Quickstep Holdings Limited ACN 096 268 156 A n n u a l r e p o r t 2 0 0 9 W h y w a i t f o r Annual Report 2008 t h e f u t u r e . Corporate Directory Directors Mr Mark Bernard Jenkins Chairman Mr Philippe Marie Odouard Managing Director Mr Dale Edwin Brosius Executive Director Mr Deryck Fletcher Gow Graham Executive Director Mr Peter Chapman Cook Non-executive Director Company Secretary Mr Peter John Williams Principal Office 136 Cockburn Road North Coogee Western Australia 6163 Telephone: 61 8 9432 3200 Facsimile: 61 8 9432 3222 Internet: www.quickstep.com.au info@quickstep.com.au Email: Registered Office 136 Cockburn Road North Coogee Western Australia 6163 Auditors KPMG Chartered Accountants 235 St George’s Terrace Perth Western Australia 6000 Solicitors Cochrane Lishman London House 216 St George’s Terrace Perth Western Australia 6000 Patent Attorney Watermark 21st Floor, 77 St George’s Terrace Perth Western Australia 6000 Share Registry Security Transfer Registrars Pty Ltd 770 Canning Highway Applecross Western Australia 6153 Stock Exchange ASX Limited Exchange Plaza 2 The Esplanade Disclaimer: Many of the images used Perth Western Australia 6000 throughout this Annual Report are meant as representative examples of the markets being pursued by Quickstep. Unless otherwise indicated, Quickstep has not licensed any technology to the manufacturer of products shown in this Annual Report. ASX Code: QHL Quickstep Holdings Limited would like to thank the following affiliates who supplied imagery in this report: – Lockheed Martin – Boeing Integrated Defence Systems – Thales Group Australia Contents Chairman’s Report Managing Director’s Report Financial Report Directors’ Report Corporate Governance Statement Income Statements Balance Sheets Statement of Changes in Equity Statement of Cash Flows Notes to and Forming Part of the Financial Statements Directors’ Declaration Auditor’s Independence Declaration Independent Auditor’s Report Shareholder Information 2 3 6 7 17 19 20 21 23 24 54 55 56 59 Chairman’s Report Joint Strike Fighter F-35. Image courtesy of Lockheed Martin Dear Shareholder, The 2009 financial year was an important period for Quickstep during which our business model was refined and the foundations laid for the Company to make the transition from a Research & Development organisation to a fully-fledged manufacturing business. As this strategy was deployed, it increasingly fed into our growing development and manufacturing capability in Western Australia – where we embarked upon a $10 million production plan based on the construction of a world-class, aerospace-grade manufacturing hub at North Coogee with capabilities in both conventional autoclave-based and out-of- autoclave production technologies. This facility is now open for business. This investment has come at an opportune time for Quickstep. We now have the second largest aerospace grade composites manufacturing capability in Australia with full quality accreditation, at a time when a number of very exciting and globally significant contract opportunities in the Defence industry are coming to fruition. We have worked hard during the year to establish and develop contacts with major suppliers in the aerospace and defence sectors. As a result, several exciting opportunities are currently being assessed and we are actively bidding on projects, some of which may come to fruition within the next six months. We also continued to progress the other pillars of our business model, including the potential to license our out-of-autoclave composites production technology, the Quickstep Process, to Original Equipment Manufacturers (OEM’s), through the establishment of strategic alliances and teaming/partnering arrangements. Several important achievements occurred in this area during the year, including the signing of an MOA with CTRM (Malaysia) to approve the Quickstep Process for use on Airbus aircraft. On the corporate front, we secured $12.7 million in new funding for the Company during the year. This included a convertible loan from a major diversified conglomerate based in the United Arab Emirates, InvestOne, and a convertible note to some existing and new investors here in Australia. In conclusion, Quickstep enters the new financial year with a clear business focus, an outstanding team of highly skilled individuals, and a unique competitive position underpinned by our world-class production facility at North Coogee. I would like to take this opportunity to acknowledge the hard work and dedication of our team, which continues to work tirelessly towards realising our vision. I am looking forward to 2010 being a pivotal year for the Company. Yours Sincerely, Mark Jenkins Chairman 2 Quickstep Holdings Limited Managing Director’s Report Dear Shareholder, In the last year’s Annual Report, we outlined our progress towards becoming a full-scale advanced composites component manufacturer. I am pleased to report that we have completed these achievements during the 2009 financial year with the commissioning of the North Coogee facility and the accreditation to AS9100/ISO9001:2000 quality standards. With these achievements behind us we are now focused on obtaining manufacturing contracts and Quickstep Process technology transfers within the aerospace, defence and automotive industries. The Company’s business model has been refined to achieve these aims: ➔ Technology transfer through the provision of the proprietary Quickstep Process and production equipment with ongoing licence and support agreements or via joint venture arrangements; ➔ Manufacture of composite components, out of its Australian facility for aerospace, defence and automotive Original Equipment Manufacturers (OEM’s) as Build to Print or Design and Build to Specification contracts; and ➔ Conducting paid or self-funded Research & Development on new composite structures and material focusing on the aerospace, defence and automotive sectors. To allow for worldwide development, an integrated approach to the market across the company has been designed and implemented. Composite Production – Facility Production Ready ➔ Quickstep’s operating subsidiary, Quickstep Technologies Pty Ltd, achieved official accreditation to the international AS9100/ISO9001:2000 aerospace quality standard, opening the way to supply aerospace components to major global companies. ➔ A state-of-the-art composites manufacturing facility was commissioned at North Coogee, Western Australia, becoming the second largest aerospace-grade composites production facility in Australia. ➔ A world-class team of experts in the production of aircraft composite parts has been assembled at North Coogee, representing one of the most capable teams in the different disciplines required for composites production in Australia. ➔ A number of smaller contracts were successfully delivered during the year including the successful production of carbon fibre composite “pods” for a geospatial company. ➔ Quickstep’s facility capabilities were evaluated by a number of OEM’s, with a view to the Company bidding on long-run strategic defence manufacturing contracts. “Quicksteps Technologies - Now accredited to AS9100 / ISO9001:2000 Aerospace Quality Standard” Artist impression Boing 787 Dreamliner which will have substantial use of composites in airframe Annual Report 2009 3 Managing Director’s Report Quickstep Process – Commercialisation Underway ➔ Quickstep continued to industrialise its fluid-based composites production technology, with major progress achieved to reduce its cost, improve its reliability and simplify its operation. ➔ A number of major OEM’s and Tier 1 composite suppliers have either continued to develop the technology in cooperation with Quickstep or entered into agreements to develop and use the technology as it matures. ➔ The Company’s cooperation with Eurocopter in Germany progressed during the year, leading to parts being developed and qualified to be produced using the Quickstep Process, with some parts now ready to be licensed to suppliers of Eurocopter. ➔ Quickstep was awarded a Small Business Innovation Research (SBIR) contract by the US Department of Defence to support the Dayton-based composites fabricator, Vector Composites, to develop an Out-of-Autoclave processing cycle for high temperature resins used on the F-35 Joint Strike Fighter (JSF) Aircraft. ➔ The abovementioned Phase I SBIR effort has been successful and the Vector/ Quickstep team was invited by the US Department of Defence to submit a Phase II proposal to develop a design database and produce certain components to approved JSF specifications. The US$4 million Phase II contract, if awarded and successfully completed, could lead to full approval of the Quickstep Process for production of these and eventually other components. ➔ Quickstep signed a MoU with Composites Technology Research Malaysia (“CTRM”), the fifth largest composites supplier to Airbus, to evaluate the Quickstep Process to enhance its composite manufacturing operations based in Malaka, Malaysia. ➔ A contract was signed with BAE Systems to develop and later produce satellite reflectors for the Australian Army satellite terminal. Quickstep Process – Paid Development Now the Standard ➔ A $2.6 million grant was awarded under the Australian Federal Government’s $75 million AusIndustry Climate Ready Program to develop Quickstep’s Resin Spray Transfer (RST) technology for production of composite laminates. This technology would allow the Company to produce high quality finish, high strength parts in a robotic environment at comparable costs to steel for half the weight, paving the way for a quantum technological leap in Aerospace and Automotive industries. It would lead to a considerable reduction in Co2 emissions that are proportional to weight of the vehicle. ➔ Paid development continues out of both Quickstep facilities in Germany and the USA with companies including EADS, Eurocopter, Vector Composites, Lockheed Martin, Boeing and Sikorsky. Copy copy here quote copy “A number of major OEM’s here quote copy here and Tier 1 composite suppliers have either continued to develop the technology in cooperation with Quickstep or entered into agreements to develop and use the technology as it matures.” 4 Quickstep Holdings Limited Managing Director’s Report Marketing & Alliances ➔ Now that Quickstep has attained AS9100 accreditation it is in active discussions with both defence and commercial aircraft OEM’s and Tier One suppliers to pursue both short and long term manufacturing contracts out of its North Coogee facility. Some of those are very advanced and Quickstep is hopeful of securing the first of these contracts in the last quarter of 2009 or early 2010. ➔ A Teaming Agreement was signed with EDAG Australia Pty Ltd to jointly identify and target integrated design and manufacturing contracts, primarily in the aerospace and defence industry. ➔ Quickstep signed an Agency Agreement with Al Sahel Trading Agencies LLC, a subsidiary of Al Farida Investments Company, a diversified conglomerate based in Abu Dhabi, United Arab Emirates, to pursue growth opportunities for Quickstep in the rapidly growing aerospace and defence industries in the Middle East. Corporate ➔ Quickstep secured $12.7 million in funding from two initiatives, one being a convertible note placement for $2.7 million with some existing and sophisticated shareholders in Australia, the other being a convertible loan facility for $10 million with InvestOne of the United Arab Emirates. ➔ This financing activity secures the future of Quickstep until it can reach an operation positive situation or secure major contracts. Conclusion Quickstep has successfully consolidated its position in its key target markets during the 2009 financial year, with all of the key ingredients now in place in terms of worldwide presence, financing, staff, equipment, procedures and contacts with potential clients to secure several very significant contracts. The Company has strengthened its technical advance by gaining further acceptance of its Quickstep Process technology globally and obtaining finance for further ground-breaking technologies that may significantly change the landscape for passenger craft, both on air and land, for the future benefit of Quickstep shareholders. In conclusion, I am confident that the Company has a very bright future with 2010 shaping up as a pivotal year for Quickstep on several fronts. I would like to take this opportunity to thank our shareholders for their support during the past year, and I look forward to sharing in our future success with you as we continue our rapid expansion in the composite aerospace market worldwide. “Key ingredients now in place: worldwide presence, financing, staff, equipment, procedures and contacts with potential clients to secure several very significant contracts.” Copy copy here quote copy here quote copy here 1 of 3 Bondtech Autoclaves at Quickstep’s Facilities Breton 5 Axis milling machine - 0ne of a handful of large high accuracy machines in Australia Yours Sincerely, Philippe Odouard Managing Director Annual Report 2009 5 Financial Report For the year ended 30th June 2009 6 Quickstep Holdings Limited D I R E C T O R S ’ R E P O R T The Directors present their report together with the financial report of Quickstep Holdings Limited (the “Company”) and of the Group, being the Company and its subsidiaries, for the financial year ended 30 June 2009 and the auditor’s report thereon. 1. Directors The Directors of the Company at any time during or since the end of the financial year are: Mr Mark Bernard Jenkins, B. Comm., Grad. Dip. Bus. Independent Chairman - appointed as director on 14 July 2005; appointed as Chairman 13 March 2007 Mr Jenkins, aged 45, has over 20 years consulting, operational/financial management and business development experience in professional services firms (chartered accountants), investment banking, government agencies and public companies. Initially qualifying as a chartered accountant in Australia, his career includes two extended periods in London and has involved successful and extensive investment, commercial, financial and government dealings in Australia, Asia, the United States and Europe. Mr Jenkins has also been involved as an advisor and investor in early stage technology companies, taking them through the initial funding and commercialisation stages. Mr Jenkins holds a Bachelor Degree in Commerce from the University of WA and a Graduate Diploma in Business from Curtin University. He has also been involved in numerous professional development programs, including Cranfield University in England. Mr Philippe Marie Odouard Managing Director - appointed 23 October 2009 Mr Odouard, aged 54, has significant management experience within the global aerospace and defence sectors – both of which are primary target markets for Quickstep’s technology. Before joining Quickstep and since 2005, Mr Odouard has held a dual role with Thiess Pty Ltd – one of Australia’s largest infrastructure and services contractors – as Senior Manager of Strategy and Business development: Defence, and Project Director for the A$3 billion Melbourne desalination plant. Prior to joining Thiess, Mr Odouard held a number of senior manager positions within Thomson-CSF (now Thales group) - a world leader in platforms and systems for the aerospace, defence and security markets. During his time with Thomson, which included roles in both Australia and Europe, Mr Odouard negotiated and managed long term contracts with major global aerospace and defence groups including major developments and technology transfers. Significantly, Mr Odouard managed the Minehunter project, which at the time was the largest user of composites in Australia. In addition, Mr Odouard negotiated and managed significant contracts with Eurocopter when they sold the all-composite Tiger helicopter to the Australian Defence forces. In 1977 Mr Odouard graduated with a Masters of Science in Business from École des Hautes Études Commerciales de Paris. Mr Dale Edwin Brosius, B. Sc. (Chem. Eng.), MBA Executive Director and Chief Operating Officer for the Americas and Europe - appointed 13 August 2004 Mr Brosius, aged 51, as the Chief Operating Officer is responsible for the commercial development of the Company’s technology in Europe and the Americas. He brings extensive practical experience in the composites field, having led composites-oriented businesses in the US and Europe, with a strong emphasis on materials. He is based near Detroit, Michigan. Mr Brosius spent eight years with Dow Chemical, in manufacturing and commercial development roles, with a focus on automotive composites. He then spent twelve years in various commercial and general management roles at Fiberite and Cytec Fiberite, gaining considerable exposure to advanced composites processes and applications in aerospace, sporting goods, and industrial markets. In 1999 Mr Brosius created a successful consulting business serving manufacturers of composite materials, equipment and parts manufacturers worldwide. During this time he obtained a thorough understanding of the global market and developed numerous relationships at the original equipment manufacturer (OEM) and supplier levels. Mr Brosius is active in leadership levels in key composites professional associations and is the author of over forty published articles in the field. Annual Report 2009 7 4 D I R E C T O R S ’ R E P O R T ( c o n t ’ d ) Mr Deryck Fletcher Gow Graham, Dip. Co. Dir. Executive Director (not classified as Independent) - appointed 16 June 2001 Mr Graham, aged 48, has over 20 years’ experience in senior management, administration and marketing positions. His experience includes five years as Managing Director of an ASX listed company that designed, developed, manufactured and distributed hardware and software products for the broadcasting and entertainment industries. He has been a director of Eagle Aircraft Australia Limited, where he held the role of Marketing Director. Since 1986, Mr Graham has been involved in the composites and aerospace industries. Mr Graham is also a founder and adviser to emerging technology companies in the mining, civil engineering and software development industries. Mr Graham holds the executive position of Business Development Manager - Australia Mr Peter Chapman Cook, M. Pharm., FRMIT, PhC., MPS, MRACI, C.Chem., MAICD. Independent Non-Executive Director - appointed 14 July 2005 Mr Cook, aged 62, has extensive business experience, both within Australia and overseas. Prior to his current appointments as Managing Director and Chief Executive Officer of Biota Holdings Limited, Mr Cook has held the positions of Managing Director and Chief Executive Officer of Orbital Corporation Limited, Chief Executive Officer of Faulding Hospital Pharmaceuticals, President of Ansell’s Protective Products Division, Deputy Managing Director of Invetech and Director of Research and Development for Nicholas Kiwi. He has had extensive experience in the commercialisation of innovation, both in new and established markets. He also has extensive experience in mergers and acquisitions, particularly with technology-based companies and has a strong manufacturing background. Mr Cook has over ten years of international commercial experience in Europe, USA and Asia, where he has both lived and worked. He holds a Masters Degree in Pharmacy and post graduate qualifications in Management from RMIT University. Mr Nicholas (Nick) Michael Noble, B.Sc. (Mech. Eng.) C.Eng, M.I. Mech. E. Former Managing Director - appointed 20 March 2001 and retired 30 September 2008 Mr Noble, aged 50, was responsible for the management of the Quickstep development program, interfacing with market participants and strategic planning to enable market entry of the Technology into Europe, North America and Asia Pacific. Mr Noble was the Chief Executive Officer and then Managing Director since the Company was founded in 2001 and had an intimate knowledge of not only the Quickstep Process and its abilities, but also the markets and the drivers for those markets. Mr Noble has a mechanical engineering degree and is a Chartered Engineer. In recent years he was the Chief Executive Officer of a hydraulics and plant equipment supply and contract company. He has also spent five years in the composites field, in the aerospace industry working for Westland Helicopters (now Finmeccanica). He possesses a useful combination of mechanical and composites engineering skills, and senior management and marketing experience. 2. Company Secretary Mr Peter John Williams, B.Bus., FCPA, MAICD. Mr Williams, aged 52, was appointed to the position of company secretary in January 2009. Mr Williams is a senior finance professional with over 30 years commercial experience gained both domestically and internationally. He joined Quickstep after two years with ASX listed biodiesel producer, Mission NewEnergy Limited where he was Finance Director and Company Secretary. Mr Kimberley Arnold Hogg, B.Com. Former Company Secretary - appointed October 2005 and resigned December 2008 Mr Hogg, aged 50, has worked in the private sector for the past 17 years as a principal of a public practice providing specialist services to clients seeking to raise capital and list on the ASX. Mr Hogg completed a Bachelor of Commerce degree in 1984 at the University of Western Australia. He is currently the company secretary of several ASX-listed entities. 8 Quickstep Holdings Limited 5 D I R E C T O R S ’ R E P O R T ( c o n t ’ d ) 3. Directors’ Meetings The number of Directors’ meetings (including meetings of committees of Directors) and the number of meetings attended by each of the Directors of the Company during the financial year are: Director Mr M B Jenkins Mr P M Odouard 1 Mr D E Brosius Mr D F G Graham Mr P C Cook Mr N M Noble 2 Board Meetings B A Audit Committee Meetings B A Remuneration Committee Meetings B A Nomination Committee Meetings B A 9 7 9 9 9 2 9 7 8 9 9 2 3 - - - 3 - 3 - - - 3 - 2 1 2 2 2 1 2 1 2 2 2 1 1 1 1 1 1 - 1 1 1 1 1 - A - number of meetings held during the time the Director held office during the year B - number of meetings attended 1 Mr Odouard was appointed 23 October 2008. 2 Mr Noble resigned 30 September 2008. 4. Principal Activities During the financial year, the principal activities of the Group consisted of: • working closely with potential customers through the international network of Quickstep ‘Centres of Excellence’ to qualify the Quickstep Process as a viable and effective alternative to traditional autoclave- based composite manufacturing techniques; • • • • development work and securing initial small-scale prototype contracts to accelerate entry to the global aerospace sector; further expansion of the Company’s existing portfolio of international research and development alliances and partnerships with major aerospace, industrial and automotive groups and their Tier One suppliers; coordination of a cohesive strategic plan for the Company’s global Research & Development initiatives; and expansion of the global management team to ensure that the Company is positioned to take full advantage of new business opportunities as they arise. 5. Results The Group incurred a loss after tax of $8,620,973 for the year ended 30 June 2009 (2008: loss of $6,305,069). 6. Operating Review A review of operations and activities for the financial year is set out in the Managing Director’s Review. 7. Dividends No dividend has been declared or paid by the Company to the date of this report. 8. Environmental Regulation The Company’s activities to date have not been subject to any particular and significant environmental regulation under Laws of either the Commonwealth or a State or Territory. The Directors are not aware of any material breach of environmental regulations as they relate to the Company. Annual Report 2009 9 6 D I R E C T O R S ’ R E P O R T ( c o n t ’ d ) 9. Events Subsequent to Reporting Date On 15 July 2009 the Company received the first $2 million tranche of funding from InvestOne Financial Advisory Est. This funding related to the $10 million Convertible Loan facility that was established with InvestOne Financial Advisory Est. (“InvestOne”), a subsidiary of Al Farida Investments Company LLC, a diversified conglomerate headquartered in Abu Dhabi. On 23 September 2009, at a General Meeting of shareholders, the shareholders approved the Convertible Loan Agreement that the Company had entered into with InvestOne. On 7 August 2009 the Company issued 720,808 fully paid ordinary shares as payment to advisors and contractors for services rendered. Other than the matters referred to above or in the financial statements, there have been no events subsequent to balance date which would have a material effect on the Group’s financial statements as at 30 June 2009. 10. Likely Developments The Group’s key areas of focus for the 2009/2010 financial year will include: • securing contracts in the aerospace and defence industries using both traditional autoclave and new technology Quickstep processing; • maintaining a strategic global marketing campaign to potential customers through our international showcase sites and pilot production facilities; • conducting paid or self-funded commercially focussed research & development on new composite structures and materials for the aerospace and defence sectors; and • working to secure early cash-flow generating contracts. 11. Directors’ Interests The relevant interest of each Director in the shares and options issued by the Company at the date of this report is as follows: Director Shares Options Mr M B Jenkins Mr P M Odouard Mr D E Brosius Mr D F G Graham (1) Mr P C Cook (2) - - 800,000 38,651,529 344,300 - - - - - 1. The registered holder of the shares is Decta Holdings Pty Ltd. Decta Holdings Pty Ltd is trustee for a discretionary trust. Mr Graham is a potential beneficiary of that trust. 2. The registered holder of the shares is Sandra Cook, Mr Cook’s wife and Lloyds Wharf Super Fund of which Mr Cook is a trustee. 10 Quickstep Holdings Limited 7 D I R E C T O R S ’ R E P O R T ( c o n t ’ d ) 12. Share Options No options were issued during or since the end of the financial year to Directors and executives as part of their remuneration. Unissued shares under option At the date of this report, unissued ordinary shares of the Company under option are: Expiry Date 15 April 2010 16 June 2010 Exercise Price $0.250 $0.260 Number of Options 6,391,489 440,000 These options do not entitle the holders to participate in any share issue of the Company or any other body corporate. Shares issued on exercise of options During or since the end of the financial year, the Company has not issued any ordinary shares as a result of the exercise of options. 13. Indemnification and Insurance of Officers Indemnification The Company has indemnified the Directors (as named above) and all executive officers of the Company and of any related body corporate against any liability incurred as a Director, secretary or executive officer to the maximum extent permitted by the Corporations Act 2001. The Company has not otherwise, during or since the financial year, indemnified or agreed to indemnify an officer of the Company or of any related body corporate against a liability incurred as an officer. Insurance Premiums The Company has paid a premium in respect of a directors and officers liability insurance policy, insuring the directors of the Company, the company secretary and all executive officers of the Company against a liability incurred as such a director, secretary or executive officer to the extent permitted by the Corporations Act 2001. The directors have not included details of the nature of the liabilities covered or the amount of the premium paid in respect of the directors’ and officers’ liability and legal expenses’ insurance contracts, as such disclosure is prohibited under the terms of the contract. 14. Non-audit Services During the financial year, KPMG, the Company’s auditor, has not performed any additional services to their statutory duties. 15. Lead auditor’s Independence Declaration The lead auditor’s independence declaration as required under Section 307C of the Corporations Act 2001, which forms part of this Directors’ Report for the financial year ended 30 June 2009, is set out on page 52. 16. Remuneration Report - Audited The remuneration report is set out under the following main headings: A: Principles used to determine the nature and amount of remuneration B: Service agreements C: Details of remuneration D: Share-based compensation E: Other benefits Remuneration is referred to as compensation throughout this report. Annual Report 2009 11 8 D I R E C T O R S ’ R E P O R T ( c o n t ’ d ) 16. Remuneration Report – Audited (cont’d) A. Principles of compensation Key management personnel have authority and responsibility for planning, directing and controlling the activities of the Company and the Group. Key management personnel comprise the directors of the Company and executives for the Company and the Group. The Board has established a remuneration committee which assists the Board in formulating policies on and in determining: the remuneration packages of executive directors, non-executive directors and senior executives; and cash bonuses and equity based incentive plans, including appropriate performance hurdles and total payments proposed. If necessary, the committee obtains independent advice on the appropriateness of remuneration packages given trends in comparable companies and in accordance with the objectives of the Group. The Corporate Governance Statement provides further information on the role of this committee. Compensation levels for key management personnel of the Group are competitively set to attract and retain appropriately qualified and experienced directors and executives. The remuneration structures are designed to attract suitably qualified candidates, reward the achievement of strategic objectives, and achieve the broader outcome of creation of value for shareholders. Compensation packages include a mix of fixed compensation, short term incentives and equity-based compensation as well as employer contributions to superannuation funds. Shares and options may only be issued to directors subject to approval by shareholders in general meeting. The Group does not have any scheme relating to retirement benefits for its key management personnel. Fixed compensation Fixed compensation consists of base compensation (which is calculated on a total cost basis), as well as employer contributions to superannuation funds. Compensation levels are reviewed annually through a process that considers individual and overall performance of the Group. Compensation is also reviewed in the event of promotion. Short-term incentives Certain key management personnel receive short-term incentives (“STI”) in the form of cash. Each year, the remuneration committee considers the appropriate targets and key performance indicators (“KPIs”). The committee is also responsible for assessing whether the KPIs are met. The remuneration committee recommends the cash incentive to be paid to the individuals for approval by the Board. Other than as disclosed in this report, there have been no performance-linked payments made by the Group. Equity-based compensation (long-term incentives) Equity-based long-term incentives may be provided to key management personnel via the Quickstep Holdings Limited Employee Share Option Scheme (“Scheme”) (refer to note 30 to the financial statements). The incentives are provided as options over ordinary shares of the Company and are provided to key management personnel based on their position within the Group. Such incentives are considered to promote continuity of employment. No grants of options were made under the Scheme during the current or prior financial year. Non-executive directors’ fees Total remuneration for all non-executive directors, last voted upon by shareholders at the 2005 Annual General Meeting, is not to exceed $300,000 per annum. Fees are set with reference to fees paid to non-executive directors of comparable companies. Currently, the Company’s Chairman, Mr Jenkins, is entitled to receive $120,000 per annum and the other non-executive director, Mr Cook, receives $59,500 per annum. Non-executive directors do not receive performance related compensation. Directors’ fees cover all main board activities and membership of committees. 12 Quickstep Holdings Limited 9 D I R E C T O R S ’ R E P O R T ( c o n t ’ d ) 16. Remuneration Report (cont’d) B. Service agreements The Group has entered into service agreements with 5 key management personnel. The employment contracts outline the components of compensation paid to the key management personnel and are reviewed on an annual basis. Mr Philippe Odouard, Managing Director, entered into an executive services agreement with the Group effective from 13 October 2008. The agreement specified the duties and obligations to be fulfilled by Mr Odouard in his role as Managing Director and Chief Executive Officer of the Group. The remuneration paid to Mr Odouard under the agreement for the financial year ended 30 June 2009 was $217,250 (2008 - $Nil), with the ability to qualify for cash and share-based bonuses to be determined annually by the remuneration committee, subject to the Group achieving planned targets. A cash bonus of $30,000 has been accrued in respect of the year ended 30 June 2009 (2008 - $Nil). Mr Odouard has the ability to earn a loyalty bonus based on years of service for the Company which will be paid with shares in the Company. His total entitlement is 882,353 shares, with one third vesting on 22 November 2010 and two thirds vesting on 26 November 2011. There is no entitlement to termination payment in the event of removal for misconduct. Mr Nick Noble, former Managing Director, entered into an executive services agreement with the Group effective from 1 September 2005. The agreement specified the duties and obligations to be fulfilled by Mr Noble in his role as Managing Director and Chief Executive Officer of the Group. The remuneration paid to Mr Noble under the agreement for the financial year ended 30 June 2009 was $90,000. Mr Noble was not entitled to any share-based bonus for the 2009 year. There was no entitlement to termination payment. Mr Dale Brosius, Executive Director and Chief Operating Officer for the Americas and Europe, has entered into an executive services agreement with the Group effective from 1 September 2005. The agreement specifies the duties and obligations to be fulfilled by Mr Brosius in his role as Chief Operating Officer for the Americas and Europe. The remuneration payable to Mr Brosius under the agreement is US$188,100 per annum, with the ability to qualify for a cash bonus subject to the Group achieving planned targets. A cash bonus of A$14,000 has been accrued in respect of the year ended 30 June 2009 (2008: A$72,000). In previous years, Mr Brosius received 400,000 fully paid ordinary shares in the Company as a sign-on retention bonus having completed a year of service from the anniversary date of the Company’s listing on the ASX. In addition, he also received a further 400,000 fully paid shares, having completed two years of service from the date of the executive services agreement. The agreement continues until terminated in accordance with the terms contained therein. There is no entitlement to termination payment in the event of removal for misconduct. With respect to the cash bonus elements of these service contracts, the planned targets include the achievement of specified Group objectives which include: • • • • achieving contracts to offer process and prototype development services to interested Original Equipment Manufacturers (“OEM”) and Tier One suppliers, seen as a precursor to OEM or Tier One adoption of Quickstep as a production process; identifying low technical risk products for initial contract manufacture by Quickstep; the supply, where appropriate, of Quickstep machinery for product and process development applications; and entering into licence agreements, joint ventures and royalty arrangements with manufacturers. Mr Andrew (Drew) Myers, Head of Engineering and Chief Operating Officer, Australia, has entered into a contract of employment which specifies the duties and responsibilities to be fulfilled in his role. The remuneration payable to Mr Myers under the agreement is $180,324 per annum, with the ability to earn performance-based bonuses to be determined annually by senior management. The agreement continues until terminated in accordance with the terms contained therein. A cash bonus of $13,000 has been accrued in respect of the year ended 30 June 2009 (2008 - $39,000). Mr Myers is entitled to receive 800,000 shares, which vested on formally signing his contract of employment which took place on 9 December 2008. There is no entitlement to a termination payment in the event of removal for misconduct. Dr Jens Schlimbach, Joint CEO, Quickstep GmbH, provides services to the Group in accordance with an agreement effective 1 January 2009. The monthly charge for Dr Schlimbach is approximately $14,862, and the present agreement is effective until 31 December 2009. A cash bonus of $14,000 has been accrued in respect of the year ended 30 June 2009 (2008: $Nil). Annual Report 2009 13 10 D I R E C T O R S ’ R E P O R T ( c o n t ’ d ) 16. Remuneration Report – Audited (cont’d) B. Service agreements (Cont’d) Mr Peter Williams, Chief Financial Officer and Company Secretary has entered into a contract of employment with effect from 8 September 2008 which specifies the duties and responsibilities to be fulfilled in his role. The remuneration paid to Mr Williams under the agreement for the financial year ended 30 June 2009 was $163,334 (2008 - $Nil), with the ability to earn performance-based bonuses to be determined annually by senior management. The agreement continues until terminated in accordance with the terms contained therein. A cash bonus of $14,000 has been accrued in respect of the year ended 30 June 2009. Mr Williams has the ability to earn a loyalty bonus based on years of service for the Company which will be paid with shares in the Company. His total entitlement is 411,765 shares, with one third vesting on 22 November 2010 and two thirds vesting on 26 November 2011. There is no entitlement to a termination payment in the event of removal for misconduct. The overall level of key management personnel’s compensation takes into account the progress of the Group towards the attainment of its business plan, including its progress towards commercialised operations. C. Details of remuneration Details of the nature and amount of each major element of the remuneration of each director of the Company and each of the named executives and relevant Group executives and other key management personnel of the Company and Group for the year are: Notes in relation to the table of remuneration: During the year Mr. Jenkins was paid amounts relating to prior periods that he was entitled to but had not claimed. 14 Quickstep Holdings Limited 11 D I R E C T O R S ’ R E P O R T ( c o n t ’ d ) 16. Remuneration Report – Audited (cont’d) (1) In accordance with the terms of Mr Odouard’s employment contract, he is entitled to receive 882,353 fully paid shares with one third vesting on 22 November 2010 and two thirds vesting on 26 November 2011. A fair value of $38,732 has been recorded as an expense in the financial statements for the portion attributable to the current financial year. A fair value of 13 cents per share was used for the purposes of this valuation, being the ASX quoted price of the shares at their grant date. (2) In accordance with the terms of Mr Brosius’ service agreement, he received 400,000 fully paid ordinary shares in the Company as a sign-on retention bonus having completed a year of service from the anniversary date of the Company’s listing on the ASX. In addition, he previously also received a further 400,000 fully paid shares, having completed two years of service from the date of the service agreement. A fair value of $9,000 was recorded as an expense in the financial statements attributable to the 2008 financial year. A value of 21 cents per share was used for the purposes of this valuation, being the estimated fair value of the shares at the date of the service agreement. These shares fully vested during the 2008 year. (3) In accordance with the terms of Mr Noble’s service agreement, he received in previous financial years 400,000 fully paid shares, having completed two years of service from 1 September 2005. A fair value of $7,000 was recorded as an expense in the financial statements attributable to the 2008 financial year. A value of 21 cents per share was used for the purposes of this valuation, being the estimated fair value of the shares at the date of the service agreement. These shares fully vested during the 2008 year. (4) In accordance with the terms of Mr Myers’ employment contract, he was entitled to receive 800,000 fully paid ordinary shares in the Company on the date he formally signed his employment contract. A fair value of $128,000 has been recorded as an expense in the financial statements attributable to the current financial year. A fair value of 16 cents per share was used for the purposes of this valuation, being the ASX quoted price of the shares at their grant date (the date of signing the employment contract). These shares fully vested during the year. (5) In accordance with the terms of Mr Williams’ employment contract, he is entitled to receive 411,765 fully paid shares with one third vesting following the November 2010 Annual General Meeting of shareholders and two thirds vesting following the November 2011 Annual General Meeting of shareholders. A fair value of $34,590 has been recorded as an expense in the financial statements for the portion attributable to the current financial year. A fair value of 29 cents per share was used for the purposes of this valuation, being the ASX quoted price of the shares at their grant date. (6) The Short Term Incentive (“STI”) payments in 2009 comprised a cash bonus which fully vested in 2009 D. Share based compensation No options were granted to key management personnel during or since the end of the financial year (2008: Nil). Exercise of options granted as compensation During the reporting period no shares were issued on the exercise of options previously granted as compensation nor did any options lapse. Messrs Odouard, Brosius, Noble, Myers and Williams received rights to certain shares offered through their executive services agreements. Refer to the table below for further details. Number of shares granted during 2009 Grant date Fair value per share at grant date ($) Vested during the year Directors Mr P Odouard 882,353 13/10/08 Executives Mr A Myers Mr P Williams 800,000 411,765 9/12/08 8/09/08 $0.13 $0.16 $0.29 - 800,000 - Annual Report 2009 15 12 D I R E C T O R S ’ R E P O R T ( c o n t ’ d ) 16. Remuneration Report – Audited (cont’d) D. Share based payments (cont’d) Details of vesting profile of the shares granted as remuneration to each key management person of the Group and each of the Company executives and Group executives are detailed below. Number of shares granted during 2009 Grant date % vested in year % forfeited in year (A) Financial years in which grant vest Directors Mr P Odouard Executives Mr A Myers Mr P Williams 882,353 13/10/08 800,000 411,765 9/12/08 8/09/08 - 100 - - - - 2010 & 2011 - 2010 & 2011 (A) The % forfeited in the year represents the reduction from the maximum number of options available to vest due to performance criteria not being achieved. E. Other benefits During the 2008 financial year, Mr Brosius received an unsecured loan of $100,000 from the Company. The loan was initially for a period of 6 months at a commercial rate of interest. During the financial year $54,000 was repaid. As per the terms of the agreement the loan has subsequently been extended until 30 September 2009. Dated at Perth, Western Australia this 30th day of September 2009. Signed in accordance with a resolution of the Directors: P M Odouard Managing Director 16 Quickstep Holdings Limited 13 C O R P O R A T E G O V E R N A N C E S T A T E M E N T This statement summarises the corporate governance practices adopted by the Board. Quickstep’s intention is to continue to adopt appropriate policies and procedures outlined in the “Principles of Good Corporate Governance and Best Practice Recommendations” issued by the ASX Corporate Governance Council in March 2003, to the extent that they are appropriate for a company of Quickstep’s size. In addition to the information contained in this statement, the Group’s website (www.quickstep.com.au) contains details of its corporate governance procedures and practices. The Board’s Charter identifies its key objectives as: • • • increasing Shareholder value; safeguarding Shareholders’ rights and interests; and ensuring the Company is properly managed. B O A R D C O M P O S I T I O N A N D M E M B E R S H I P At the date of this Report, the Board comprises two non-executive Directors, one of whom is the Chairperson, and three executive Directors. The Company’s Constitution provides that the number of Directors shall not be less than three and not more than nine. There is no requirement for any share holding qualification. The Board, through its Nominations Committee, is responsible for establishing criteria for Board membership, reviewing Board membership and identifying and nominating Directors. Board membership is regularly reviewed to ensure the Board has an appropriate mix of qualifications, skills and experience. Directors appointed by the Board hold office only until the next Annual General Meeting and are then eligible for re-appointment. Directors, (other than the Managing Director) are eligible for reappointment by Shareholders, no later than the third anniversary following their last appointment. Subject to the requirements of the Corporations Act, there is no maximum period of service as a Director. The Managing Director may be appointed for any period and on any terms the Directors, through its Nomination’s and Remuneration’s Committees, identify as appropriate, although they shall be guided by current market practices and rates. The Board has established three Committees; Audit, Remuneration and Nominations, to assist with effective governance. A U D I T C O M M I T T E E The Audit Committee comprises the independent non-executive Directors. The Audit Committee meets at least twice per year and its key roles are to: • • • monitor the integrity of the financial statements of the Group; review significant financial reporting judgements; and recommend to the Board the appointment of external Auditors. The Audit Committee is chaired by Mr MB Jenkins, who has both relevant financial qualifications and business experience required for this role. R E M U N E R AT I O N C O M M I T T E E The Remuneration Committee is comprised of the full Board. The Chairperson must be one of the non-executive Directors. The Committee meets at least twice per year. The function of the Committee is to assist the Board in formulating policies on and in determining: • • the remuneration packages of executive directors, non-executive directors and senior executives; and cash bonuses and equity based incentive plans, including appropriate performance hurdles and total payments proposed. The Remuneration Committee is chaired by Mr P Cook. Annual Report 2009 17 14 C O R P O R A T E G O V E R N A N C E S T A T E M E N T ( c o n t ’ d ) N O M I N AT I O N S C O M M M I T T E E The Nominations Committee is comprised of the full Board. The Chairperson of the Committee is also Chairman of the Board. The Committee meets on an as needed basis and at least once per year. The role of the Committee, within the limits required by the Company’s Constitution, is to: • • • determine the size and composition of the Board; select new directors and senior executives; and establish the evaluation methods used in determining the performance of Directors and senior Executives. E T H I C AL S T A N D A R D S Quickstep is aware of its Corporate Governance responsibilities and seeks to operate to the highest ethical standards. Quickstep has established the following policies and codes to ensure that ethical standards are understood by all of its associates and are followed at all times: • • • • Code of Conduct; Trading in Company Securities; Board Charter; and Director’s Disclosure Obligations. I N D E P E N D E N T P R O F E S S I O N AL A D V I C E Individual Directors have the right, in connection with their duties and responsibilities as Directors, to seek independent professional advice at the Company’s expense. With the exception of expenses for legal advice in relation to a Director’s rights and duties, the engagement of outside advisors is subject to prior approval of the Chairman, which will not be unreasonably withheld. I D E N T I F Y I N G A N D M AN A G I N G R I S K The Board regularly monitors the operational and financial performance of the Group against budget and other key performance measures. The Board also reviews and receives advice on areas of operational and financial risks. Appropriate risk management strategies are developed to mitigate any identified risks to the business. A S X G U I D E L I N E S O N C O R P O R AT E G O V E R N A N C E Pursuant to ASX Listing Rule 4.10.3, the Company advises that it has followed the best practice recommendations set by the ASX Corporate Governance Council except as identified below: Principle of Good Corporate Governance and Best Practice Recommendations Reasons if not adopted 2.1 A majority of the board should be independent directors: 4.2 The audit committee should be structured so that it: consists only non-executive directors consists of a majority of independent directors is chaired by an independent chair who is not chair of the board has at least three members. The Company notes that the Board consists of 5 directors, 3 of whom are executives and 2 who are non-executives who are considered to be independent. is considered The structure appropriate at this stage of the Company’s development but is continually under review. The chair of the Audit Committee is the chair of the Board. This utilises the appropriate skills of the directors and is considered sufficient and appropriate for the Company’s present size and level of activity. Two members are considered sufficient and appropriate for the Company’s present size and level of activity. 18 Quickstep Holdings Limited 15 I N C O M E S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 Consolidated Company Note 2009 $ 2008 $ 2009 $ 2008 $ Revenue Cost of sales Gross profit Other revenue Administration and corporate expenses Marketing expenses Operational expenses Research and development expenses Other expenses Loss from operating activities Financial income Financial expense Net financing income Loss before income tax Income tax benefit Loss for the period 5 6 8 9 24 5 314,667 179,236 (129,515) (178,512) 185,152 724 201,033 (2,687,264) (977,652) (3,443,005) (793,677) (2,002,562) 29,533 (1,664,424) (1,049,259) (2,933,611) (914,294) (827,339) - - - - - - - - (1,034,129) - - - (7,579,523) - (842,069) - - - (5,992,199) (9,517,975) (7,358,670) (8,613,652) (6,834,268) 689,477 (120,995) 568,482 678,322 (65,703) 612,619 160,675 (91,847) 68,828 502,238 - 502,238 (8,949,493) (6,746,051) (8,544,824) (6,332,030) 328,520 440,982 - - (8,620,973) (6,305,069) (8,544,824) (6,332,030) Basic and diluted loss per share Ordinary shares (cents) 11 (5.31) (4.13) The income statements are to be read in conjunction with the accompanying notes. Annual Report 2009 19 16 B AL A N C E S H E E T S A S A T 3 0 J U N E 2 0 0 9 Consolidated Company Note 2009 $ 2008 $ 2009 $ 2008 $ CURRENT ASSETS Cash and cash equivalents Trade and other receivables Inventories Other assets TOTAL CURRENT ASSETS NON-CURRENT ASSETS Trade and other receivables Property, plant and equipment Intangible assets 12 13 14 15 13 16 17 2,815,876 650,655 115,475 294,178 10,307,615 1,142,024 118,466 404,759 4,465 22,739 - 67,810 5,344,218 51,648 - 113,062 3,876,184 11,972,864 95,014 5,508,928 - 7,026,016 171,322 - 4,279,893 742,545 9,203,689 - - 9,626,308 - - TOTAL NON-CURRENT ASSETS 7,197,338 5,022,438 9,203,689 9,626,308 TOTAL ASSETS 11,073,522 16,995,302 9,298,703 15,135,236 CURRENT LIABILITIES Trade and other payables Loans and borrowings Employee benefits 19 20 21 964,188 9,890 63,626 962,455 4,945 35,890 170,951 - - 200,940 - - TOTAL CURRENT LIABILITIES 1,037,704 1,003,290 170,951 200,940 NON-CURRENT LIABILITIES Trade and other payables Loans and borrowings 19 20 889,934 2,508,124 997,787 32,967 - 2,489,992 TOTAL NON-CURRENT LIABILITIES 3,398,058 1,030,754 2,489,992 - - - TOTAL LIABILITIES 4,435,762 2,034,044 2,660,943 200,940 NET ASSETS 6,637,760 14,961,258 6,637,760 14,934,296 EQUITY Issued capital Reserves Accumulated losses TOTAL EQUITY 22 23 24 30,146,119 447,438 (23,955,797) 30,146,119 149,963 (15,334,824) 30,146,119 416,050 (23,924,409) 30,146,119 167,762 (15,379,585) 6,637,760 14,961,258 6,637,760 14,934,296 The balance sheets are to be read in conjunction with the accompanying notes. 20 Quickstep Holdings Limited 17 STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2009 Consolidated Balance as at 1 July 2007 Note Share capital Translation reserve $ $ 13,775,983 (13,406) Share based payments reserve $ 403,762 Foreign currency translation differences Total income and expense recognised directly in equity Loss for the period Total recognised income and expense Issue of ordinary shares Share issue costs Transfer from share based payments reserve on vesting of shares Share based payments Balance at 30 June 2008 Foreign currency translation differences Total income and expense recognised directly in equity Loss for the period Total recognised income and expense Issue of convertible notes (net of transaction costs) Share based payments 23 23 24 22 22 22 23 23 23 24 23 23 - - - - 17,243,240 (1,125,104) 252,000 - (4,393) (4,393) - (4,393) - - - - 30,146,119 (17,799) - - - - - - 49,187 49,187 - 49,187 - - Balance at 30 June 2009 30,146,119 31,388 A n n u a l R e p o r t 2 0 0 9 2 1 Convertible note reserve Retained earnings Total equity $ - - - - - - - - - - - - - - $ $ (9,029,755) 5,136,584 - - (6,305,069) (6,305,069) - - - - (4,393) (4,393) (6,305,069) (6,309,462) 17,243,240 (1,125,104) - 16,000 (15,334,824) 14,961,258 - - (8,620,973) (8,620,973) 49,187 49,187 (8,620,973) (8,571,786) - - - - - - (252,000) 16,000 167,762 - - - - - 201,322 369,084 46,966 - 46,966 - - 46,966 201,322 (23,955,797) 6,637,760 The statements of changes in equity are to be read in conjunction with the accompanying notes 18 STATEMENTS OF CHANGES IN EQUITY (cont’d) FOR THE YEAR ENDED 30 JUNE 2009 2 2 Q u i c k s t e p H o d n g s l i L i m i t e d Company Balance as at 1 July 2007 Loss for the period Total recognised income and expense Issue of ordinary shares Share issue costs Transfer from share based payments reserve on vesting of shares Share based payments Balance at 30 June 2008 Loss for the period Total recognised income and expense Issue of convertible notes (net of transaction costs) Share based payments Note Share capital Translation reserve $ 13,775,983 $ 24 22 22 22 23 24 23 23 - - 17,243,240 (1,125,104) 252,000 - 30,146,119 - - - - Balance at 30 June 2009 30,146,119 Share based payments reserve $ 403,762 - - - - (252,000) 16,000 167,762 - - - 201,322 369,084 - - - - - - - - - - - - - Convertible note reserve Retained earnings Total equity $ - - - - - - - - - - $ $ (9,047,555) 5,132,190 (6,332,030) (6,332,030) - - - - (6,332,030) (6,332,030) 17,243,240 (1,125,104) - 16,000 (15,379,585) 14,934,296 (8,544,824) (8,544,824) (8,544,824) (8,544,824) 46,966 - 46,966 - - 46,966 201,322 (23,924,409) 6,637,760 The statements of changes in equity are to be read in conjunction with the accompanying notes. 19 S T AT E M E N T S O F C A S H F L O W S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 Consolidated Company Note 2009 $ 2008 $ 2009 $ 2008 $ Cash flows from operating activities Cash receipts in the course of operations Interest received Interest paid Research and development tax offset rebate and EMDG claim Cash paid to suppliers and employees 237,809 409,711 (2,832) 187,370 627,497 (2,777) - 203,534 (18) - 462,279 - 1,042,952 (7,440,240) 532,127 (6,595,653) - (962,166) - (771,230) Net cash used in operating activities 27 (5,752,600) (5,251,436) (758,650) (308,951) Cash flows from investing activities Acquisition of plant and equipment Development expenditure Employee loan repaid / (provided) Employee relocation loan repaid Proceeds from sale of fixed assets Payments for business combinations Loans to controlled entities (4,690,732) - 54,000 - - - - (2,808,357) (37,450) (100,000) 150,000 499 (175,000) - - - 54,000 - - - (7,156,903) - - - - - - (12,029,119) Net cash used in investing activities (4,636,732) (2,970,308) (7,102,903) (12,029,119) Cash flows from financing activities Proceeds from issues of shares Payment of transaction costs Proceeds from convertible notes Convertible note issue costs Finance lease payments - - 2,700,000 (178,200) (9,890) 17,218,240 (1,125,104) - - (9,890) - - 2,700,000 (178,200) - 17,218,240 (1,125,104) - - - Net cash from financing activities 2,511,910 16,083,246 2,521,800 16,093,136 Net (decrease) / increase in cash and cash equivalents Effects of exchange rate changes on cash held in foreign currencies (7,877,422) 7,861,502 (5,339,753) 3,755,066 385,683 - - - Cash and cash equivalents at 1 July 10,307,615 2,446,113 5,344,218 1,589,152 Cash and cash equivalents at 30 June 12 2,815,876 10,307,615 4,465 5,344,218 The statements of cash flows are to be read in conjunction with the accompanying notes. Annual Report 2009 23 20 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 1. Significant accounting policies (a) Reporting entity Quickstep Holdings Limited (“the Company”) is a company domiciled in Australia. The consolidated financial statements of the Company as at and for the year ended 30 June 2009 comprise the Company and its subsidiaries (together referred to as the “Group” and individually as “Group Entities”). The Group is primarily involved in the manufacture of composite components for the aerospace industry, and continuing research and development in composite manufacturing processes. (b) Basis of preparation Statement of compliance The financial report is a general purpose financial report, which has been prepared in accordance with the Australian Accounting Standards (”AASBs”) (including Australian interpretations) adopted by the Australian Accounting Standards Board (”AASB”) and the Corporations Act 2001. The consolidated financial report of the Group and the financial report of the Company complies with the International Financial Reporting Standards (”IFRS”) and interpretations adopted by the International Accounting Standards Board. The financial statements were approved by the Board of Directors on 30th September 2009. Basis of measurement The financial report is prepared on the historical cost basis. The methods used to measure fair values are disclosed further in Note 2. Use of estimates and judgements The preparation of a financial report in conformity with AASBs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described in the following notes: • Note 1(c) – Financial position • Note 16 – Recoverable amount of property, plant and equipment • Note 19 – Royalties payable • Note 30 – Share-based payments Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by all entities in the Group. (c) Financial position The Group and Company incurred a loss after tax for the year of $8,620,973 and $8,544,824, respectively. The Group has a surplus in working capital at 30 June 2009 of $2,838,480 whilst the Company has a deficiency in working capital of $75,937. During the year, the Group and Company has had a net decrease in cash of $7,877,422 and $5,339,753, respectively. The accounts have been prepared on the basis of going concern, which contemplates continuity of normal business activities and the realisation of assets and settlement of liabilities in the ordinary course of business. The Directors believe this to be appropriate for the following reasons: • Over the last 18 months the Group has invested significant funds in the development of internal systems and processes, the employment of experienced and skilled staff in the composites industry and the acquisition of plant and equipment, with the objective to manufacture advanced composite materials on a commercial scale, primarily for aerospace applications. The Group has continued to incur cash outflows from operations since balance date. 24 Quickstep Holdings Limited 21 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) 1. Significant accounting policies (cont’d) • Whilst the Group continues to actively seek commercial opportunities for its processes and products, it has not yet reached commercial production and has not secured any significant customer contracts. Given the investment in its production facility and expertise, the Group has reasonable expectations that such contracts will be secured. Revenues to-date have been generated mainly through non-recurring, test-basis projects. • The Group has undertaken an analysis of its cash flow requirements for the coming 12 month period and does not anticipate significant cash in-flows from customer contracts during this period. Accordingly, the Group will remain dependent on external funding, either in the form of debt or equity raisings, to meet its cash flow requirements for at least the next 12 months. • On 16 May 2009, the Company entered into a Convertible Loan Agreement (“Agreement”) with InvestOne Financial Advisory Est., a related company of Al Farida Investments Company LLC, headquartered in Abu Dhabi, United Arab Emirates. Pursuant to the Agreement, the Company may borrow up to $10 million (interest free) in tranches of up to $2 million at intervals of at least 90 days, at the Company’s discretion. On 15 July 2009, the Company drew down on the first tranche of these borrowings. At a general meeting of members of the Company on 23 September 2009 the shareholder approvals required pursuant to the terms of the Agreement were obtained. • The Group is dependent on the funding available under the Agreement to meet its cash flow requirements for at least the next 12 months. Directors expect that the funds will be available to the Group in accordance with the terms of the Agreement and will be sufficient to meet its requirements. At 30 June 2009, the Group holds property, plant and equipment with a carrying value of $7,026,016. The carrying value of these assets is expected to be ultimately recovered through the establishment of profitable operations. The Group has raised funds (refer note 20) and expects to raise further funds through the issue of convertible note instruments. Should the instrument holders not elect to convert these to equity instruments at their maturity dates, the ability of the Group to repay amounts borrowed is dependent on it establishing sufficiently profitable operations and/or the Group being able to raise funds from alternative sources to extinguish its obligations. For the reasons discussed above, the Directors are confident that the Group will be able to continue its operations into the foreseeable future. Should the Group be unable to draw on the funding available pursuant to the Agreement or obtain funding from other sources and/or be unsuccessful in establishing sufficiently profitable operations, there is material uncertainty which may cast significant doubt as to whether the Company and Group will continue as a going concern and therefore whether they will realise their assets and extinguish their liabilities in the normal course of business and at the amounts stated in the financial report. (d) Basis of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Quickstep Holdings Limited (“Company” or “parent entity”) as at 30 June 2009 and the results of all subsidiaries for the year then ended. Quickstep Holdings Limited and its subsidiaries together are referred to in the financial report as the consolidated entity or the Group. A subsidiary is any entity controlled by the Company. Control exists where the Company has the power, directly or indirectly, to govern the financial and operating policies of another entity so as to obtain benefits from its activities. Subsidiaries are fully consolidated from the date on which control is transferred to the Group, and de- consolidated from the date that control ceases. Intragroup balances and any recognised gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated financial statements. There are presently no outside interests in the Company’s subsidiaries. Associates and jointly controlled entities (equity accounted investees) Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Group holds between 20 and 50 percent of the voting power of another entity. Jointly controlled entities are those entities over whose activities the Group has joint control, established by contractual agreement and requiring unanimous consent for strategic financial and operating decisions. Associates and jointly controlled entities are accounted for using the equity method (equity accounted investees) and are initially recognised at cost. The Group’s investment includes goodwill identified on acquisition, net of any accumulated impairment losses. Annual Report 2009 25 22 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) 1. Significant accounting policies (cont’d) The consolidated financial statements include the Group’s share of the income and expenses and equity movements of equity accounted investees, after adjustments to align the accounting policies with those of the Group, from the date that significant influence or joint control commences until the date that significant influence or joint control ceases. When the Group’s share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest (including any long-term investments) is reduced to nil and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the investee. In the Company’s financial statements, investments in associates and jointly controlled entities are carried at cost. (e) Functional and presentational currency These consolidated financial statements are presented in Australian Dollars, which is the Company’s functional currency and the functional currency of the majority of the Group. (f) Income tax Income tax on the income statement for the periods presented comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Quickstep Holdings Limited and its subsidiary have unused tax losses. However, no deferred tax balances have been recognised, as it is considered that asset recognition criteria have not been met at this time. (g) Intangible assets Research and development Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised in the income statement as an expense as incurred. Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products and processes, is capitalised if the product or process is technically feasible, the Group has sufficient resources to complete development and the Group is able to demonstrate how the product or process will generate future economic benefits. Expenditure which may be capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads. Other development expenditure is recognised in the income statement as an expense as incurred. Capitalised development expenditure is stated at cost less accumulated amortisation (see below) and impairment losses (see accounting policy (h)). Goodwill All business combinations are accounted for by applying the purchase method. Goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired. It is stated at cost less any accumulated impairment losses. Impairment is tested for annually (see accounting policy (h)). Other intangible assets Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation (see below) and impairment losses (see accounting policy (i)). 26 Quickstep Holdings Limited 23 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) 1. Significant accounting policies (cont’d) Amortisation Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets unless such lives are indefinite. Goodwill and intangible assets with indefinite useful lives are tested for impairment at each balance sheet date. Other intangible assets are amortised from the date that they are available for use. The estimated useful lives in the current and comparative periods are as follows: • • • Licences, patents and rights to technology Royalty buy-back Capitalised development costs 10 years 10 years 5 – 10 years (h) Plant and equipment Plant and equipment is stated at cost less accumulated depreciation (see below) and any impairment in value (see accounting policy (h)). The cost of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads. Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognised net within “other income” in profit or loss. Depreciation Depreciation is charged to the income statement on a reducing balance basis over the estimated useful life of the asset. The depreciation rates used for each class of depreciable asset for the current and prior years are: Class of Fixed Asset Plant and factory equipment Office equipment (i) Impairment Financial assets Depreciation Rate 10% to 37.5% 7.5% to 40.0 % A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. All impairment losses are recognised in profit or loss. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost, the reversal is recognised in profit or loss. Non-financial assets The carrying amounts of the Group’s assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. For goodwill and intangible assets that have indefinite useful lives or are not yet available for use, the recoverable amount is estimated annually. An impairment loss is recognised whenever the carrying amount of an asset of its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement unless the asset has previously been revalued, in which case the impairment loss is recognised as a reversal to the extent of that previous revaluation with any excess recognised through the income statement. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (group of units) and then, to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. Annual Report 2009 27 24 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) 1. Significant accounting policies (cont’d) An impairment write down to goodwill may not be reversed in future years. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (j) Trade and other receivables Trade and other receivables are stated at their amortised cost less impairment losses. (k) Financial instruments Compound financial instruments Compound financial instruments issued by the Group comprise convertible notes that can be converted to share capital at the option of both the holder and issuer, provided certain pre-existing conditions are met. The number of shares to be issued does not vary with changes in their fair value. The liability component of a compound financial instrument is recognised initially at the fair value of a similar liability that does not have an equity conversion option. The equity component is recognised initially at the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts. Subsequent to initial recognition, the liability component of a compound financial instrument is measured at amortised cost using the effective interest method. The equity component of a compound financial instrument is not re-measured subsequent to initial recognition. Interest, dividends, losses and gains relating to the financial liability are recognised in profit or loss. Distributions to the equity holders are recognised against equity, net of any tax benefit. (l) Inventories Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. (m) Trade and other payables Trade and other payables are stated at their amortised cost. (n) Royalties payable Royalties payable are royalties due under contracts and are on initial recognition recorded at fair value utilising discounted cash flows and then subsequently recorded at amortised cost (refer note 19). (o) Employee entitlements Wages, salaries, annual leave and non-monetary benefits Liabilities for employee benefits for wages, salaries, annual leave and other entitlements represent present obligations resulting from employees’ services provided to reporting date, and are calculated at undiscounted amounts based on remuneration wage and salary rates that the Group expects to pay as at reporting date including related on-costs, such as, workers compensation insurance and payroll tax. Provisions made in respect of other employee entitlements which are not expected to be settled within 12 months (such as long service leave) are measured as the present value of the estimated future cash outflows to be made by the company in respect of services provided by employees up to the reporting date. 28 Quickstep Holdings Limited 25 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) 1. Significant accounting policies (cont’d) Share-based payment transactions An expense is recognised for all equity-based remuneration and other transactions, including shares and options issued to employees and directors. The fair value of securities granted is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (‘vesting date’). The amount recognised is adjusted to reflect the actual number of shares and options that vest, except for those that fail to vest due to market conditions not being met. The fair value of options granted is measured using a generally accepted valuation model, taking into account the terms and conditions upon which the options were granted. The fair value of shares issued is measured based on relevant market prices at the measurement date. (p) Foreign currency (i) Foreign currency transactions Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to Australian dollars at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to Australian dollars at foreign exchange rates ruling at the dates the fair value was determined. (ii) Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to Australian dollars at exchange rates at the reporting date. The income and expenses of foreign operations, excluding foreign operations in hyperinflationary economies, are translated to Australian dollars at exchange rates at the dates of the transactions. Foreign currency differences are recognised directly in equity. Since 1 July 2004, the Group’s date of transition to AASBs, such differences have been recognised in the foreign currency translation reserve (“FCTR”). When a foreign operation is disposed of, in part or in full, the relevant amount in the FCTR is transferred to income statement. Foreign exchange gains and losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in a foreign operation and are recognised directly in equity in the FCTR. (q) Cash and cash equivalents Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less. For the purposes of the cash flow statement, cash consists of cash and short-term deposits as defined above, net of outstanding bank overdrafts. (r) Revenue recognition Revenue from sale of goods is recognised in the income statement when the significant risks and rewards of ownership have been transferred to the buyer. Revenue from the rendering of a service is recognised in the income statement in proportion to the stage of completion of the transaction at balance sheet date. The stage of completion is assessed by reference to analysis of work performed. To the extent to which amounts are received in advance of the provision of the related services, the amounts are recorded as unearned income and credited to the income statement as earned. Licence fee revenue is recognised on an accruals basis when the Group has the right to receive payment under the relevant agreement and has performed its obligations. Interest income is recognised in the income statement as it accrues, using the effective interest method. Government grants are recognised initially as deferred income where there is a reasonable assurance that the grant will be received and all grant conditions will be met. Annual Report 2009 29 26 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) 1. Significant accounting policies (cont’d) (s) Expenses Operating lease payments Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Net financing costs Net financing costs comprise interest payable on borrowings calculated using the effective interest method, interest receivable on funds invested, dividend income, transaction costs, unwinding discounting of provisions and foreign exchange gains and losses. The interest expense component of finance lease payments is recognised in the income statement using the effective interest method. (t) Leased assets Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases are operating leases and the leased assets are not recognised on the Group’s balance sheet. (u) Goods and services tax Revenue, 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 taxation authority. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the balance sheet. Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating cash flows. (v) Segment reporting A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. (w) Earnings per share The Group presents basic and diluted earnings per share (“EPS”) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise share options granted to employees and convertible notes on issue. (x) Share capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects. Dividends Dividends are recognised as a liability in the period in which they are declared. 30 Quickstep Holdings Limited 27 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) 1. Significant accounting policies (cont’d) (y) New standards and interpretations not yet adopted The following standards, amendments to standards and interpretations have been identified as those which may impact the entity in the period of initial application. They are available for early adoption at 30 June 2009, but have not been applied in preparing this financial report: (i) (ii) (iii) (iv) (v) (vi) Revised AASB 3 Business Combinations (2008) changes the application of acquisition accounting for business combinations and the accounting for non-controlling (minority) interests. Key changes include: the immediate expensing of all transaction costs; measurement of contingent consideration at acquisition date with subsequent changes through the income statement; measurement of non-controlling (minority) interests at full fair value or the proportionate share of the fair value of the underlying net assets; guidance on issues such as reacquired rights and vendor indemnities; and the inclusion of combinations by contract alone and those involving mutuals. The revised standard becomes mandatory for the Group’s 30 June 2010 financial statements. The Group has determined that this revised standard will have no material impact on the Group’s financial report. Revised AASB 101 Presentation of Financial Statements introduces as a financial statement (formerly “primary” statement) the “statement of comprehensive income”. The revised standard does not change the recognition, measurement or disclosure of transactions and events that are required by other AASBs. The revised AASB 101 will become mandatory for the Group’s 30 June 2010 financial statements. The Group has not yet determined the potential effect of the revised standard on the Group’s disclosures. Revised AASB 123 Borrowing Costs removes the option to expense borrowing costs and requires that an entity capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. The revised AASB 123 will become mandatory for the Group’s 30 June 2010 financial statements and will constitute a change in accounting policy for the Group. In accordance with the transitional provisions the Group will apply the revised AASB 123 to qualifying assets for which capitalisation of borrowing costs commences on or after the effective date. The Group has not yet determined the potential effect of the revised standard on future earnings. Revised AASB 127 Consolidated and Separate Financial Statements (2008) changes the accounting for investments in subsidiaries. Key changes include: the re-measurement to fair value of any previous/retained investment when control is obtained/lost, with any resulting gain or loss being recognised in profit or loss; and the treatment of increases in ownership interest after control is obtained as transactions with equity holders in their capacity as equity holders. The revised standard will become mandatory for the Group’s 30 June 2010 financial statements. The Group has determined that this revised standard will have no material impact on the Group’s financial report. AASB 2008-1 Amendments to Australian Accounting Standard – Share-based Payment: Vesting Conditions and Cancellations change the measurement of share-based payments that contain non- vesting conditions. AASB 2008-1 becomes mandatory for the Group’s 30 June 2010 financial statements. The Group has not yet determined the potential effect of the amending standard on the Group’s financial report. AASB 8 Operating Segments introduces the “management approach” to segment reporting. AASB 8, which becomes mandatory for the Group’s 30 June 2010 financial statements, will require the disclosure of segment information based on the internal reports regularly reviewed by the Group’s Chief Executive Officer in order to assess each segment’s performance and to allocate resources to them. Currently the Group presents segment information in respect of its business and geographical segments (refer note 4). The Group has not yet determined the potential effect of the amending standard on the Group’s financial report. 2. Determination of fair values A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Where applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. Annual Report 2009 31 28 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) 3. Financial risk management (a) Overview The Company and Group have exposure to the following risks from their use of financial instruments: • credit risk • liquidity risk • market risk. This note presents information about the Company’s and Group’s exposure to each of the above risks, their objectives, policies and processes for measuring and managing risk, and the management of capital. Further quantitative disclosures are included throughout this financial report. The Board of Directors has overall responsibility for the establishment and oversight of the risk management framework and is responsible for developing and monitoring risk management policies. Risk management policies are established to identify and analyse the risks faced by the Company and Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company’s and Group’s activities. The Company and Group, through their training and management standards and procedures, aim to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The Group Audit Committee oversees how management monitors compliance with the Company’s and Group’s risk management policies and formally documented procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Company and Group. (b) Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers and cash balances. For the Company it arises from receivables due from subsidiaries and cash balances. Trade and other receivables The Company’s and Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. The demographics of the Group’s customer base, including the default risk of the industry and country in which customers operate, has less of an influence on credit risk. Geographically, other than in Australia for amounts due from the Australian Taxation Office, there is no concentration of credit risk. Goods are generally sold subject to retention of title clauses, so that in the event of non-payment the Group may have a secured claim. The Group does not require collateral in respect of trade and other receivables. Cash investments The Group limits its exposure to credit risk by only investing in liquid securities and only with counterparties that have a credit rating of at least A1 from Standard & Poor’s. Given these high credit ratings, management has assessed the risk that counterparties fail to meet their obligations as low. (c) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. Typically, the Group ensures that it has sufficient cash on demand to meet expected operational expenses for a period of at least 12 months, including the servicing of financial obligations; this excludes the potential impact of extreme circumstances that cannot reasonably be predicted, such as natural disasters. The Group holds cash reserves raised from convertible note placements during the year ending 30 June 2009. Refer to note 1(c) for further detail. 32 Quickstep Holdings Limited 29 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) 3. Financial risk management (cont’d) (d) Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. The Group does not enter into derivatives in order to manage market risks. Interest rate risk The Group is exposed to interest rate risk predominantly on cash investments and convertible notes. Given the short investment horizon for cash investments and the fact that the interest rate payable on the convertible notes is fixed, management has not found it necessary to establish a policy on managing interest rate risk. Currency risk The Group is exposed to currency risk on sales, purchases and cash holdings that are denominated in a currency other than the respective functional currencies of Group entities, primarily the Australian dollar (“AUD”) and the Euro (“EUR”). The currencies in which these transactions primarily are denominated are AUD, EUR, British Pound (“GBP”) and US Dollar (“USD”). In respect of other monetary assets and liabilities denominated in foreign currencies, the Group ensures that its net exposure is kept to an acceptable level by buying or selling foreign currencies at spot rates when necessary to address short-term imbalances. The Group’s investment in its German subsidiary is not hedged as the currency position is considered to be long- term in nature. (e) Capital management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, so as to maintain a strong capital base sufficient to maintain future development in accordance with the business strategy. In order to maintain or adjust the capital structure, the Group may return capital to shareholders or issue new shares. The Group’s focus has been to raise sufficient funds through equity to fund commercialisation of technology. During 2009, the Group has raised funding from sources other than equity issues. There were no changes in the Group’s approach to capital management during the year. Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements. Annual Report 2009 33 30 3 4 Q u i c k s t e p H o d n g s i l N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) 4. Segment reporting L i m i t e d Segment information is presented in the consolidated financial statements in respect of the Group’s geographical segments, which are the primary basis of segment reporting. Segment results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly non income- earning assets, borrowings and expenses, and corporate assets and expenses. Geographical segments The manufacturing segments are managed on a worldwide basis, but operate in two principal geographical areas, Australia and Germany. In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers. Segment assets are based on the geographical location of the assets. Business segments The Group comprises one business segment which is the manufacture of composite components for the aerospace industry, and continuing research and development in composite manufacturing processes. 31 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) 5. Revenue and income Sales Recoveries/reimbursements Consolidated 2009 $ 2008 $ 310,795 3,872 175,008 4,228 Total revenue from operating activities 314,667 179,236 Other revenue Income from government grants 201,033 29,533 Company 2009 $ 2008 $ - - - - - - - - 6. Other expenses Provision for impairment in investments Provision for impairment of intercompany loans (refer note 13) Impairment of property, plant & equipment (refer note 16) Impairment of intangible assets (refer note 17) Other - - - - 1,374,447 264,197 363,918 2,002,562 - 379,098 448,241 827,339 - 39,613 7,579,523 5,952,586 - - - 7,579,523 - - - 5,992,199 Personnel expenses 7. Wages and salaries Other associated personnel expenses Increase in liability for annual leave Expense of share based payments (refer note 30) Finance income and expense 8. Recognised in profit or loss Interest income Net foreign exchange gain Finance income Finance lease interest paid Convertible note interest Amortisation of convertible note costs Net foreign exchange loss Interest expense on amortised cost Finance expense liabilities measured at 2,871,202 331,869 27,737 1,728,762 202,856 7,487 201,322 16,000 3,432,130 1,955,105 352,986 336,491 689,477 (2,832) (76,671) (15,158) - (26,334) (120,995) 678,322 - 678,322 (2,757) - - (56,981) (5,965) (65,703) - 11,150 - 201,322 212,472 160,675 - 160,675 - (76,671) (15,158) - (18) (91,847) - 8,014 - 16,000 24,014 502,238 - 502,238 - - - - - - Net finance income 568,482 612,619 68,828 502,238 Annual Report 2009 35 32 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S ( c o n t ’ d ) F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) 9. Income tax Consolidated 2009 $ 2008 $ Company 2009 $ 2008 $ (a) Income tax benefit The major components of income tax benefit are: Current income tax benefit Adjustments in respect of current income tax of previous years Income tax benefit reported in the consolidated income statement (328,520) (371,660) - (69,322) (328,520) (440,982) - - - - - - (b) Numerical reconciliation between tax benefit and pre-tax net loss A reconciliation between tax benefit and the product of accounting loss before income tax multiplied by the Group’s applicable income tax rate is as follows: Accounting loss before tax from continuing operations (8,949,493) (6,746,051) (8,544,824) (6,332,030) At the statutory income tax rate of 30% Expenditure not allowable for income tax purposes R&D concession uplift Increase in prior year R&D offset rebates Deferred tax asset not brought to account (2,684,848) (2,023,815) (2,563,447) (1,899,609) 94,565 (52,685) - 2,314,448 238,140 (94,694) (69,322) 1,508,709 2,340,319 - - 223,128 1,803,014 - - 96,595 Income tax benefit (328,520) (440,982) - - (c) Tax losses not brought to account Unused tax losses for which no deferred tax asset has been recognised: Potential at 30% (2008: 30%) (d) Temporary differences not brought to account Deferred tax assets/(liabilities): Accrued income Prepayments Other provision Borrowing costs Deductible capital raising costs and blackhole expenditure Property, plant and equipment Deferred tax assets not recognised 4,693,482 3,104,981 782,476 435,301 (2,670) (20,089) 96,009 24,288 328,731 518,105 (944,374) - (17,018) (17,815) 75,888 11,420 431,041 24,946 (508,462) - (2,670) - 4,148 16,748 326,552 - (344,777) - (12,858) - 54,000 - 418,783 - (459,925) - (e) Tax consolidation legislation Quickstep Holdings Limited and its 100% owned Australian resident subsidiaries have not formed a tax consolidated group. 36 Quickstep Holdings Limited 33 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S ( c o n t ’ d ) F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) 10. Auditor’s remuneration Amounts received or due and receivable by the auditor for: Audit services KPMG 11. Loss per share Consolidated 2009 $ 2008 $ Company 2009 $ 2008 $ 50,797 45,701 50,797 45,701 The calculation of basic loss per share at 30 June 2009 was based on the loss attributable to ordinary shareholders of $8,620,973 (2008: $6,305,069) and a weighted average number (W.A.N.) of ordinary shares outstanding during the financial year ended 30 June 2009 of 162,446,305 (2008: 152,613,735) calculated as follows: 2009 2008 Note Actual No. W.A.N. Actual No. W.A.N. Issued ordinary shares 1 July Effect of shares issued Effect of share options exercised 22 162,446,305 - - 162,446,305 - - 132,054,425 132,054,425 20,060,669 498,641 29,585,000 806,880 Issued ordinary shares at 30 June 22 162,446,305 162,446,305 162,446,305 152,613,735 The dilutive effect of potential ordinary shares is not considered material. 12. Cash and cash equivalents Cash at bank and on hand Short-term bank deposits 13. Trade and other receivables Current Trade receivables Other receivables - R&D tax offset rebate and government grants receivable - GST and VAT receivable - accrued interest Consolidated Company 2009 $ 2008 $ 2009 $ 2008 $ 2,815,876 - 1,264,519 9,043,096 4,465 - 44,218 5,300,000 2,815,876 10,307,615 4,465 5,344,218 72,986 - - - 368,520 209,149 - 881,919 203,380 56,725 650,655 1,142,024 - 22,739 - 22,739 - 8,789 42,859 51,648 Annual Report 2009 37 34 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) Trade and other receivables 13. (cont’d) Consolidated 2009 $ 2008 $ Company 2009 $ 2008 $ - - - - - - 26,871,681 (17,667,992) 19,714,778 (10,088,470) 9,203,689 9,626,308 Non-current Unsecured loans to controlled entities Less: provision for impairment The loans to the controlled entities are unsecured, interest free and at call. They are provided as working capital to fund operational expenditure by the controlled entities. Accordingly, the ultimate recoupment of the loans is dependent upon successful development and operation of the controlled entities. The company does not expect to call these loans in the next 12 months. The provision for impairment has been increased in 2009 by $7,579,523 (2008: $5,952,586) reflecting mainly utilisation by its subsidiaries of the funds advanced by the Company during the period. 14. Inventories Raw materials and consumables 115,475 118,466 - - 15. Other current assets Prepaid expenses Loan to related party (refer note 28) 16. Property, plant & equipment 235,569 58,609 288,746 116,013 294,178 404,759 9,201 58,609 67,810 9,354 103,708 113,062 Consolidated Plant & Equipment Assets Under Construction $ $ Office Furniture & Equipment $ Total $ Costs Balance at 1 July 2007 1,406,974 731,178 249,868 2,388,020 Additions 1,031,123 1,482,163 404,993 2,918,279 Transfer to Plant & Equipment 560,462 (560,462) - - Disposals (146,085) - (129,070) (275,155) Balance at 30 June 2008 2,852,474 1,652,879 525,791 5,031,144 Balance at 1 July 2008 2,852,474 1,652,879 525,791 5,031,144 Additions 2,543,627 2,079,422 47,598 4,670,647 Transfer to Plant & Equipment Effect of movements in exchange rates 244,955 17,045 (244,955) - - - 7,384 24,429 Balance at 30 June 2009 5,658,101 3,487,346 580,773 9,726,220 38 Quickstep Holdings Limited 35 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) 16. Property, plant & equipment (cont’d) Depreciation and impairment losses Balance at 1 July 2007 Depreciation for the year Disposals Balance at 30 June 2008 Balance at 1 July 2008 Depreciation for the year Impairment losses (i) Consolidated Plant & Equipment Assets Under Construction $ $ Office Furniture & Equipment $ Total $ 387,236 311,261 (73,286) 625,211 625,211 432,631 - - - - - - 70,618 457,854 150,416 461,677 (94,994) (168,280) 126,040 751,251 126,040 751,251 137,531 570,162 1,106,719 235,802 31,926 1,374,447 Effect of movements in exchange rates 4,299 - 45 4,344 Balance at 30 June 2009 2,168,860 235,802 295,542 2,700,204 Carrying Amounts At 1 July 2007 At 30 June 2008 At 1 July 2008 At 30 June 2009 1,019,738 731,178 179,250 1,930,166 2,227,263 1,652,879 399,751 4,279,893 2,227,263 1,652,879 399,751 4,279,893 3,489,241 3,251,544 285,231 7,026,016 (i) An impairment loss of $1,374,447 (2008: nil) has been recognised in the other expenses in the income statement for the year ended 30 June 2009. The impairment loss was recognised on certain Quickstep machines held by the Group, and minor property, plant and equipment and office furniture and fittings that are not expected to be recoverable. The impairment loss has arisen as a consequence of the intention to modify the design of the Quickstep machines such that existing machines are unlikely to recover their carrying value from future cash flows. The recoverable amount of these assets has been determined with reference to their fair value less costs to sell, which has been deemed to be nil. The Company does not hold any property, plant and equipment. 17. Intangibles Costs Patents & Rights $ Royalty Buy- Back $ Consolidated Technology Goodwill Total $ $ $ Balance at 1 July 2007 612,716 94,419 1,320,970 175,000 2,203,105 Additions 36,311 - - - 36,311 Balance at 30 June 2008 649,027 94,419 1,320,970 175,000 2,239,416 Balance at 1 July 2008 Balance at 30 June 2009 649,027 649,027 94,419 94,419 1,320,970 175,000 2,239,416 1,320,970 175,000 2,239,416 36 Annual Report 2009 39 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) 17. Intangibles (cont’d) Patents & Rights $ Royalty Buy- Back $ Consolidated Technology Goodwill Total $ $ $ Amortisation and impairment losses Balance at 1 July 2007 Amortisation for the year Impairment losses (i) Balance at 30 June 2008 Balance at 1 July 2008 Amortisation for the year Impairment losses (ii) 152,507 125,473 204,098 482,078 482,078 33,390 - 37,765 9,449 - 528,385 264,194 - - 718,657 399,116 - 175,000 379,098 47,214 792,579 175,000 1,496,871 47,214 9,442 - 792,579 175,000 1,496,871 264,194 264,197 - - 307,026 264,197 Balance at 30 June 2009 515,468 56,656 1,320,970 175,000 2,068,094 Carrying amounts At 1 July 2007 At 30 June 2008 At 1 July 2008 At 30 June 2009 460,209 166,949 166,949 133,559 56,654 47,205 47,205 37,763 792,585 175,000 1,484,448 528,391 528,391 - - - - 742,545 742,545 171,322 (i) In accordance with the accounting policy for measuring intangible assets, management previously assessed the carrying value for patents and goodwill relating to Quickboats Pty Ltd. Given the competing demands for resources and productive capacity at the Group’s Fremantle facility, management elected to indefinitely defer the production of Flat Out Boats. A licensing arrangement or outright sale of the business has been determined as the best strategy for utilising the full potential of the investment. As no such agreement has been entered into, the goodwill and patents are considered to provide no material future economic benefit at this time, and therefore these assets have been recorded at nil value. (ii) An impairment loss of $264,197 (2008: nil) has been recognised in the other expenses in the income statement for the year ended 30 June 2009 in respect to the Technology intangible asset. The forecast future cash flows of the Group are expected to arise through the design and production of composite parts using the recently acquired plant and machinery, rather than the existing technology which was being amortised over a five-year period. The recoverable amount of the asset has been determined with reference to the fair value less costs to sell, which is deemed to be nil. The Company does not hold any intangibles. 40 Quickstep Holdings Limited 37 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) 18. Group entities Investments in controlled entities Shares in Quickstep Technologies Pty Ltd - at cost Less: provision for diminution in value Shares in Quickstep GmbH - at cost Less: provision for diminution in value Parent entity Quickstep Holdings Limited Controlled entities Quickstep Technologies Pty Ltd Quickboats Pty Ltd Quickstep GmbH 19. Trade and other payables Current Unsecured trade payables Sundry payables and accrued expenses Royalties payable (i) Non-current Royalties payable (i) Consolidated 2009 $ 2008 $ Company 2009 $ 2008 $ - - - - - - - - - - - - 4,193,052 (4,193,052) - 4,193,052 (4,193,052) - 39,613 (39,613) - 39,613 (39,613) - Country of Incorporation Entity interest 2009 Entity interest 2008 Australia Australia Australia Germany 100% 100% 100% 100% 100% 100% Consolidated 2009 $ 2008 $ Company 2009 $ 2008 $ 188,740 569,497 205,951 246,000 638,921 77,534 964,188 962,455 29,302 141,649 - 170,951 17,440 183,500 - 200,940 889,934 997,787 - - (i) On 21 July 2005, a Heads of Agreement was executed between Quickstep Holdings Limited (“QHL”), Quickstep Technologies Pty Ltd (“QTPL”) and VCAMM Limited which agreed the value of services provided by VCAMM to the Group during the period 1 July 2003 to 30 June 2005 and which formalised arrangements that existed before 30 June 2005 between the parties. The agreed consideration for services provided was $1,790,000, which was satisfied by the grant of 2,160,000 ordinary fully paid shares in QHL (issued at $0.25 per share), with the balance of $1,250,000 to be paid to VCAMM on a quarterly basis from total cash revenues received by QTPL on a percentage basis (varying from 4% to 7% of QTPL’s cash revenues for the period), subject to a maximum annual repayment of $650,000. The discount rate that has been used to calculate the royalties payable is 8.46%. Annual Report 2009 41 38 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) 20. Loans and borrowings Consolidated 2009 $ 2008 $ Company 2009 $ 2008 $ Current Finance lease liabilities Non-current Finance lease liabilities 9,890 4,945 18,132 32,967 Convertible loan (net of transaction costs) 2,489,992 - 2,508,124 32,967 - - 2,489,992 2,489,992 - - - - 13,500,000 convertible notes were issued during the year at $0.20 per note. The notes have a 11% coupon rate and are convertible into ordinary shares on 27 March 2012 on the basis of 1 share for 1 convertible note. A Noteholder may, at any time prior to the maturity of the Convertible Notes, elect to convert the convertible notes into shares. The Company may also elect to redeem all the outstanding convertible notes if the 5-day volume weighted average price of shares remains above $0.30 for a continuous period of more than 3 months at any time before the maturity date for the convertible notes. In accordance with AASB 139 Financial Instruments the amount of convertible notes classified as equity is $46,966 (net of attributable transaction costs of $3,319). 21. Employee benefits Current Consolidated 2009 $ 2008 $ Company 2009 $ 2008 $ Liability for annual leave 63,626 35,890 - - 22. Issued capital Issued capital 162,446,305 (2008: 162,446,305 ) fully paid ordinary shares The following movements in issued capital occurred during the year: 30,146,119 30,146,119 30,146,119 30,146,119 2009 No. of shares $ 2008 No. of shares $ Balance at the beginning of the year 162,446,305 30,146,119 132,054,425 13,775,983 Shares issued for cash Shares issued on exercise of options Shares issued to consultants (i) Transfer from share based payment reserve on vesting of shares Shares issued via share purchase plan Share issue and capital raising costs - - - - - - - - - - - - 20,000,000 806,880 50,000 12,000,000 217,240 25,000 1,200,000 8,335,000 - 252,000 5,001,000 (1,125,104) Balance at the end of the year 162,446,305 30,146,119 162,446,305 30,146,119 (i) In recognition of assistance with the acquisition and development of Flat Out Boats, Novae Pty Ltd was issued with an allotment of shares on 8 February 2008 for nil consideration. 42 Quickstep Holdings Limited 39 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) 22. Issued capital (cont’d) Options Options granted during the year No options to subscribe for ordinary fully paid shares of the Company were granted during the financial year. Unissued shares under option At 30 June, unissued ordinary shares of the Company under option are: Expiry Date Exercise Price Number of Options 15 April 2010 16 June 2010 $0.25 $0.26 2009 6,391,489 440,000 2008 6,391,489 440,000 These options do not entitle the holders to participate in any share issue of the Company or any other body corporate. Exercise of options During the financial year, no options were exercised therefore the Company did not issue any ordinary shares as a result of the exercise of options (2008: 806,880 ordinary shares were issued as a consequence of the exercise of options). Lapse of options During the current financial year and previous financial year no options lapsed. 23. Reserves Share-based payments reserve Balance at the beginning of the year Grant of rights to shares to key management personnel Transfer to issued capital on vesting of shares Consolidated 2009 $ 2008 $ Company 2009 $ 2008 $ 167,762 403,762 167,762 403,762 201,322 - 16,000 (252,000) 201,322 - 16,000 (252,000) Balance at the end of the year 369,084 167,762 369,084 167,762 This reserve is used to record the fair value of options and rights to shares granted as consideration for services provided. Foreign currency translation reserve Balance at the beginning of the year Foreign currency translation differences Balance at the end of the year The foreign currency translation reserve comprises foreign currency differences arising from the translation of the financial statements of foreign operations. Convertible notes reserve Balance at the beginning of the year Issue of convertible notes Transaction costs Balance at the end of the year The convertible notes reserve is used to record the equity component of the convertible notes. (17,799) 49,187 (13,406) (4,393) 31,388 (17,799) - - - - 50,285 (3,319) 46,966 - - - - - 50,285 (3,319) 46,966 - - - - - - - Total reserves 447,438 149,963 416,050 167,762 40 Annual Report 2009 43 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) 24. Accumulated losses Consolidated Company 2009 $ 2008 $ 2009 $ 2008 $ Accumulated losses at the beginning of the year Loss for the year (15,334,824) (8,620,973) (9,029,755) (6,305,069) (15,379,585) (8,544,824) (9,047,555) (6,332,030) Accumulated losses at the end of the year (23,955,797) (15,334,824) (23,924,409) (15,379,585) Financial instruments 25. Credit risk Exposure to credit risk The carrying amount of the Group’s financial assets represents the maximum credit exposure. The Group’s maximum exposure to credit risk at the reporting date was: Cash and equivalents Loan to related parties (i) R&D tax offset rebate and government grants receivable GST / VAT receivable Trade receivables Consolidated 2009 $ 2008 $ 2,815,876 58,609 10,307,615 109,815 368,520 209,149 72,986 881,919 203,380 - 3,525,140 10,502,729 Company 2009 $ 2008 $ 4,465 58,609 - 22,739 - 85,813 5,344,218 109,815 - - - 5,454,033 (i) The related party loan is with Mr Dale Brosius and is unsecured. As at 30 June 2009, no financial asset was considered past due (2008: nil). Liquidity risk The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements: 44 Quickstep Holdings Limited 41 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) 25. Financial instruments (cont’d) Liquidity risk (Cont’d) Currency risk Exposure to currency risk The Group’s exposure to foreign currency risk at balance date was as follows, based on notional amounts: 2009 Cash Trade payables Receivables Balance sheet exposure 2008 Cash Trade payables Balance sheet exposure USD EUR GBP - - - - 25,634 (103,088) 120,301 42,847 - - - - USD EUR GBP 1,115,495 - 1,115,495 - - - - (67,302) (67,302) The Company was not exposed to any currency risk in 2009 or 2008. The following significant exchange rates applied during the year: USD EUR GBP Average Rate Reporting Date Spot Rate 2009 2008 2009 2008 0.7477 0.5420 0.4621 0.8968 0.6102 0.4478 0.8114 0.5751 0.4872 0.9626 0.6096 0.4829 Annual Report 2009 45 42 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) 25. Financial instruments (cont’d) Currency risk (cont’d) Sensitivity analysis A 10 percent movement of the Australian dollar against the following currencies at 30 June would have increased (decreased) profit or loss on balances denominated in foreign currencies by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for 2008. 2009 2008 Profit / Loss +10% $ -10% $ Profit / Loss +10% $ -10% $ - - (3,895) (3,895) - - 4,761 4,761 (101,409) 6,118 - 123,944 (7,478) - (95,291) 116,466 USD GBP EUR Interest rate risk Profile At the reporting date the interest rate profile of the Group’s and the Company’s interest-bearing financial instruments was: Fixed rate instruments Loans to related parties Convertible notes Finance lease liabilities Variable rate instruments Cash and equivalents Consolidated 2009 $ 2008 $ Company 2009 $ 2008 $ 58,608 (2,700,000) (28,022) (2,669,414) 109,815 - (37,912) 71,903 58,608 (2,700,000) - (2,641,392) 109,815 - - 109,815 2,815,876 10,307,615 4,465 5,344,218 Cash includes funds held in term deposits and cheque accounts during the year, which earned a weighted average interest rate of 5.35% (2008: 6.55%). The interest rates applicable to the Group’s finance leases are 9.55% (2008: 9.55%) and convertible notes are 11.00% (2008: N/A). Loans to related parties, excluding subsidiaries, are set at 14.85% (2008: 15.04%). All other material financial assets and liabilities are non-interest bearing. Fair value sensitivity analysis for fixed rate instruments The Group does not account for any fixed rate financial assets and liabilities at fair value through profit or loss. Therefore a change in interest rates at the reporting date would not affect profit or loss. 46 Quickstep Holdings Limited 43 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) 25. Financial instruments (cont’d) Cash flow sensitivity analysis for variable rate instruments A change of 100 basis points in interest rates at the reporting date would have increased (decreased) profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis for 2008. Effect in AUD 30 June 2009 Variable rate instruments Cash flow sensitivity (net) 30 June 2008 Variable rate instruments Cash flow sensitivity (net) Fair values Consolidated Profit or loss 100 bp increase 100 bp decrease Company Profit or loss 100 bp increase 100 bp decrease 28,159 28,159 (28,159) (28,159) 45 45 (45) (45) 103,076 103,076 (103,076) (103,076) 53,442 53,442 (53,442) (53,442) The carrying amounts of financial assets and liabilities approximate fair value. 26. Capital and other commitments Consolidated 2009 $ 2008 $ Company 2009 $ 2008 $ Operating lease commitments Non-cancellable operating lease contracted for but not capitalised in the financial statements. Payable - less than 1 year - between 1 and 5 years 237,087 267,940 226,893 502,645 237,087 267,940 226,893 502,645 505,027 729,538 505,027 729,538 The property lease is a non-cancellable lease with a 5-year term, with rent payable quarterly in advance. The lease contains provisions for rent reviews on an annual basis, and a 5-year renewable option. Capital commitments The Company’s and Group’s commitments in respect of plant and equipment contracted for but not provided for are set out below: Payable - less than 1 year - between 1 and 5 years Consolidated 2009 $ 2008 $ Company 2009 $ 2008 $ 379,785 - 2,776,933 10,000 379,785 2,786,933 - - - - - - Annual Report 2009 47 44 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) 27. Cash flow information Reconciliation of cash flows from operating activities to loss after income tax: Loss for the year Adjustments for: • Amortisation • Depreciation • • Impairment of intangibles Impairment of property, plant & equipment Loss from asset writedowns • • Amortisation of convertible loan costs • Share based payment expense • Convertible note accrued interest • • • Gain from recognition of re-acquired Foreign exchange gain Finance costs asset • Provision for diminution in investments • Provision for non recovery of intercompany loans Operating loss before changes in working capital (Increase)/decrease in trade & other receivables (Increase) in inventories (Increase)/decrease in other current assets (Decrease)/increase in trade and other payables Increase in employee benefits Consolidated Company 2009 $ 2008 $ 2009 $ 2008 $ (8,620,973) (6,305,069) (8,544,824) (6,332,030) 307,026 570,162 264,197 1,374,447 - 15,158 201,322 76,671 (336,491) 20,565 - - - 399,116 461,677 379,098 - 106,875 - 16,000 - - 65,703 (499) - - - - - - 15,158 201,322 76,671 - - - - - - - - - - 16,000 - - - - 39,613 - 7,579,522 5,952,585 (6,127,916) (4,877,099) (672,151) (323,832) 491,366 2,991 56,581 (31,631) (54,699) 14,323 28,909 - (8,748) (203,358) 27,736 (309,817) 7,487 (106,660) - (43,035) - (39,635) 97,551 - Net cash used in operating activities (5,752,600) (5,251,436) (758,650) (308,951) 28. Related parties Key management personnel compensation The key management personnel compensation included in “personnel expenses” in note 7 is as follows: Short-term employee benefits Post-employment benefits Share based payments Consolidated Company 2009 $ 1,399,592 48,650 201,322 1,649,564 2008 $ 1,182,257 16,290 16,000 1,214,547 2009 $ 190,958 - 201,322 392,280 2008 $ 176,439 - 16,000 192,439 Individual directors and executives compensation (key management personnel remuneration) disclosures Information regarding individual directors’ and executives’ remuneration and some equity instruments disclosures as permitted by Corporations Regulations 2M.3.03 is provided in the Remuneration Report section of the Directors’ Report. Apart from the details disclosed in the Remuneration Report and below, no director has entered into a material contract with the Company or the Group since the end of the previous financial year. 48 Quickstep Holdings Limited 45 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) 28. Related parties (cont’d) Loans to key management personnel and their related parties Details regarding loans outstanding at the reporting date to key management personnel and their related parties, where the individual’s aggregate loan balance exceeded $100,000 at any time in the reporting period, are as follows: Director Dale Brosius Balance 1 July 2008 $ Balance 30 June 2009 $ Interest paid and payable in the reporting period $ Highest balance In period $ 103,708 58,608 8,900 107,499 During the 2008 financial year Mr Dale Brosius received the above loan from the Company. The loan was for $100,000 with interest payable on commercial terms and a term of 6 months with option to extend by either party. During the year the loan principal has been reduced by $54,000 (2008: nil) through the offsetting of certain employee entitlement amounts. Other key management personnel transactions with the Company or its controlled entities A number of key management persons, or their related parties, hold positions in other entities that result in them having control or significant influence over the financial or operating policies of those entities. A number of those entities transacted with the Company or its subsidiaries during the financial year. The terms and conditions of those transactions were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to unrelated entities on an arm’s length basis. The aggregate amounts recognised during the year relating to key management personnel and their related parties were as follows: Director Transaction Note Consolidated 2009 $ 2008 $ Company 2009 $ 2008 $ Mr N Noble Mr D Graham Mr D Graham Accommodation and consulting services Consulting services Consulting services (i) (ii) (iii) - 50,537 - 1,800 40,000 48,440 - - - - - - (i) (ii) (iii) A company associated with Mr Noble, Dolphin Dreams, provided accommodation services during 2008 to the Group. Terms for such services were based on market rates, and amounts were payable on a monthly basis. A company associated with Mr Graham, Decta Holdings Pty Ltd, provided prototype design services, patent portfolio management and development program coordination. Terms for such services were based on market rates and amounts were payable on a monthly basis. A company associated with Mr Graham, Golden Rivers Mining Pty Ltd, provided management consulting services. Terms for such services were based on market rates, and amounts were payable on a monthly basis. During the year Mr Graham was appointed an executive of the company. Assets and liabilities at 30 June arising from the above transactions Consolidated 2009 $ 2008 $ Company 2009 $ 2008 $ Current liabilities Other creditors and accruals - - - - Annual Report 2009 49 46 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) 28. Related Parties (cont’d) Equity holdings Options and rights over shares The movement during the reporting period in the number of options over ordinary shares in Quickstep Holdings Limited held, directly, indirectly or beneficially by each key management persons, including their personally- related entities at 30 June 2009, are as follows: Exercise price Expiry date Held at 1 July Held at date of appointment Expiry of options Exercised Held at 30 June 2008 Directors Mr P C Cook $0.25 15 April 2010 168,000 N/A - (168,000) - There were no options over ordinary shares in Quickstep Holdings Limited held by key management personnel during the 2009 year. No options were granted to key management personnel during the reporting period as compensation. Options held by key management personnel are vested and exercisable. The movement during the reporting period in the number of rights over ordinary shares in Quickstep Holdings Limited held, directly, indirectly or beneficially by each key management persons, including their personally- related entities at 30 June 2009, are as follows: Held at 1 July Granted as compensation Held at 30 June Vested during the year Vested and exercisable at 30 June 2009 Directors Mr P Odouard Executives Mr A Myers Mr P Williams - - - 882,353 882,353 - - 800,000 411,765 800,000 411,765 800,000 - 800,000 - Shares The movement during the year in the number of ordinary shares held, directly, indirectly or beneficially by each key management person, including their personally-related entities, is as follows: 50 Quickstep Holdings Limited 47 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) 28. Related Parties (cont’d) Equity holdings (Cont’d) Shares (Cont’d) (1) On 6 December 2007, 800,000 ordinary fully paid shares were issued to Mr D Brosius in accordance with the terms of the Executive Service Agreement between the Company and Mr Brosius. The issue of shares was approved by shareholders at the Company’s Annual General Meeting held in November 2007. (2) On 6 December 2007, 400,000 ordinary fully paid shares were issued to Mr N Noble in accordance with the terms of the Executive Service Agreement between the Company and Mr Noble. The issue of shares was approved by shareholders at the Company’s Annual General Meeting held in November 2007. (3) On 14 August 2008 a related party of Mr D Graham (Decta Holdings Pty Ltd) disposed of 1,684,201 shares via an on market trade and transferred an additional 1,000,000 shares in an off market transaction to Mr N Noble. (4) Mr N Noble ceased to be a key management person on 30 September 2008. Non-key management personnel disclosures Wholly owned group Non-director related parties are the Company’s controlled entities. Details of the Company’s interest in controlled entities are set out in note 18. Details of dealings with these entities are set out below. Transactions The loans to controlled entities are unsecured, interest-free and at call. The loans are provided primarily for capital purchases and working capital purposes. Receivables Aggregate amounts receivable from non-key management personnel (note 13): Non-current Unsecured loans to controlled entities Less: provision for non-recovery Company 2009 $ 2008 $ 26,871,681 (17,667,992) 19,714,778 (10,088,470) 9,203,689 9,626,308 Annual Report 2009 51 48 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) 29. Equity accounted investees On 1 May 2008 the Group acquired a 20 percent investment in QuickPipes Pty Ltd for the amount of $2. This investee was established as an incorporated joint venture in conjunction with Vortex Pipes Ltd to research and develop a composite pipe for industrial applications. At reporting date, the investee held no assets or liabilities and had not entered into any transactions. 30. Share based payments The Company has established the Quickstep Holdings Limited Employee Share Option Scheme (“Scheme”) to provide a means by which employees of the Group, including directors, upon whom the responsibilities for the successful growth of the Group rest, can share in such growth, thereby strengthening their commitment to the Group. Pursuant to the Scheme, and subject to any approvals required by the Corporations Act 2001 and the ASX Listing Rules, the directors may, from time to time, resolve to grant such numbers of options, at such exercise price to such employees of the Group as determined by the directors. To date, only two option issues have been made pursuant to the Scheme. These were made to the retiring directors in June 2005, Messrs Land and Smalley. Mr Land was issued 480,000 options and Mr Smalley 240,000 options. The options vested one month from the date of grant and were exercisable by 16 June 2010. During the year ended 30 June 2009 there were no options exercised (2008: nil). There are no voting or dividend rights attaching to the options. There are no voting rights attached to the unissued ordinary shares. Voting rights will be attached to the unissued ordinary shares when the options have been exercised. The number and weighted average exercise prices (“WAEP”) of options are as follows: 2009 Number 2009 WAEP 2008 Number 2008 WAEP Outstanding at the end of the year Exercisable at the end of the year 440,000 440,000 $0.26 $0.26 440,000 440,000 $0.26 $0.26 Performance shares / rights issued during 2009 were as follows: 2009 Number Vesting conditions Performance shares / rights on issue July 1 - Performance shares / rights granted 800,000 Vest immediately on date of signing contract Performance shares / rights granted 1,294,118 Vest in two tranches as long as employee remains with the Group. 1/3 vest after the 2010 AGM, 2/3 vest after the 2011 AGM Total performance shares / rights on issue 30 June 2,094,118 There were no performance shares / rights issued or on issue in 2008. Employee expenses Consolidated 2009 $ 2008 $ Company 2009 $ 2008 $ Performance shares / rights granted 201,322 16,000 - - Other The Company has entered into executive service agreements with its executive directors. Those agreements include the issue of shares to the directors in prescribed circumstances. Refer to the Remuneration Report for further details. During the year $201,322 (2008: $16,000) was expensed in the income statement with regard to share based payments. 52 Quickstep Holdings Limited 49 N O T E S T O A N D F O R M I N G P A R T O F T H E F I N A N C I A L S T AT E M E N T S F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 ( c o n t ’ d ) 31. Subsequent Events On 15 July 2009 the Company received the first $2 million tranche of funding from InvestOne Financial Advisory Est. This funding related to the $10 million Convertible Loan facility that was established with InvestOne Financial Advisory Est. (“InvestOne”), a subsidiary of Al Farida Investments Company LLC, a diversified conglomerate headquartered in Abu Dhabi. On 23 September 2009, at a General Meeting of shareholders, the shareholders approved the Convertible Loan Agreement that the Company had entered into with InvestOne. On 7 August 2009 the Company issued 720,808 fully paid ordinary shares as payment to advisors and contractors for services rendered. Other than the matters referred to above or in the financial statements, there have been no events subsequent to balance date which would have a material effect on the Group’s financial statements as at 30 June 2009. Annual Report 2009 53 50 D I R E C T O R S ’ D E C L A R A T I O N F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 9 In the opinion of the directors of Quickstep Holdings Limited: 1. (a) the financial statements and notes and Remuneration Report in the Directors’ Report, set out on pages 16 to 50 and pages 8 to 13 respectively, are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Company’s and the Group’s financial position as at 30 June 2009 and their performance, for the financial year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; (b) (c) the financial report complies with International Financial Reporting Standards as described in Note 1 (b); there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. The directors have been given the declarations required by s.295A of the Corporations Act 2001 for the financial year ended 30 June 2009. Dated at Perth, Western Australia this 30th day of September 2009. Signed in accordance with a resolution of the directors: P M Odouard Director 54 Quickstep Holdings Limited 51 A U D I T O R ’ S I N D E P E N D E N C E D E C L A R A T I O N Annual Report 2009 55 52 I N D E P E N D E N T A U D I T O R ’ S R E P O R T T O T H E M E M B E R S O F Q U I C K S T E P H O L D I N G S L I M I T E D 56 Quickstep Holdings Limited 53 I N D E P E N D E N T A U D I T O R ’ S R E P O R T T O T H E M E M B E R S O F Q U I C K S T E P H O L D I N G S L I M I T E D ( c o n t ’ d ) Annual Report 2009 57 54 I N D E P E N D E N T A U D I T O R ’ S R E P O R T T O T H E M E M B E R S O F Q U I C K S T E P H O L D I N G S L I M I T E D ( c o n t ’ d ) 58 Quickstep Holdings Limited 55 D E T A I L S O F S H A R E S A N D O P T I O N S A S A T 2 O C T O B E R 2 0 0 9 : Voting rights The voting rights attaching to ordinary shares are: On a show of hands every member present in person or by proxy shall have one vote and upon a poll each share shall have one vote. Options do not carry any voting rights. Substantial shareholders The names of substantial shareholders in the company and the number of shares to which each substantial shareholder and their associates have a relevant interest are set out below: Substantial Shareholder Number of Shares Decta Holdings Pty ltd 38,651,529 On-Market buy back There is no current on-market buy back. Distribution schedules Distribution of each class of security as at 2 October 2009: Ordinary fully paid shares Range Holders Units 1 − 1,000 1,001 − 5,000 5,001 − 10,000 305 604 669 135,084 1,937,726 5,726,984 10,001 − 100,000 1,323 41,768,075 100,001 − Over 157 113,632,575 % 0.08 1.19 3.51 25.59 69.63 Total 3,058 163,200,444 100.00 Options exercisable at $0.25 on or before 15 April 2010 (unlisted) Range Holders Units % 1 − 1,000 1,001 − 5,000 5,001 − 10,000 10,001 − 100,000 100,001 − Over Total − − 1 35 19 55 − − 9,600 1,418,698 4,929,860 − − 0.15 22.31 77.54 6,358,158 100.00 Annual Report 2009 59 56 D E T A I L S O F S H A R E S A N D O P T I O N S A S A T 2 O C T O B E R 2 0 0 9 ( c o n t ’ d ) : Distribution schedules (cont’d) Options exercisable at $0.26 on or before 16 June 2010 (unlisted) Range Holders Units % 1 − 1,000 1,001 − 5,000 5,001 − 10,000 10,001 − 100,000 100,001 − Over Total − − − − 2 2 − − − − − − − − 480,000 480,000 100.00 100.00 Unmarketable parcels Holdings less than a marketable parcel of ordinary shares (being 1,562 shares at $0.32 per share as at 2 October 2009): Holders 380 Units 237,580 Top holders The 20 largest registered holders of each class of quoted security as at 2 October 2009 were: 6. Mr Julius Solomons and Mrs Dianne Solomons2,740,440 Fully paid ordinary shares Name 1. Decta Holdings Pty Ltd 2. WSF Pty Ltd 3. Washington H Soul Pattinson and Company Limited 4. 5. Nicholas Michael Noble State One Stockbroking Ltd 7. 8. 9. Romadak Pty Ltd HSBC Custody Nominees (Australia) Limited Boldbow Pty Ltd 10. Prunelle Holdings Pty Ltd 11. Bond Street Custodians Limited 12. Equity Trustees Limited 13. Aileendonan Investments Pty Ltd 14. Davmin Pty Ltd 15. Mr David Creighton Gellatly & Mrs Evelyn May Gellatly 16. Mr Paul Baster & Ms Catherine Bellemore 17. State One Stockbroking Ltd 18. Washington H Soul Pattinson and Company Limited 19. Best Holdings Pty Ltd 20. Mr William Robert Hawkes (Hawkes Family A/C) 60 Quickstep Holdings Limited 57 No. of Shares % 38,651,529 23.68 4,915,418 4,567,000 3,900,000 3,810,449 2,602,300 2,432,595 2,083,235 2,077,692 1,862,923 1,800,000 1,705,500 1,500,000 1,250,000 1,150,000 1,112,618 1,000,000 1,000,000 1,000,000 3.01 2.80 2.39 2.33 1.68 1.59 1.49 1.28 1.27 1.14 1.10 1.05 0.92 0.77 0.70 0.68 0.61 0.61 0.61 81,161,699 49.71 136 Cockburn Road North Coogee Western Australia 6163 Telephone: +61 8 9432 3200 Facsimile: +61 8 9432 3222 Internet: www.quickstep.com.au info@quickstep.com.au Email: m o c . e v i t a e r c z a j . w w w | e v i t a e r C Z A J y b d e n g i s e D