - (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 36 157,500 22,000 25,000 84,290 20,000 17,500 - 75,000 5,000 5,000 - - - - - - NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 5 INCOME TAX EXPENSE/(BENEFIT) (a) Components of tax expense/(benefit) Current tax expense/(benefit) Under-provision from prior year Deferred tax Economic Entity Parent Entity 2011 $’000 2010 $’000 2011 $’000 2010 $’000 19,760 14,215 - - (1,022) (3,988) (1,139) 1,183 173 (198) (1,425) Income tax expense/(benefit) 18,738 10,227 217 (1,623) (b) The prima facie tax payable on profit before income tax is reconciled to the income tax expense/(benefit) as follows: Profit before income tax expense Prima facie tax payable on profit before income tax at 30% (2010: 30%) Add tax effect of: - gain on business acquisition - share-based payments - non-deductible costs - investment allowance - research & development - (over)/under provision from prior year Less tax effect of: - dividends received 62,198 18,659 - 145 17 - (83) - 18,738 55,187 16,556 (6,357) 159 10 (28) (110) (3) 10,227 17,881 5,364 20,347 6,104 - - - - - 1,183 6,547 - - - - - - 6,104 - - (6,330) (7,727) Income tax expense/(benefit) 18,738 10,227 217 (1,623) 6 EARNINGS PER SHARE Reconciliation of earnings to profit Net profit 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 $43,460 $43,460 67,903 3,088 ’000 $44,960 $44,960 67,592 - 70,991 67,592 37 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIESNOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 7 DIVIDENDS Final fully franked ordinary dividend for the year ended 30 June 2010 of $0.14 (2009: $0.105) per share franked at the tax rate of 30% (2010: 30%) Interim fully franked ordinary dividend for the year ended 30 June 2011 of $0.16 (2010: $0.10) per share franked at the tax rate of 30% (2010: 30%) Economic Entity Parent Entity 2011 $’000 2010 $’000 2011 $’000 2010 $’000 9,497 7,097 9,497 7,097 10,891 6,758 10,891 6,758 20,388 13,855 20,388 13,855 Franking credits available for subsequent financial years based on a tax rate of 30% (2010 – 30%) 32,764 22,631 32,990 22,631 The above amounts represent the balance of the franking account at the end of the financial 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 profits 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 $6,421,829 (2010: $4,060,679). 8 CASH AND CASH EQUIVALENTS Cash on hand Bank balances Short term deposits Economic Entity Parent Entity 2011 $’000 2010 $’000 2011 $’000 2010 $’000 3 14,119 912 15,034 3 15,844 910 16,757 - 506 - 506 - 1,405 - 1,405 Cash and cash equivalents are subject to interest rate risk as they earn interest at floating rates. Cash at bank is invested at floating rates. In 2011, the floating interest rates for the economic entity and parent entity were between 1.50% and 5.22% (2010: 1.50% and 5.28%). The short term deposits are also subject to floating rates, which in 2011 were between 4.96% and 5.43% (2010: 3.64% and 4.96%). These deposits have an average maturity of 90 days (2010: 90 days). 38 NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 Economic Entity Parent Entity 2011 $’000 2010 $’000 2011 $’000 2010 $’000 9 TRADE AND OTHER RECEIVABLES Current Trade receivables Finance lease receivables Other receivables 6,444 3,748 7,587 4,346 2,957 5,342 17,779 12,645 - - 342 342 Included in 2010 trade receivables were amounts received in advance of $2,401,000 which have been reclassified as a liability Non Current Finance lease receivables 4,200 6,269 - - - - - - The carrying amount of all current receivables are equal to their fair values as they are short term and fully recoverable. The fair value of Non-current receivable is $4,736,000 (2010: $7,160,000). The fair values are based on cash flows discounted using a lending rate of 8.4% (2010: 8.12%). (a) Ageing and impairment losses The ageing of trade receivables for the economic entity at reporting date was: Economic entity 2011 2010 Total Amount impaired Amount not impaired Total Amount impaired Amount not impaired $’000 6,196 178 30 114 145 6,663 $’000 - (54) (2) (23) (140) (219) $’000 6,196 124 28 91 5 6,444 $’000 4,133 77 256 16 108 4,590 $’000 - (34) (86) (16) (108) (244) $’000 4,133 43 170 - - 4,346 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 The Group’s maximum exposure to credit risk at reporting date by geographic region is predominantly in Australia based on the location of trades and economic activity. Approximately 25% (2010: 26%) of the Group’s trade receivables relate to customers for the supply of vehicle leasing related products. Management have assessed this concentration of risk and are satisfied with the strategies employed in ensuring the exposure to this risk is minimal. Management considers that no other significant 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). 39 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIESNOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 (e) Finance lease receivables Within one year Later than one but not more than five years Less: unearned finance income Present value of minimum lease payments 10 OTHER FINANCIAL ASSETS Non-current Shares in subsidiaries at cost 11 SUBSIDIARIES The consolidated financial 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* Remuneration Services (Qld) Pty Limited * Easilease Pty Limited Interleasing (Australia) Ltd * CARILA Pty Ltd * TVPR Pty Ltd * Maxxia Limited Economic Entity Minimum lease payments Present value of lease payments Minimum lease payments Present value of lease payments 2011 $’000 4,198 4,792 8,990 1,042 7,948 2011 $’000 3,748 4,200 7,948 - 7,948 2010 $’000 4,191 8,772 12,963 3,737 9,226 Economic Entity Parent Entity Note 2011 $’000 2010 $’000 2011 $’000 2010 $’000 2,957 6,269 9,226 - 9,226 2010 $’000 11 - - 100,863 100,381 Country of Incorporation Percentage Owned 2011 Percentage Owned 2010 Australia Australia Australia Australia Australia Australia Australia New Zealand 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% *These subsidiaries have been granted relief from the necessity to prepare financial reports in accordance with Class Order 98/1418 issued by the Australian Securities and Investments Commission. For further information refer to Note 27. 40 NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 Economic Entity Parent Entity 2011 $’000 2010 $’000 2011 $’000 2010 $’000 12 PROPERTY, PLANT AND EQUIPMENT (a) Plant and equipment Plant and equipment At cost Less accumulated depreciation Assets under operating lease At cost Less accumulated depreciation 17,069 (8,290) 8,779 279,855 (69,194) 210,661 13,130 (5,772) 7,358 218,460 (15,989) 202,471 Total plant and equipment 219,440 209,829 (b) Movements in cost and accumulated depreciation - - - - - - - - - - - - - - Consolidated entity Year ended 30 June 2011 Balance at the beginning of year Additions (1) Disposals/ transfers to assets held for sale Impairment loss Depreciation expense Balance at 30 June Year ended 30 June 2010 Balance at the beginning of year Additions(1) Assets classified as held for sale Additions as part of a business combination Impairment loss Depreciation expense Balance at 30 June Plant and equipment Assets under operating lease $’000 $’000 7,358 4,165 (28) - (2,716) 202,471 104,212 (32,427) (1,037) (62,558) Total $’000 209,829 108,377 (32,455) (1,037) (65,274) 8,779 210,661 219,440 2,007 6,948 (91) 70 - (1,576) - 23,701 (8,560) 203,319 (266) (15,723) 2,007 30,649 (8,651) 203,389 (266) (17,299) 7,358 202,471 209,829 (1) Included in additions of $4,165,000 (2010: $6,948,000) were reimbursements by the lessor of $895,000 (2010: $3,400,000) (c) Security The above assets form part of the security supporting the fixed and floating charge pledged to the economic entity’s financier. (d) Property, plant and equipment held for sale Property, plant and equipment no longer held under operating leases are classified as inventory. 41 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIESNOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 13 DEFERRED TAX ASSETS AND LIABILITIES (a) Asset/(Liability) The balance comprises temporary differences attributable to: Amounts recognised in profit 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 Derivatives Deferred tax arising on acquisition Closing balance at 30 June (b) Movement Opening balance at 1 July (Credited/Charged) to Statement of Comprehensive Income Charged to equity Deferred tax arising on acquisition Closing balance at 30 June Economic Entity Parent Entity 2011 $’000 2010 $’000 2011 $’000 2010 $’000 65 1,622 (5,955) 3,612 - (699) 2,851 481 (829) 92 - 1,240 126 1,022 92 - 1,240 46 869 (6,644) 1,929 1,263 (442) 7,862 130 (1,107) - (3,780) 126 (82) 3,988 - (3,780) 126 - - - 17 - - - 54 - - - 71 1,427 (1,356) - - 71 - - - 164 1,263 - - - - - - 1,427 2 1,425 - - 1,427 42 NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 14 INTANGIBLE ASSETS (a) Carrying values Goodwill Cost Impairment loss Net carrying value Software development costs Cost(1) Accumulated amortisation Net carrying value Contract rights Cost(1) Accumulated amortisation Net carrying value Total Intangibles (1) Software includes capitalised internal costs (b) Reconciliation of net book amount 2011 Net book amount Balance beginning of year Additions Amortisation Balance end of year 2010 Net book amount Balance beginning of year Additions Amortisation Balance end of year Economic Entity Parent Entity 2011 $’000 2010 $’000 2011 $’000 2010 $’000 33,328 (36) 33,292 9,001 (5,207) 3,794 7,672 (4,909) 2,763 33,328 (36) 33,292 6,299 (4,413) 1,886 7,672 (3,945) 3,727 39,849 38,905 - - - - - - - - - - Economic Entity Software development costs $’000 Contract rights $’000 Goodwill $’000 33,292 - - 33,292 33,292 - - 33,292 1,886 2,694 (786) 3,794 962 1,583 (659) 1,886 - - - - - - - - - - Total $’000 38,905 2,694 (1,750) 3,727 - (964) 2,763 39,849 4,764 46 (1,083) 39,018 1,629 (1,742) 3,727 38,905 43 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIESNOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 (c) Impairment test for goodwill Goodwill is allocated to the economic entity’s cash-generating units (CGUs) identified arising from the acquisitions of subsidiaries. The carrying amount of goodwill allocated to each CGU: Maxxia Pty Limited Remuneration Services (Qld) Pty Limited Economic Entity 2011 $’000 24,190 9,102 2010 $’000 24,190 9,102 33,292 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 flow projections based on financial budgets approved by management covering a five-year period. (d) Key assumptions used for value-in-use calculations Maxxia Pty Limited Remuneration Services (Qld) Pty Limited Discount rate 2011 % 16.20 16.20 2010 % 17.84 17.84 The budgets use historical average growth rates to project revenue. Costs are determined taking into account historical margins and estimated cost increases. Cash flows beyond the five-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 flows. The equivalent pre-tax discount rates are disclosed above. The discount rates used reflect specific 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 Receivables in advance Derivative financial instruments Amounts payable to wholly owned entities Economic Entity Parent Entity 2011 $’000 2010 $’000 2011 $’000 2010 $’000 13,561 1,211 20,619 6,306 3,282 306 - 10,766 1,129 21,996 8,653 2,398 - - - - 508 - - - - - 817 - - - 30,482 16,377 45,285 44,942 30,990 17,194 Trade and other payables are non-interest bearing. These are short-term liabilities and the carrying value is representative of the fair value. 44 NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 16 CURRENT TAX LIABILITY Income tax 17 PROVISIONS Current Employee benefits Non current Employee benefits Aggregate employee benefits liability 18 BORROWINGS Current Bank loans Non-current Bank loans (a) Security Economic Entity Parent Entity 2011 $’000 2010 $’000 2011 $’000 2010 $’000 6,752 8,431 6,752 8,431 4,023 3,184 448 4,471 458 3,642 - - - - - - 2,949 7,949 2,949 7,949 126,539 133,964 13,917 21,866 The parent entity guarantees a bank loan of a subsidiary of $113,000,000 (2010: $112,727,000). Fixed and floating charges are also provided by the Group in respect to financing facilities. The loans are secured by pledges to the following financial undertakings: (i) for each quarter, consolidated EBIT shall be or exceed 3.0 times consolidated interest; (ii) the ratio of total bank loans to consolidated EBIT for the twelve months ending at the end of each quarter must be less than 4.5:1; and (iii) shareholders’ equity to 30 December 2011 must be at least $55,000,000 and from 31 December 2011 to be at least $65,000,000. (b) Fair value disclosures The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the group for similar financial instruments. The fair value of current borrowings approximates the carrying amount, as the impact of discounting is not significant. (c) Risk exposures Details of the Group’s exposure to risks arising from current and Non-current borrowings are set out in note 2. 45 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIESNOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 Economic Entity Parent Entity 2011 $’000 2010 $’000 2011 $’000 2010 $’000 19 CONTRIBUTED EQUITY (a) Share capital 68,081,810 (2010: 67,677,977) fully paid ordinary shares 25,053 23,066 25,053 23,066 (b) Reconciliation of movement in equity Balance at 1 July 2010 Options exercised during the year Fully paid shares issued on the exercise of employee options Fully paid shares issued on the exercise of employee options Transfer from option reserve Total shares issued Balance at 30 June 2011 Balance at 1 July 2009 Options exercised during the year Fully paid shares issued on the exercise of employee options Transfer from option reserve Total shares issued Balance at 30 June 2010 Number of shares 67,677,977 95,520 308,313 - 403,833 68,081,810 67,583,428 94,549 - 94,549 67,677,977 Issue price $ Ordinary shares $’000 3.80 4.52 3.80 23,066 362 1,393 232 1,987 25,053 22,637 360 69 429 23,066 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 2011, there were 7,186,454 (2010: 8,317,289) unissued ordinary shares for which options were outstanding. No options over ordinary shares were issued during the year. The Company issued the following options over ordinary shares to specified executives in 2010. Date of issue 14 August 2009 14 August 2009 28 May 2010 Number of options Exercise price 133,334 193,939 698,924 $3.40 $4.70 $3.42 Option expiry date 13 August 2012 13 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 benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. 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 financial guarantees) less cash and cash equivalents. Total capital is calculated as equity as shown in the statement of financial position plus net debt. 46 NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 The Group’s gearing ratio at 30 June 2011 was 50% (2010: 58%), calculated as Net debt of $114,454,000 (2010: $125,156,000) divided by total capital of 228,966,000 (2010: $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 not to exceed 65%. During the financial year the Group met these requirements. Total equity of the Group as at 30 June was $114,512,000 (2010: $89,417,000). No banking facility covenants were breached during the financial 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. 20 RESERVES (a) 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 benefits expense but not exercised. (b) Cash flow hedge reserve Revaluation - gross Deferred tax Balance at 30 June 2011 21 CASH FLOW INFORMATION Reconciliation of cash flow from operations with profit from operating activities after income tax Profit for the year Non-cash flows in profit from operating activities Amortisation Impairment loss Depreciation Option expense Net loss on disposal of plant and equipment Gain from business combination Acquisition expenses Purchase of operating lease assets Written down value of assets sold Changes in assets and liabilities, net of the effects of purchase of subsidiaries Decrease/(increase) in trade receivables and other assets Increase/(decrease) in trade payables and accruals Increase/(decrease) in income taxes payable Decrease/(increase) in deferred taxes Increase in provisions Economic Entity Parent Entity 2011 $’000 (306) 92 (214) 2010 $’000 2011 $’000 2010 $’000 - - - - - - - - - 43,460 44,960 17,664 21,970 964 1,037 66,060 482 19 - - (113,181) 33,527 (9,213) 14,331 (1,679) (1,114) 829 1,742 266 17,299 549 30 (20,991) 5,707 (25,261) 10,386 (6,880) 6,859 (1,298) 2,279 495 - - - - - - - - - (414) (11,510) (1,679) 1,356 - - - - - - - 4,430 - - 66 (253) (212) - - Net cash from operating activities 35,522 36,142 5,417 26,001 47 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIESNOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 22 COMMITMENTS (a) Capital expenditure commitments Capital expenditure commitments contracted for: Property, plant and equipment Payable: - Not later than 12 months (b) Operating lease commitments Noncancellable operating leases contracted for but not capitalised in the financial statements: Payable minimum lease payments Not later than 12 months Between 12 months and 5 years Greater than 5 years Economic Entity Parent Entity 2011 $’000 2010 $’000 2011 $’000 2010 $’000 1,537 1,447 1,537 1,447 3,970 14,665 11,634 30,269 3,809 14,773 15,502 34,084 - - - - - - - - - - - - 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 year securing office premises for 5 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. 23 SEGMENT REPORTING Reportable segments (a) Description of Segments The Group has identified 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 identified 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 identified “Group Remuneration Services” and “Asset Management”, 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 financial risks and how they affect the pricing and rates of return. Group 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 financing. The segment also provides ancillary services associated with motor vehicle novated lease products. Asset Management - This segment provides financing and ancillary management services associated with motor vehicles, commercial vehicles and equipment. 48 NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 (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. Segment revenue Segment profit 2011 $’000 111,648 158,890 270,538 2010 $’000 92,139 38,882 131,021 Group Remuneration Services Asset Management Total for segment operations Corporate administration and directors’ fees Integration costs Interest expense Interest income Profit before tax from continuing operations Net gain on business combination before tax Profit before tax for the year (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 2011 $’000 45,268 19,299 64,567 (831) (491) (1,814) 767 62,198 - 62,198 2010 $’000 35,830 4,573 40,403 (710) - (791) 1,001 39,903 15,284 55,187 2011 $’000 270,538 767 271,305 2010 $’000 131,021 1,001 132,022 Segment revenue above represents sales to external customers and excludes inter-segment sales, consistent with the basis by which the financial information is presented to the Chief Decision Maker. The accounting policies of the reportable segments are the same as the Group’s policies. Segment profit 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 profit does not include corporate costs of the parent entity, including listing and company fees, director’s fees and finance costs relating to borrowings not specifically sourced for segment operations or interest revenue not directly attributable to a segment. Included in the revenue for the Group Remuneration Services segment are revenues of $41,319,000 (2010: $33,600,000) from the Group’s largest customer. The Group’s operations and its customers are predominantly located in Australia. 49 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIESNOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 (ii) Segment depreciation and amortisation Group Remuneration Services Asset Management (iii) Segment assets and liabilities 2011 $’000 4,275 63,786 68,061 2010 $’000 3,305 16,002 19,307 The segment information with respect to total assets is measured in a consistent manner with that of the financial statements. These assets are allocated based on the operations of the segment and the physical location of the asset. The parent entity’s borrowings are not considered to be segment liabilities. The reportable segments’ assets and liabilities are reconciled to total assets as follows: Segment assets Group Remuneration Services(3) Asset Management(3) Segment assets Non-segment assets Unallocated assets (1) Consolidated assets per statement of financial position Segment liabilities Group Remuneration Services Asset Management Segment liabilities Non-segment liabilities Unallocated liabilities (2) Consolidated liabilities per statement of financial position All assets and liabilities are located in Australia. 2011 $’000 61,401 222,833 284,234 16,274 300,508 27,079 135,299 162,378 23,618 185,996 2010 $’000 54,368 217,211 271,579 16,883 288,462 25,010 136,309 161,319 37,726 199,045 (1) Unallocated assets comprise cash and cash equivalents of the Group, maintained as part of the centralised treasury and funding function and deferred tax asset. (2) Unallocated liabilities comprise tax liabilities of the Group and parent company loans that are employed by the whole group. (3) Finance lease receivables of $9,226,000 in 2010 were re-classified from Group Remuneration Services to Asset Management. Additions to Non-current assets Group Remuneration Services Asset Management 50 2011 $’000 4,886 106,185 2010 $’000 8,577 23,701 111,071 32,278 NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 24 CONTINGENT LIABILITIES Estimates of the potential financial 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 2011 $’000 2010 $’000 2011 $’000 2010 $’000 623 20 3,953 4,596 573 20 4,118 4,711 - - 380 380 - - 380 380 Transactions between the Company and other entities within the wholly owned group during the years ended 30 June 2011 and 2010 consisted of: (a) loans advanced to the Company; and (b) the payment of dividends to the Company. Aggregate amounts included in the determination of profit 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 benefits Post-employment benefits Long-term employment benefits Termination benefits Share-based payments 2011 $’000 2010 $’000 2011 $’000 2010 $’000 - - - - 21,100 25,578 30,482 16,377 3,294,212 2,917,219 1,926,251 1,657,002 276,549 40,476 196,923 443,096 249,955 20,129 - 430,484 192,814 24,301 196,923 282,702 171,472 241 - 333,056 4,251,256 3,617,787 2,622,991 2,161,771 51 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIESNOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 (c) Equity instrument disclosures relating to key management personnel Shareholding The number of shares in the Company held during the financial year ended 30 June 2011 and 30 June 2010 by each Director and each of the specified executives of the economic entity, including their personally related parties, are set out below: Year ended 30 June 2011 Non-Executive Directors R Pitcher G McMahon J Bennetts R Chessari Executive Directors A Podesta(1) M Kay Other key management personnel M Cansdale (until 31 August 2010) G Kruyt P Lang M Salisbury P McCluskey (commenced 1 September 2010) A Tomas (commenced 1 April 2010) Balance at the start of the year Shares acquired through option exercise Other changes during the year Balance held at balance date 105,100 122,000 4,718,025 6,425,063 11,235,000 4,164 22,609,352 - 370,348 101,001 - 130 - - - - - - - - - 90,000 40,000 - - - - - (150,000) (200,000) 105,100 122,000 4,568,025 6,225,063 - - 11,235,000 4,164 (350,000) 22,259,352 - (341,176) (134,549) - 782 - - 119,172 6,452 - 912 - (1) Mr Podesta resigned as an executive director with effect from 17 August 2010, but continues in the role of non-executive director. 471,479 130,000 (474,943) 126,536 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) 52 105,100 100,000 4,718,025 6,425,063 12,935,000 4,164 24,287,352 - 364,348 406,138 - - - - 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 94,549 (399,686) - - - - - - - 370,348 101,001 - - - 770,486 94,549 (393,686) 471,349 NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 (c) Equity instrument disclosures relating to key management personnel Options The number of options to acquire shares in the Company held during the financial year ended 30 June 2011 and 30 June 2010 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 2011 M Kay M Cansdale (until 31 August 2010) G Kruyt P Lang M Salisbury P McCluskey (commenced 1 September 2010) A Tomas (commenced 1 April 2010) 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) 26 SHARE-BASED PAYMENTS Balance at the start of the year 3,750,000 725,000 715,000 665,000 136,364 - 537,634 6,528,998 3,750,000 725,000 715,000 761,634 136,364 - - 6,087,998 Issued Exercised Lapsed Balance held at balance date - - - - - - - - - - - - - 66,667 537,634 604,301 - - (90,000) (40,000) - - - - 3,750,000 (725,000) - - - - - - 625,000 625,000 136,364 - 537,634 (130,000) (725,000) 5,673,998 - - - - - - (94,549) (2,083) - - - - - - 3,750,000 725,000 715,000 665,002 136,364 66,667 537,634 (94,549) (2,083) 6,595,667 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 or above prevailing market prices when the issue is approved by the Board. Options granted under the plan carry no dividend or voting rights. As at 30 June 2011, the Company had made ten 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 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 vested 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 financial years ended 30 June 2007, 30 June 2008 and 30 June 2009 the targets centred on the achievement of budgeted NPAT; 25% of the options vested 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 financial 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. 53 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIESNOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 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 financial years ending 30 June 2008, 30 June 2009 and 30 June 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 financial years ending 30 June 2008, 30 June 2009 and 30 June 2010. A further 90,000 options of the December 2007 offer vested 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, of which 3,750,000 options were available for issue at reporting date. The entitlement to exercise was subject to continuity of employment to 30 June 2011 and the achievement of predetermined targets, of which 75% were based on earnings per share (“EPS”) targets over three years, including a cumulative EPS target over the three year period in the event that the maximum EPS target was not achieved in any one year. The EPS growth targets were based on the actual FY08 EPS achieved as the base year. The EPS targets were as follows: Performance Hurdles Achievement of FY2009 EPS growth of not less than 15.0% Achievement of FY2009 EPS growth of not less than 17.5% Achievement of FY2009 EPS growth of not less than 20.0% Achievement of FY2010 EPS growth of not less than 15.0% Achievement of FY2010 EPS growth of not less than 17.5% Achievement of FY2010 EPS growth of not less than 20.0% Achievement of FY2011 EPS growth of not less than 15.0% Achievement of FY2011 EPS growth of not less than 17.5% Achievement of FY2011 EPS growth of not less than 20.0% Weighting 12.50% 6.25% 6.25% 12.50% 6.25% 6.25% 12.50% 6.25% 6.25% The balance (25%) was based on the undertaking by the Company of a transformational event resulting in a major diversification for the Company. At reporting date the transformational event is regarded as having been met through the acquisition of Interleasing (Australia) Ltd. The maximum amount from this option issue have vested upon the adoption of this Annual Report. The remaining 625,000 options issued to the former Group CFO in this tranche lapsed during the financial year ended June 2011. A further 2,600,114 options were issued in November 2008 and a further 327,273 options were issued in August 2009. These options all expire four years from the relevant date of issue. 54 NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 The entitlement to exercise these options was 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 was not achieved in any one year. The EPS growth target was based on the actual FY08 EPS achieved as the base year. The performance hurdles were as follows. Performance Hurdles Achievement of FY2009 EPS growth of not less than 15.0% Achievement of FY2009 EPS growth of not less than 17.5% Achievement of FY2009 EPS growth of not less than 20.0% Achievement of FY2010 EPS growth of not less than 15.0% Achievement of FY2010 EPS growth of not less than 17.5% Achievement of FY2010 EPS growth of not less than 20.0% Achievement of FY2011 EPS growth of not less than 15.0% Achievement of FY2011 EPS growth of not less than 17.5% Achievement of FY2011 EPS growth of not less than 20.0% Weighting 25.00% 5.00% 3.34% 25.00% 5.00% 3.33% 25.00% 5.00% 3.33% Other than options in this tranche which have lapsed due to resignation, the maximum amount of options in this tranche has vested upon the adoption of this Annual Report. 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 fixed term employment contract. The entitlement is subject to continuity of employment and the achievement of predetermined EPS targets over three years. Targets will be established at the commencement of the 36 month employment contract. The entire issue vests and is exercisable (subject to the achievement of the conditions) on 1 October 2014. Set out below are summaries of options granted under the plan: Economic and parent entity - 2011 Grant date Expiry date 4 February 2007 3 February 2011 21 December 2007 20 December 2011 1 July 2008 30 June 2012 24 November 2008 23 November 2012 24 November 2008 23 November 2012 14 August 2009 13 August 2012 14 August 2009 13 August 2012 28 May 2010 1 October 2015 Weighted average exercise price Economic and parent entity - 2010 4 February 2007 3 February 2011 21 December 2007 20 December 2011 1 July 2008 30 June 2012 24 November 2008 23 November 2012 24 November 2008 23 November 2012 14 August 2009 13 August 2012 14 August 2009 13 August 2012 28 May 2010 1 October 2015 Exercise price $3.80 $4.52 $4.70 $3.40 $4.70 $3.40 $4.70 $3.42 $3.80 $4.52 $4.70 $3.40 $4.70 $3.40 $4.70 $3.42 Balance at start of the year 95,522 425,001 4,375,000 306,819 2,088,750 133,334 193,939 698,924 8,317,289 $4.50 289,971 463,063 4,375,000 511,364 2,088,750 Granted during the year - - - - - - - - - - - - - - - - - - 133,334 193,939 698,924 Exercised during the year (95,522) (308,313) Forfeited during the year Balance at end of the year Exercisable at end of the year - - - (2,000) 114,688 114,688 - - - - - - (625,000) 3,750,000 - 306,819 (100,000) 1,988,750 - - - 133,334 193,939 698,924 - - - - - - 403,835 (727,000) 7,186,454 114,688 $4.35 $4.70 $4.49 $4.52 (94,549) - - - - - - - (99,900) (38,062) 95,522 425,001 4,375,000 (204,545) 306,819 - - - - 2,088,750 133,334 193,939 698,924 95,522 136,938 - - - - - - Weighted average exercise price $4.57 $3.66 $3.80 $3.64 $4.50 $4.22 7,728,148 1,026,197 (94,549) (342,507) 8,317,289 232,460 55 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIESNOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 Of the forfeited options, 2011: none (2010: 70,851 with a value of $45,404) represented expired options. The weighted average share price at the date of exercise of options during the year ended 30 June 2011 was $4.35 (2010: $3.80). The weighted average remaining contractual life of options outstanding at the end of the year was 1.4 years (2010: 2.4 years). Fair value of options granted No options were granted during the year and the assessed fair value at grant date of options granted in 2010 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. 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 2009 May 2010 $0.60 and $0.33 $3.40 and $4.70 $0.93 $3.42 14 August 2009 28 May 2010 13 August 2012 1 October 2015 $3.23 37% 6.6% 5.0% $3.42 37% 5.0% 5.5% 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. 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 benefits expense were as follows: Options issued under Employee Option Plan 27 DEED OF CROSS GUARANTEE Economic Entity Parent Entity 2011 $’000 482 2010 $’000 549 2011 $’000 - 2010 $’000 - McMillan Shakespeare Limited, Maxxia 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 and Interleasing (Australia) Ltd, CARILA Pty Ltd and TVPR Pty Ltd entered into deeds of cross guarantee in the year ended 30 June 2011. Under the deeds, each company guarantees the debts of the others and is relieved from the requirement to prepare a financial report and directors’ report under Class Order 98/1418 (as amended) issued by the Australian Securities and Investments Commission. The above companies represent a ‘Closed Group’ for the purposes of the Class Order, and as there are no other parties to the Deed of Cross Guarantee that are controlled by McMillan Shakespeare Limited, they also represent the ‘Extended Closed Group’. Set out below is a statement of comprehensive income, statement of financial position and a summary of movements in consolidated retained profits for the year ended 30 June 2011 of the Closed Group consisting of McMillan Shakespeare Limited, Maxxia Pty Ltd and Remuneration Services (Qld) Pty Ltd, Interleasing (Australia) Ltd, CARILA Pty Ltd and TVPR Pty Ltd. 56 NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 (a) Consolidated Statement of Comprehensive Income and summary of movements in consolidated retained profits Statement of Comprehensive Income Revenue and other income Employee and director benefits expenses Depreciation and amortisation expenses and impairment Leasing and vehicle management expenses Consulting cost expenses Marketing expenses Property and corporate expenses Technology and communication expenses Finance costs Other expenses Profit before business combination and income tax Gain on business combination Acquisition costs Profit before income tax Income tax expense Profit attributable to members of the parent entity Other comprehensive income Other comprehensive income/(loss) for the period after tax Total comprehensive income for the period Summary of movements in consolidated retained profits Retained profits at the beginning of the financial year Profits for the year Dividends paid Retained profits at the end of the financial year 2011 $’000 2010 $’000 271,297 (55,336) (68,024) (52,470) (1,541) (2,671) (4,942) (5,594) (11,278) (7,250) 62,191 - - 62,191 (18,735) 43,456 132,016 (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) 44,956 (214) 43,242 - 44,956 64,834 43,456 (20,388) 87,902 33,733 44,956 (13,855) 64,834 57 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIESNOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 2011 $’000 14,833 19,210 1,477 35,520 220,050 39,849 1,248 4,200 265,347 300,867 2010 $’000 16,562 12,308 1,809 30,679 209,829 38,904 135 6,269 255,137 285,816 45,881 42,529 6,752 4,023 2,949 - 8,431 3,184 7,949 116 59,605 62,209 448 126,539 126,987 186,592 114,275 25,053 1,320 87,902 459 133,964 134,423 196,632 89,184 23,066 1,284 64,834 114,275 89,184 (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 Trade and other receivables 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 Provisions Borrowings Total Non-current liabilities TOTAL LIABILITIES NET ASSETS EQUITY Contributed equity Reserves Retained earnings TOTAL EQUITY 58 NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 28 BUSINESS COMBINATION The Gain from business combination in the prior year related to the Group’s 100% acquisition 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 finance 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 outflow Cash paid for shares Cash paid to discharge loan from vendor Total cash consideration Cash acquired with Interleasing Net cash outflow for consideration transferred Reconciliation to the Statement of Cash Flows Net cash outflow transferred to vendor Cash inflow from sale of novated lease book on acquisition Net cash outflow for acquisition 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 Net gain on business combination after tax $’000 1,507 206,883 208,390 (1,507) 206,883 206,883 (40,740) 166,143 208,390 229,381 20,991 (5,707) 15,284 17,055 59 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIESNOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011 DIRECTORS’ DECLARATION The Directors are of the opinion that: 1. the financial statements and notes on pages 21 to 59 are in accordance with the Corporations Act 2001(Cth) including: (a) compliance with Accounting Standards, the Corporations Regulations 2001 (Cth) and other mandatory professional reporting requirements; (b) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2011 and financial performance for the financial year ended on that date; and (c) compliance 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 Officer and Chief Financial Officer 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 30 August 2011 Melbourne, Australia Michael Kay Managing Director 60 INDEPENDENT AUDIT REPORT AS AT 30 JUNE 2011 Grant Thornton Audit Pty Ltd ACN 130 913 594 Level 2 215 Spring Street Melbourne Victoria 3000 GPO Box 4984 Melbourne Victoria 3001 T +61 3 8663 6000 F +61 3 8663 6333 E info.vic@au.gt.com W www.grantthornton.com.au 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 61 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES INDEPENDENT AUDIT REPORT AS AT 30 JUNE 2011 62 INDEPENDENT AUDIT REPORT AS AT 30 JUNE 2011 63 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES AUDITOR’S INDEPENDENCE DECLARATION AS AT 30 JUNE 2011 Grant Thornton Audit Pty Ltd ACN 130 913 594 Level 2 215 Spring Street Melbourne Victoria 3000 GPO Box 4984 Melbourne Victoria 3001 T +61 3 8663 6000 F +61 3 8663 6333 E info.vic@au.gt.com W www.grantthornton.com.au 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 64 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 22 August 2011, the number of shares held by substantial shareholders and their associates is as follows: No. Name Number of Ordinary Shares Percentage of Ordinary Shares1 J P Morgan Nominees Australia Limited National Nominees Limited Chessari Holdings Pty Ltd 1. Meddiscope Pty Ltd 2. 3. 4. 5. HSBC Custody Nominees (Aust) Ltd 6. 7. Asia Pac Technology Pty Ltd Cogent Nominees Pty Limited 10,800,000 8,747,028 7,030,196 6,225,063 5,999,258 4,568,025 2,615,226 15.86 12.85 10.33 9.14 8.81 6.71 3.84 1 2 3 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. NUMBER OF SHARE & OPTION HOLDERS As at 22 August 2011, 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 $4.52 and expiring on 20 December 2011 Options exercisable at $4.70 and expiring on 30 June 2012 Options exercisable at $3.40 and expiring on 23 November 2012 Options exercisable at $4.70 and expiring on 23 November 2012 Options exercisable at $3.40 and expiring on 13 August 2012 Options exercisable at $4.70 and expiring on 13 August 2012 Options exercisable at $3.42 and expiring on 1 October 2015 Options exercisable at $7.31 and expiring on 30 September 2015 VOTING RIGHTS Number of Holders 2,906 4 1 2 4 2 2 2 23 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 22 August 2011, the distribution of share and option holders in the Company was as follows: Distribution of Shares & Options Number of Holders of Ordinary Shares 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,000+ As at 22 August 2011 there were 57 shareholders who held less than a marketable parcel of 64 fully paid ordinary shares in the Company. 1,161 1,217 283 212 33 65 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES TOP 20 SHAREHOLDERS As at 22 August 2011, the details of the top 20 shareholders in the Company are as follows: Name Meddiscope Pty Ltd J P Morgan Nominees Australia Limited National Nominees Limited Chessari Holdings Pty Ltd HSBC Custody Nominees (Aust) Ltd Asia Pac Technology Pty Ltd Cogent Nominees Pty Limited Aust Executor Trustees Nsw LtdRBC Dexia Investor Services Australia Nominees Pty Limited Ann Leslie Ryan Citicorp Nominees Pty Limited Perpetual Trustees Consolidated Limited Cobax Pty Ltd Bond Street Custodians Ltd MF Custodians Ltd Mohl Invest Pty Ltd Citicorp Nominees Pty Limited Bond Street Custodians Limited JP Morgan Nominees Australia Limited Citicorp Nominees Pty Limited 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 Number of Ordinary Shares 10,800,000 8,747,028 7,030,196 6,225,063 5,999,258 4,568,025 2,615,226 1,726,536 1,367,496 1,258,418 1,063,317 930,153 435,000 397,925 350,000 345,455 298,863 250,000 178,939 150,360 54,737,258 Percentage of Ordinary Shares1 15.86 12.85 10.33 9.14 8.81 6.71 3.84 2.54 2.01 1.85 1.56 1.37 0.64 0.58 0.51 0.51 0.44 0.37 0.26 0.22 80.40 Total Remaining Holders Balance 13,344,552 19.60 1 2 3 4 As at 22 August 2011, 68,110,310 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 Number of Securities Number of Holders Options exercisable at $4.52 and expiring on 20 December 2011 Options exercisable at $4.70 and expiring on 30 June 2012 Options exercisable at $3.40 and expiring on 23 November 2012 Options exercisable at $4.70 and expiring on 23 November 2012 Options exercisable at $3.40 and expiring on 13 August 2012 Options exercisable at $4.70 and expiring on 13 August 2012 Options exercisable at $3.42 and expiring on 1 October 2015 Options exercisable at $7.31 and expiring on 30 September 2015 ON-MARKET BUY BACK The Company does not have a current on-market buy-back. 66 86,188 3,750,000 306,819 1,988,750 133,334 193,939 698,924 1,487,273 4 1 2 4 2 2 2 23 This page has been left intentionally blank 67 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES This page has been left intentionally blank 68 McMillan Shakespeare Limited - Australia and New Zealand’s leading provider of workplace benefits. All of the benefits, none of the hassles. Annual Report 2011 McMillan Shakespeare Limited A.B.N. 74 107 233 983 A.F.S.L. No. 299054 Level 19, 360 Elizabeth Street Melbourne, Victoria 3000 www.mmsg.com.au MCMS_MAKG_Rebrand_AnnReport2011.indd 1-2 11/08/11 12:38 PM