Quickstep Holdings Limited
Annual Report 2014

Plain-text annual report

Advanced Composite Manufacturing Annual Report 2014 Substantial growth anticipated in FY2015 In FY2014 Quickstep completed its move into commercial autoclave production of carbon fibre components $12m Sales rose 368% to $12 million in FY2014 Firm order book of $49 million, and increasing 03 Milestones 04 Executive Chairman’s Review 08 Aerospace Manufacturing 10 Aerospace 11 Automotive 12 The Board 14 Our People 16 Directors’ Report 38 Corporate Governance Statement 47 Financial Statements 90 Directors’ Declaration 91 Lead Auditor’s Independence Declaration 92 94 Shareholder Information 97 Corporate Directory Independent Auditor’s Report to the Members Quickstep Holdings Limited I Annual Report 2014 Quickstep Holdings Limited I Annual Report 2014 01 Quickstep is today the largest independent carbon fibre composites manufacturer in Australia Milestones Production accelerated on Quickstep’s cornerstone aerospace contracts as total sales increased to $12 million in FY2014, up 368% Moved to production of the full range of Joint Strike Fighter components that Quickstep will deliver to the JSF program Completed 188 carbon fibre composite parts for the JSF program in FY2014 US$139 million long-term JSF component agreement signed with Marand recision Engineering Awarded $1 million Australian government grant to progress qualification of Quickstep Process for manufacturing JSF vertical tail spars US $75 million Lockheed Martin C130-J wing flaps Memorandum of Agreement signed First seven Lockheed Martin C130-J ship-sets of wing flaps delivered First sale of Quickstep Process technology to ORPE Technologiya; delivery expected in FY2015 Developed unique resin spray transfer (RST) technology, enabling production of carbon fibre automotive parts which can be painted straight from the mould RST technology passes tough paint finish and environmental testing from luxury carmaker Quickstep team grows to 110 staff, 101 in Australia 02 Quickstep Holdings Limited I Annual Report 2014 Quickstep Holdings Limited I Annual Report 2014 03 Executive Chairman’s Review In FY2014 Quickstep completed its progress into being a fully-fledged manufacturer of carbon-fibre components. Quickstep is an innovator of advanced composites technology capitalising on the carbon-fibre market revolution that is driving change, particularly in the aerospace and automotive industries. We are the largest independent carbon-fibre composites manufacturer in Australia, and the only company listed on the Australian Securities Exchange with direct exposure to the multibillion-dollar global advanced carbon fibre composites market. The JSF program is valued at $700 million over two decades to Quickstep, and as volume continues to rise annual revenue is forecast to peak at about $40 million per year. Our five-year, US$75 million memorandum of agreement with Lockheed Martin to supply 120 sets of C-130J wing flaps has moved into production. Quickstep is the sole producer of wing flap components for the C-130J which is operated by 16 countries worldwide, with demand increasing. We completed the necessary qualification steps to manufacture components and delivered seven sets of wing flaps in FY2014. Further firm orders for 55 sets have been secured, and from which production is planned to grow to three sets per month in FY2015. As the programs build they should generate strong cash flow for Quickstep. Our continued positive progress in this highly specialised industry ensures that we enjoy excellent relationships with the Australian government and our clients. Moving into Production In FY2014 Quickstep completed its transformation from a research and development company into being a fully-fledged manufacturer of carbon-fibre components. Our business includes manufacturing contracts for aerospace and defence, and we are moving toward licencing our innovative Quickstep Process to the aerospace and automotive sectors. Quickstep is an innovator of advanced composites technology capitalising on the carbon-fibre market revolution that is driving change, particularly in the aerospace and automotive industries. We are the largest independent carbon-fibre composites manufacturer in Australia, and the only company listed on the Australian Securities Exchange with direct exposure to the multibillion- dollar global advanced carbon fibre composites market. Financial Overview Our sales for FY2014 were $12.0 million, up 368% from $2.6 million in FY2013 as production accelerated underpinned by our strong order book. This growth is a phenomenal achievement in a short time, as production only began at our state- of-the-art Bankstown Airport facility in 2013. Total revenue, including income from grants and R&D tax rebates, was $17.8 million in FY2014, up from $6.8 million. Quickstep remains in a phase of fast-growth and our net loss for the year was $11.2 million, in line with expectations, compared to a loss of $17.0 million in FY2013. R&D expenditure for the year was $3 million. Work is underway on the ORPE project and in accordance with accounting standards, the revenue will be recognised on completion of the project. Net debt at 30 June 2014 was $10.5 million. After balance date, Quickstep secured a $7 million Efic multi-option facility, including a performance bond facility that releases funds held in restricted term deposits, and an export working capital guarantee which secures additional facilities of up to $2.5 million through to 31 October 2015. This is intended to provide working capital for the company as we move toward a cash-flow positive position. Aerospace Manufacturing Quickstep’s signature contracts include component manufacturing for the F-35 Lightning II Joint Strike Fighter (JSF) and the C-130J “Super Hercules” aircraft. We are delighted to be a supplier to the JSF, which is the world’s largest military aerospace program. More than 3,000 JSF aircraft will be delivered over the life of the program. In FY2014 we produced 188 JSF components for Northrop Grumman, including complex parts, and expect to increase production to in excess of 350 parts in FY2015. A highlight of the year was completion of our $139 million long-term agreement to supply 700 sets of carbon fibre components for JSF vertical tails, to be assembled by Marand Precision Engineering for BAE Systems. We began preliminary work and our first components are scheduled for delivery in the second half of 2015. 04 Quickstep Holdings Limited I Annual Report 2014 Quickstep Holdings Limited I Annual Report 2014 05 Building on what we have achieved, we anticipate steady sales growth, and have a strong pipeline of opportunities to win further contracts in both the Aerospace & Defence and Automotive sectors. We completed FY2014 with 116 staff, 101 in Australia. With substantial growth anticipated in FY2015, we need to continue growing skills and to strengthen our management team and automotive capability. I wish to thank our shareholders, the management team, and our employees. This has been a year of exceptional momentum, and I look forward to continued growth and a successful year in FY2015. Tony Quick Executive Chairman Executive Chairman’s Review Quickstep Process: Aerospace We have developed the Quickstep Process, a revolutionary system which uses liquid to cure components. Our business model is to both utilise and license Quickstep Process technology, generating revenue through sale of production plants and royalties. This liquid-heated technology offers the potential to substantially cut the cost of manufacturing parts in series, with significant energy-efficiency and process improvements. It reduces cure times compared to traditional autoclave methods. The Australian Department of Defence has awarded a $1 million grant to support the qualification for the JSF program. The grant is intended to be used over three years to qualify the Quickstep Process for the manufacture of JSF components replacing the traditional autoclave method. The Quickstep Process is delivered through a fully-automated plant which can be tailored for specific business needs. Our first commercial plant is in production and will be assembled at our Munich facility before handover to ORPE Technologiya in FY2015. The production unit will be six metres by four metres in size, and capable of curing components for shielding satellites during launch in a single machine cycle. Completion of this $6 million contract will pave the way for our entry into the large integrated parts market, and we believe this commercial endorsement of our technology should provide a catalyst for further sales. Quickstep Process: Automotive The Quickstep Process is a disruptive technology for the automotive industry, which is expected to become the largest user of carbon fibre composites. We are currently engaging with a number of original equipment manufacturers, providing demonstration parts and qualifying our technology. Our initial focus has been automotive body panels such as roofs and bonnets, which showcase the high standard of finish that the Quickstep Process enables. Automakers are focused on developing more lightweight vehicles to reduce fuel consumption; change is being driven by carbon dioxide emissions legislation, particularly in Europe where our PRESCHE project with the German government and Audi is underway. The project aims to demonstrate the commercial benefits of using the Quickstep Process. One of our advantages is the unique resin spray transfer technology which can produce automotive components at fast speeds, low cost and with a superior finish, using robotic fibre and resin placement, using the Quickstep Process and resins developed by Quickstep. The automotive composite components market is expected to grow to US$95.5 million per annum by 2017 from $14.7 million in 2010, a compound annual growth rate of more than 30%. Engagement with automotive manufacturers is continuing, and we are in advanced negotiations with an original equipment manufacturer. Outlook The world’s economies are improving, the industries in which we operate are growing and demand for their products is increasing. Quickstep’s strong order book is valued at $49 million, with the majority of this work to be completed in FY2015. 06 Quickstep Holdings Limited I Annual Report 2014 07 Quickstep Holdings Limited I Annual Report 2014Aerospace Manufacturing In 2014 Quickstep’s aerospace manufacturing operations accelerated production for the F-35 Lightning II Joint Strike Fighter program and the ‘Super Hercules’ C-130J aircraft. Following establishment of JSF manufacturing at Quickstep’s state of the art facility at Bankstown Airport, a key focus of FY2014 was building capability and capacity to serve this large-scale, long-term program. Quickstep now manufactures a full range of JSF composite components for Northrop Grumman. The components include lower skins, fuel tank covers and maintenance access panels. In FY2014 Quickstep completed 188 JSF parts and is expected to nearly double production in the next year as the world’s largest military program continues to build momentum. The company also signed a $139 million long-term agreement to supply JSF vertical tail components, which will be assembled by Marand Precision Engineering for BAE Systems. Planning for production in FY2015 is well under way. Quickstep supplied the first C-130J wing flaps to Lockheed Martin in February 2014, and in FY2014 delivered seven ship-sets. Production is expected to increase to three ship-sets per month in FY2015, and firm purchase orders have been received for 55 ship-sets. The substantial increase of volume manufacturing, which began at Bankstown Airport in 2014, is a key objective for Quickstep in FY2015. 08 Quickstep Holdings Limited I Annual Report 2014 Quickstep Holdings Limited I Annual Report 2014 Quickstep Holdings Limited I Annual Report 2014 09 09 Production accelerated on Quickstep’s cornerstone aerospace contracts Aerospace Automotive Quickstep secured the first sale of its innovative Quickstep Process Plant in July 2013. Our contract with leading European aerospace composites manufacturer, ORPE Technologiya (ORPE), is progressing well. Having completed preliminary design review and critical design review milestones, the design of the Quickstep Process mini-plant that will be delivered to ORPE is complete. Following integration of the system at Quickstep’s German facility, completion is anticipated in early 2015. The technology will be used to manufacture large carbon-fibre shielding - up to 6 x 4 metres in size – for satellites during launching. Once operational, this cornerstone contract will provide an important endorsement of our technology. Quickstep is working with the Australian Department of Defence, the US JSF Program Office, BAE Systems and Lockheed Martin Aerospace to qualify the Quickstep Process for manufacturing spars for the JSF tail structure. Once completed, this will enable Quickstep to reduce the cost of manufacturing spars for the JSF program. Developmental programmes with Airbus, and discussions with other aerospace manufacturers, are continuing as we move toward establishing the Quickstep Process as a key out-of-autoclave manufacturing process for the aerospace industry. Quickstep has made steady progress towards providing global carmakers with a complete manufacturing solution for composite components. Quickstep’s patented process technology automates the production of strong, lightweight carbon fibre body panels and components, surpassing existing carbon fibre techniques by producing parts at significantly lower costs, at higher speed and with a superior high-quality finish. The cornerstones of this are two innovative technologies – Quickstep’s resin spray transfer (RST) and the Quickstep Process, which rapidly cures the components using heated liquids. Combining appropriate carbon fibre weaving techniques and advanced resin systems we can prevent ‘print-through’ on components and enable the painting of these parts without any further surface treatment, achieving the highest quality painted finish requirements. These results have been validated in tests by a number of original equipment manufacturers, including the most stringent painted panel benchmarks of luxury European carmakers. Quickstep’s process technology is now producing parts reliably and repeatedly, and the capacity of our automated mini-plant is currently around 5,000 parts per annum. We are continuing to improve this volume production capability. Transport is the only major sector in the European Union where greenhouse gas emissions are still rising, and light-weighting vehicles, through the usage of carbon fibre, offers an important way to reduce fuel consumption and, thereby, carbon dioxide emissions. Quickstep is a partner with the German government and Audi in the PRESCHE project, which has been established to demonstrate the commercial benefits of the Quickstep Process and is expected to complete in FY2015. Quickstep’s automotive business model involves the supply of a complete manufacturing solution to its customers which includes: — design of the advanced manufacturing equipment — resin and carbon fibre material specification — supply and installation of manufacturing equipment — process optimisation — prototype and initial parts manufacturing — maintenance, technical support and services Quickstep plans to accelerate its advancement into the global automotive market in 2015 through collaboration with a select number of automakers, tier one suppliers and advanced research institutions. 10 11 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014The Board n1 n2 n3 n4 n5 n6 n7 n8 n PHILIPPE MARIE ODOUARD 1 M.Sc (Bus) n BRUCE GRIFFITHS 2 OAM n NIGEL IAN AMPHERLAW 3 B.Com, FCA, MAICD n MARK BERNARD JENKINS 4 B. Comm., Grad. Dip. Bus Executive Director Independent Non Executive Director Independent Non Executive Director Independent Non Executive Director Appointed 13 October 2008 Appointed 14 February 2013 Appointed 8 July 2013 Mr Nigel Ampherlaw, aged 59, joined the Quickstep Board in July 2013 and is chairman of the Audit, Risk and Compliance Committee. He was a Partner of PricewaterhouseCoopers for 22 years where he held a number of leadership positions, including heading the financial services audit, business advisory services and consulting businesses. He also held a number of senior client Lead Partner roles. Mr Ampherlaw has extensive experience in Risk Management, technology, consulting and auditing in Australia and the Asia-Pacific region. Mr Ampherlaw’s current corporate Directorships include a Non-Executive Directorship with Credit Union Australia, where he is Chair of the Audit Committee and a member of each of the Risk, Remuneration and Strategy Committees; a Non-Executive Director of Elanor Investors Ltd where he is Chair of the Audit and Risk Committee; and a Non-Executive Director of the Australia Red Cross Blood Service, where he is a member of the Finance and Audit Committee and of the Risk Committee. Mr Ampherlaw has also been a member of the Grameen Foundation Australia charity Board since 2012. Mr Bruce Griffiths OAM, aged 64, is a member of the Remuneration, Nomination and Diversity Committee. Bruce has had a successful and extensive career, spanning more than 40 years, in the manufacturing industry. He has held a number of senior Executive roles within the industry and has a long history in working with Government. Bruce was recently awarded the Order of Australia Medal for services to the automotive manufacturing industry and to the community. Current appointments include: Board Member - Industry Capability Network Limited (ICNL), Director - Air International Thermal Systems, Chairman - Sail Melbourne ISAF Sailing World Cup. Previous appointments include: Rail Supplier Advocate from 2009 to 2014, Chairman - Futuris Automotive Group (2007-2012), Managing Director - Futuris Automotive Group (1992 -2007), Chairman - Air International Thermal Systems (2008-2011), Board Member - AutoCRC (Advanced Automotive Technology Ltd) (Inception -2012), Vice President of the Federation of Automotive Products Manufacturers (FAPM) (1990- 2012). Member - Automotive Industry Innovation Council, Advisory Board Member - Enterprise Connect Mr Griffiths’ honours include: Order of Australia Medal - 2013, Centenary Medal for Services to the Development of the Auto Industry Policy, Victorian Manufacturing Hall of Fame for services to the Manufacturing Industry. Mr Philippe Odouard, aged 59, was appointed Chief Executive Officer and Managing Director in October 2008. Mr Odouard, is Executive Director and manages all customer and strategic relationships whilst focusing on opportunities for the Quickstep Process including RST with effect from 29 May, 2014. He has significant management experience within the global aerospace and defence sectors, which represent primary target markets for Quickstep’s technology. Prior to joining Quickstep, Mr Odouard 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 $3 billion Melbourne desalination plant. Mr Odouard has also held a number of senior management roles with profit and loss responsibility within Thomson-CSF (now Thales Group) - a world leader in information systems for the aerospace, defence and security markets. During this time Mr Odouard was responsible for managing large contracts with innovative developments as well as technology transfers in both Australia and Europe. He negotiated and managed long term contracts with major global aerospace and defence groups including several worth in excess of $1 billion. Significantly, Mr Odouard managed the Minehunter project, which at the time was the largest user of composites in Australia. In addition, he negotiated and managed significant contracts with Eurocopter when they sold the all- composite Tiger helicopter to the Australian Defence Force. 12 Appointed as director 14 July 2005; appointed as Chairman 13 March 2006. Resigned as Chairman 14 February 2013 Mr Mark Jenkins, aged 50, is a member of the Audit, Risk and Compliance Committee. Mark 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 of America 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 Western Australia and a Graduate Diploma in Business from Curtin University. He has also been involved in numerous professional development programs, including Cranfield University in England. n TONY QUICK 5 MA (Cantab) Executive Chairman Appointed 14 February 2013 (interim appointment as Executive Chair 29 May, 2014) Mr Tony Quick, aged 58, joined Quickstep following a highly successful career in the aerospace and defence industries. He is Chair of the Defence Materials Technology Centre, which is a Defence funded Co-operative Research Centre, and an Adjunct Professor at RMIT University. After graduating from Cambridge University, Mr Quick spent most of his career in International Business Development, Program and Business Management. He joined an Aerospace composites business in 1988 and in 1993 he joined Westland Helicopters in England where he held senior international business development and program management roles. In October 2000 he left Westland to emigrate to Australia and, in 2001, set up GKN Aerospace Engineering Services Pty Ltd to service global demand for engineering services. The Company’s parent, GKN Aerospace, is one of the world’s largest independent first-tier suppliers to the global aviation industry providing integrated metal and composite assemblies for aerostructures and engine products. GKN Aerospace Engineering Services Pty Ltd provided design services to the F-35 Joint Strike Fighter program for Lockheed Martin and Northrop Grumman and grew to employ more than 240 aerospace engineering staff in Australia. He was the Managing Director and General Manager of that company until 2009. Mr Quick was the Director of the Defence Industry Innovation Centre, Enterprise Connect from 2009 to 2011. n ERROL JOHN MCCORMACK 6 AO Independent Non Executive Director Appointed 11 August 2010 Air Marshal Errol McCormack, aged 73, is a member of the Audit, Risk and Compliance Committee. Errol has extensive experience as a Senior Commander in the Royal Australian Air Force. Errol McCormack served in the Royal Australian Air Force for 39 years, retiring in 2001 as Chief of Air Force with the rank of Air Marshal. During his period of service he commanded at unit, wing and command level, held staff positions in capability development, operations and educational posts and attended both RAAF and Joint Services Staff Colleges. His overseas postings included flying tours in Vietnam, Thailand, Malaysia and Singapore, an exchange tour with the US Air Force flying the RF4C, Air Attaché Washington and Commander Integrated Air Defence System in the Five Power Defence Agreement between Malaysia, Singapore, UK, New Zealand and Australia. Since his retirement from the RAAF he has established a company providing consultancy services for multi- national companies working with the Australian Department of Defence. He is also Non-Executive Chairman of Chemring Australia Pty Ltd, a countermeasures and pyrotechnic manufacturing company based in Victoria, and consults for Chemring Group PLC and General Electric Military Engines. His pro-bono work includes Chairman of the Board of the Sir Richard Williams Foundation, an independent think- tank supporting development of Australian military aviation policy. He is a member of the Royal Aeronautical Society and the Australian Institute of Company Directors. n DAVID PATRICK ALEXANDER 7 SINGLETON BSc (Hons) n PETER CHAPMAN COOK 8 MPharm., PhC, CChem, FMonash, FRMIT, MPS, MRACI, MAICD Independent Non Executive Director Independent Non Executive Director Appointed 11 October 2010 Appointed 14 July 2005 Mr David Singleton, aged 54, is a member of the Audit, Risk and Compliance Committee and the Remuneration, Nomination and Diversity Committee. David worked for 19 years for BAE Systems (formerly British Aerospace) in a variety of roles. He was the Group Head of Strategy, Mergers and Acquisitions for BAE Systems based in London. Prior to that, Mr Singleton spent three successful years as the Chief Executive Officer of Alenia Marconi Systems (a BAE Systems European Joint Venture) and was based in Rome, Italy. Mr Singleton has served as a member of the National Defence Industries Council in the UK, and as a Board member and Vice-President of Defence for Intellect. Mr Singleton became the Chief Executive Officer and Managing Director of Poseidon Nickel in July 2007. He was the Chief Executive Officer and Managing Director of Clough Limited between August 2003 and January 2007. He is a Non-Executive Director of Austal Ships based in Perth WA and also Deputy Chair of Council to Methodist Ladies College in Perth. Mr. Singleton has a degree in Mechanical Engineering from University College London. Mr Peter Cook, aged 67, is the Chairman of the Remuneration, Nomination and Diversity Committee and Senior Independent Director. He has extensive business experience, both within Australia and overseas. Current appointments include Chair, Pharmaceutical Science Advisory Group (Monash University) and Director Myostin Therapeutics. His most recent Executive appointment was as Managing Director and Chief Executive Officer of Biota Holdings Limited, Mr Cook has also 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. Mr Cook has had extensive experience in the commercialisation of innovation, both in new and established markets. Mr Cook also has considerable experience in mergers and acquisitions, particularly with technology-based companies, and has a strong manufacturing background. Mr Cook has had a wide exposure of international commercial experience in Europe, USA and Asia, where he has both lived and worked. He holds a Masters Degree in Pharmacy, post graduate qualifications in Management from RMIT University and is a Fellow of Monash University. 13 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014Our People 110 staff in Australia up 46% 14 14 Quickstep Holdings Limited I Annual Report 2014 Quickstep Holdings Limited I Annual Report 2014 Quickstep Holdings Limited I Annual Report 2014 Quickstep Holdings Limited I Annual Report 2014 15 15 Directors’ Report Directors’ Report The Directors present their report together with the financial statements of the Group, being Quickstep Holdings Limited (the “Company”) and its subsidiaries, for the financial year ended 30 June 2014 and the auditor’s report thereon. 1. Directors Mr Tony Quick, MA (Cantab) Executive Chairman - appointed 14 February 2013 (interim appointment. as Executive Chair 29 May, 2014) Mr Tony Quick, aged 58, joined Quickstep following a highly successful career in the aerospace and defence industries. He is Chair of the Defence Materials Technology Centre, which is a Defence funded Co-operative Research Centre, and an Adjunct Professor at RMIT University. After graduating from Cambridge University, Mr Quick spent most of his career in International Business Development, Program and Business Management. He joined an Aerospace composites business in 1988 and in 1993 he joined Westland Helicopters in England where he held senior international business development and program management roles. In October 2000 he left Westland to emigrate to Australia and, in 2001, set up GKN Aerospace Engineering Services Pty Ltd to service global demand for engineering services. The Company’s parent, GKN Aerospace, is one of the world’s largest independent first-tier suppliers to the global aviation industry providing integrated metal and composite assemblies for aerostructures and engine products. GKN Aerospace Engineering Services Pty Ltd provided design services to the F-35 Joint Strike Fighter program for Lockheed Martin and Northrop Grumman and grew to employ more than 240 aerospace engineering staff in Australia. He was the Managing Director and General Manager of that company until 2009. Mr Quick was the Director of the Defence Industry Innovation Centre, Enterprise Connect from 2009 to 2011. Mr Philippe Marie Odouard, M.Sc (Bus) Executive Director - appointed 13 October 2008 Mr Philippe Odouard, aged 59, was appointed Chief Executive Officer and Managing Director in October 2008. Mr Odouard, is Executive Director and manages all customer and strategic relationships whilst focusing on opportunities for the Quickstep Process including RST with effect from 29 May, 2014. He has significant management experience within the global aerospace and defence sectors, which represent primary target markets for Quickstep's technology. Prior to joining Quickstep, Mr Odouard 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 $3 billion Melbourne desalination plant. Mr Odouard has also held a number of senior management roles with profit and loss responsibility within Thomson-CSF (now Thales Group) - a world leader in information systems for the aerospace, defence and security markets. During this time Mr Odouard was responsible for managing large contracts with innovative developments as well as technology transfers in both Australia and Europe. He negotiated and managed long term contracts with major global aerospace and defence groups including several worth in excess of $1 billion. Significantly, Mr Odouard managed the Minehunter project, which at the time was the largest user of composites in Australia. In addition, he negotiated and managed significant contracts with Eurocopter when they sold the all- composite Tiger helicopter to the Australian Defence Force. Directors (continued) Mr Nigel Ian Ampherlaw, B.Com, FCA, MAICD Independent Non Executive Director - appointed 8 July 2013 Mr Nigel Ampherlaw, aged 59, joined the Quickstep Board in July 2013 and is chairman of the Audit, Risk and Compliance Committee. He was a Partner of PricewaterhouseCoopers for 22 years where he held a number of leadership positions, including heading the financial services audit, business advisory services and consulting businesses. He also held a number of senior client Lead Partner roles. Mr Ampherlaw has extensive experience in Risk Management, technology, consulting and auditing in Australia and the Asia-Pacific region. Mr Ampherlaw's current corporate Directorships include a Non-Executive Directorship with Credit Union Australia, where he is Chair of the Audit Committee and a member of each of the Risk, Remuneration and Strategy Committees; a Non-Executive Director of Elanor Investors Ltd where he is Chair of the Audit and Risk Committee; and a Non-Executive Director of the Australia Red Cross Blood Service, where he is a member of the Finance and Audit Committee and of the Risk Committee. Mr Ampherlaw has also been a member of the Grameen Foundation Australia charity Board since 2012. Mr Peter Chapman Cook, MPharm., PhC, CChem, FMonash, FRMIT, MPS, MRACI, MAICD. Independent Non Executive Director - appointed 14 July 2005 Mr Peter Cook, aged 67, is the Chairman of the Remuneration, Nomination and Diversity Committee and Senior Independent Director. He has extensive business experience, both within Australia and overseas. Current appointments include Chair, Pharmaceutical Science Advisory Group (Monash University) and Director Myostin Therapeutics. His most recent Executive appointment was as Managing Director and Chief Executive Officer of Biota Holdings Limited, Mr Cook has also 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. Mr Cook has had extensive experience in the commercialisation of innovation, both in new and established markets. Mr Cook also has considerable experience in mergers and acquisitions, particularly with technology-based companies, and has a strong manufacturing background. Mr Cook has had a wide exposure of international commercial experience in Europe, USA and Asia, where he has both lived and worked. He holds a Masters Degree in Pharmacy, post graduate qualifications in Management from RMIT University and is a Fellow of Monash University. Mr Bruce Griffiths, OAM Independent Non Executive Director - appointed 14 February 2013 Mr Bruce Griffiths OAM, aged 64, is a member of the Remuneration, Nomination and Diversity Committee. Bruce has had a successful and extensive career, spanning more than 40 years, in the manufacturing industry. He has held a number of senior Executive roles within the industry and has a long history in working with Government. Bruce was recently awarded the Order of Australia Medal for services to the automotive manufacturing industry and to the community. Current appointments include: Board Member - Industry Capability Network Limited (ICNL), Director - Air International Thermal Systems, Chairman - Sail Melbourne ISAF Sailing World Cup. Previous appointments include: Rail Supplier Advocate from 2009 to 2014, Chairman - Futuris Automotive Group (2007-2012), Managing Director - Futuris Automotive Group (1992 -2007), Chairman - Air International Thermal Systems (2008-2011), Board Member - AutoCRC (Advanced Automotive Technology Ltd) (Inception -2012), Vice President of the Federation of Automotive Products Manufacturers (FAPM) (1990-2012). Member - Automotive Industry Innovation Council, Advisory Board Member - Enterprise Connect Mr Griffiths’ honours include: Order of Australia Medal - 2013, Centenary Medal for Services to the Development of the Auto Industry Policy, Victorian Manufacturing Hall of Fame for services to the Manufacturing Industry. 4   16 5   17 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014     Directors’ Report Directors (continued) Mr David Edward Wills, B Comm., FCA Independent Non Executive Director - appointed 26 November 2010, retired 5 July 2013 Mr David Wills, aged 65, was Chairman of the Audit, Risk and Compliance Committee until his recent retirement. David is a Chartered Accountant, having been a Partner in PricewaterhouseCoopers (and its predecessor firm Coopers & Lybrand) for 25 years. He was Deputy Chairman of the firm from 2000 to 2004, Managing Partner of the Sydney office from 1997 until 2003 and Chairman of the firm’s manufacturing practice from 1995 - 1997. Mr Wills’ major area of practice throughout all of his career was as an audit partner and his client base included many large manufacturing companies, both publicly listed in Australia and subsidiaries of US based companies. In addition to audit, Mr Wills was experienced in mergers and acquisitions and special investigations of companies. Mr Wills is now (or has been) a director of the following publicly listed companies: • • • Washington H Soul Pattinson Limited (since 2006); Clover Corporation Limited (from 2004 to July 2013); and Souls Private Equity Limited (since 2005); In addition, Mr Wills is Chairman of Sir David Martin Foundation, a charity that raises funds to support youth programs undertaken by Mission Australia. Mr Wills graduated from the University of New South Wales with a Bachelor of Commerce in 1970 and qualified as a Chartered Accountant in 1972. Company Secretary Mr. Jaime Pinto, B.Com, CA. - appointed 20 November 2012 Mr Pinto, aged 43, is a Chartered Accountant with over 20 years’ experience in both professional practice and commerce. He has held senior finance roles in organisations of varying size and complexity, including small private businesses, large national groups and ASX listed entities. He is currently the Company Secretary of a number of ASX-listed and unlisted companies in the manufacturing, investing, real estate and advisory industries. Mr Pinto holds a Bachelor Degree in Commerce from the University of NSW, and is a member of The Institute of Chartered Accountants Australia. Directors’ Report Directors (continued) Mr Mark Bernard Jenkins, B. Comm., Grad. Dip. Bus. Independent Non Executive Director - appointed as director 14 July 2005; appointed as Chairman 13 March 2006. Resigned as Chairman 14 February 2013 Mr Mark Jenkins, aged 50, is a member of the Audit, Risk and Compliance Committee. Mark 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 of America 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 Western Australia and a Graduate Diploma in Business from Curtin University. He has also been involved in numerous professional development programs, including Cranfield University in England. Air Marshal Errol John McCormack (Ret’d), AO Independent Non Executive Director - appointed 11 August 2010 Air Marshal Errol McCormack, aged 73, is a member of the Audit, Risk and Compliance Committee. Errol has extensive experience as a Senior Commander in the Royal Australian Air Force. Errol McCormack served in the Royal Australian Air Force for 39 years, retiring in 2001 as Chief of Air Force with the rank of Air Marshal. During his period of service he commanded at unit, wing and command level, held staff positions in capability development, operations and educational posts and attended both RAAF and Joint Services Staff Colleges. His overseas postings included flying tours in Vietnam, Thailand, Malaysia and Singapore, an exchange tour with the US Air Force flying the RF4C, Air Attaché Washington and Commander Integrated Air Defence System in the Five Power Defence Agreement between Malaysia, Singapore, UK, New Zealand and Australia. Since his retirement from the RAAF he has established a company providing consultancy services for multi- national companies working with the Australian Department of Defence. He is also Non-Executive Chairman of Chemring Australia Pty Ltd, a countermeasures and pyrotechnic manufacturing company based in Victoria, and consults for Chemring Group PLC and General Electric Military Engines. His pro-bono work includes Chairman of the Board of the Sir Richard Williams Foundation, an independent think- tank supporting development of Australian military aviation policy. He is a member of the Royal Aeronautical Society and the Australian Institute of Company Directors. Mr David Patrick Alexander Singleton, BSc (Hons) Independent Non Executive Director - appointed 11 October 2010 Mr David Singleton, aged 54, is a member of the Audit, Risk and Compliance Committee and the Remuneration, Nomination and Diversity Committee. David worked for 19 years for BAE Systems (formerly British Aerospace) in a variety of roles. He was the Group Head of Strategy, Mergers and Acquisitions for BAE Systems based in London. Prior to that, Mr Singleton spent three successful years as the Chief Executive Officer of Alenia Marconi Systems (a BAE Systems European Joint Venture) and was based in Rome, Italy. Mr Singleton has served as a member of the National Defence Industries Council in the UK, and as a Board member and Vice-President of Defence for Intellect. Mr Singleton became the Chief Executive Officer and Managing Director of Poseidon Nickel in July 2007. He was the Chief Executive Officer and Managing Director of Clough Limited between August 2003 and January 2007. He is a Non-Executive Director of Austal Ships based in Perth WA and also Deputy Chair of Council to Methodist Ladies College in Perth. Mr. Singleton has a degree in Mechanical Engineering from University College London. 18 19 6   7   Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014         (continued) Directors’ Report Directors’ Report Meetings of Directors The numbers of meetings of the Company's board of Directors and of each board committee held during the year ended 30 June 2014, and the numbers of meetings attended by each Director were: Director Mr T Quick Mr P M Odouard Mr N Ampherlaw Mr P C Cook Mr B Griffiths Mr M B Jenkins Mr E J McCormack Mr D Singleton Mr D Wills Board Meetings Audit, Risk and Compliance Committee Meetings Remuneration, Nomination and Diversity Committee Meetings A 12 12 12 12 12 12 12 12 - B 12 12 12 11 12 11 12 10 - A - - 5 - - 5 5 5 - B - - 5 - - 4 5 4 - A - - - 4 4 - - 4 - B - - - 4 4 - - 4 - A = Number of meetings held during the time the Director held office during the year B = Number of meetings attended Principal Activities During the year the principal continuing activities of the Group consisted of: a) increased the volume of JSF parts for Northrop Grumman including commencing manufacture of the most complex parts; b) commenced C130 production delivering the first seven shipsets and worked towards achieving three shipsets per month production during FY15; c) seen significant growth in new orders finishing the year with a $49 million order book; d) substantially progressed our resin spray technology for the auto sector Results The loss from ordinary activities after income tax amounted to $11,181,401 (2013 loss: $16,985,894). Review of operations A review of operations and activities for the financial year is set out in the Executive Chairman’s Review. Dividends No dividends have been paid during the financial year. The Directors do not recommend that a dividend be paid in respect of the financial year (2013: $nil). Events Since the end of the Financial Year (continued) Since the end of the financial year the Group: (a) secured support from Efic for the bonds of $3 million, disclosed within Other Financial Assets, associated with the ORPE program. This has allowed the Group access to the previously restricted funds (b) secured from Efic a $2.5 million working capital guarantee facility to support the anticipated growth in production volumes (c) received a customer advance payment of $2.3 million (d) commenced the process of closing down the US office and is in the advanced stages of transferring the activities to a licensee. Likely developments and expected results of operations Strategies, prospects and risks by division Manufacturing Strategic Objective Achieve sales revenue from new and existing manufacturing contracts Prospects Program schedules indicate a significant increase in sales for the 2015 financial year Risks Steep ramp up over a short period, mitigated by strong management team and achievement to date. Quickstep has a non-binding agreement with Northrop Grumman to produce components for the JSF program. There is a risk that the actual production orders may not be issued by Northrop Grumman. Quickstep Systems Strategic Objective Fully demonstrate RST cell capability by producing motor vehicle parts capable of sale Prospects Develop manufacture real parts for Risks Finalise all related technologies to the parts (Tools, faster machine...) Manufacture and deliver motor vehicle part Original Manufacturer (OEM) first an Equipment to Sign a contract with OEM to produce such part New technology needs to be accepted, risk mitigated by a growing team of automotive specialist of discussions. advanced stages and Progress the qualification of Aerospace parts manufactured using the Quickstep process Program in place to qualify a spar for the JSF Vertical tail supported by a grant from the Australian Government. Other opportunities being pursued. Long process to demonstrate equivalency within qualification Aerospace an environment. 8   9   20 21 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014           Directors’ Report Directors’ Report Directors' Interests Indemnification and Insurance of Officers The relevant interest of each Director in the shares, rights and options at the date of this report unless otherwise indicated is as follows: Except as indicated below, the Group has not otherwise, during or since the financial year, indemnified or agreed to indemnify an officer of the Group or of any related body corporate against a liability incurred as an officer. Indemnification The Group has indemnified the Directors (as named in this Report) and all Executive officers of the Group 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. Insurance Premiums The Group 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 and Group against a liability incurred by a Director, Secretary or executive officer to the maximum 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. Non-Audit Services During the financial year, KPMG, the Group’s auditor, has not performed any additional services to their statutory duties. Auditor's independence declaration A copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 91. Mr T Quick Mr P M Odouard Mr N Ampherlaw (1) Mr P C Cook (2) Mr B Griffiths Mr M B Jenkins Mr E J McCormack (3) Mr D Singleton Mr D Wills(4) Shares Options Rights 100,000 2,440,685 275,000 220,758 91,000 100,000 369,315 100,000 460,107 - 3,256,593 - - - - - - - - 802,000 - - - - - - - (1) The registered holder of the shares is NIJS Fund which is a superannuation fund of which Mr Ampherlaw is a trustee and member. (2) The registered holder of the shares is Bond Street Custodians Limited as custodian for the Lloyds Wharf Superannuation Fund, of which Mr Cook is a trustee. (3) The registered holder of the shares is Aviops Pty Ltd, of which Mr McCormack is a Director. (4) The registered holder of the shares is Jammit Pty Ltd, of which Mr Wills is a director. Mr Wills retired as a Director on 5 July 2013. The interest disclosed is at the date of cessation as Director. Share Options and Rights During the financial year 802,000 rights were granted under the Incentive Rights Plan (IRP) to the Executive Director, Mr P M Odouard, as part of his remuneration with vesting based on future conditions. During the financial year 306,480 options were exercised with an exercise price of $nil and 2,204,589 rights were vested. On the exercise/vesting of those options/rights ordinary shares of the company were issued. No other options or rights have been granted during or since the end of the financial year. Unissued Shares Under Options and Rights At the date of this report, unissued ordinary shares of the Company under options and rights are: Employee Earliest possible vesting date Expiry date Exercise price Number of shares Options Mr P M Odouard Mr P M Odouard Mr P M Odouard Mr P M Odouard Rights Mr P M Odouard Total 1/7/2012 1/7/2013 31/8/2014 31/08/2015 30/03/2017 26/11/2017 23/11/2018 22/11/2019 31/08/2016 22/11/2018 $0.00 $0.00 $0.00 $0.00 $0.00 1,091,144 471,337 706,373 987,739 802,000 4,058,593 No option holder has any right under the options to participate in any other share issue of the Company or any other entity. 10   11   22 23 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014                         Directors’ Report Directors’ Report Remuneration Report - Audited The report contains the following sections: 1 2 3 4 5 Principles of compensation Details of remuneration Share based compensation Analysis of bonuses included in remuneration Services from remuneration consultant 1 Principles of Compensation Key management personnel, including Directors of the Company, have authority and responsibility for planning, directing and controlling the activities of the Group. Key management personnel comprise the Directors of the Company and Executives for the Group. The report includes details relating to: Non Executive Directors Mr N I Ampherlaw Mr P Cook Mr B Griffiths Mr M Jenkins Air Marshal (R’td) E McCormack Mr D Singleton Mr D Wills Executive Directors Mr T Quick Mr P Odouard Executive and Officers Mr J Pinto Mr J Johnson Mr S Godbille Mr P Robertson Mr M Schramko Ms T Swinley Dr J Schlimbach Mr A Vihersaari Ms N Sharman Chair of Audit Risk and Compliance Committee (appointed 8th July 2013) Chair of Remuneration, Nomination and Diversity Committee and Senior Independent Director from 29 May 2014 Chair of Audit, Risk and Compliance Committee (retired 5 July 2013) Chairman, Interim Executive Chairman from 29 May 2014 Managing Director and Chief Executive Officer until 29 May 2014 and then Executive Director from that date Company Secretary Vice President of Commercial and Admin Vice President of Quickstep Systems (until 31 March 2014) Vice President of Finance (until 25 November 2013) Vice President of Manufacturing and Operations Vice President of Human Resources CEO, Quickstep GmbH Vice President of Global Business Development (until 12 June 2014) Chief Financial Officer (appointed 11th March 2014) Remuneration Report - Audited (continued) 1 Principles of compensation (continued) The Board has established a Remuneration, Nomination and Diversity (RN&D) 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, total payments proposed and plan eligibility criteria. If necessary, the RN&D 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 the statutory employer contributions to superannuation funds. Shares, options or rights may only be issued to directors subject to approval by shareholders in a general meeting. The Group does not have any scheme relating to retirement benefits for its key management personnel other than contributions defined under its statutory obligations. The Company’s policy is to provide executives with a fixed compensation to meet the median of that paid by like sized companies undertaking similar work and offers additional short and long term incentives to allow the executive to achieve top quartile compensation, if all performance hurdles are met. All incentives are capped. The Company’s policy is to provide non-executive directors with a fixed fee comparable to the median of that paid by similar sized ASX listed companies operating in similar fields. Non-executive directors may also receive chair fees and committee fees as additional payments. Non-executive directors are not eligible for participation in any of the Company’s incentive schemes. Fixed compensation Fixed compensation consists of base compensation as well as employer statutory contributions superannuation. to Compensation levels are reviewed annually through a process that considers current labour market rates, the individual’s contribution and overall performance of the Group. Compensation is also reviewed in the event of promotion or significant change in responsibilities. Performance linked compensation Performance linked compensation includes both short and long term incentives and is designed to reward key management personnel, excluding non-executive directors, for meeting or exceeding the Company’s business and their personal objectives. Each individual’s performance linked compensation is capped as a percentage uplift of fixed compensation. Other than as disclosed in this report, there have been no performance-linked payments made by the Group to key management personnel. 12   13   24 25 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014         Directors’ Report Directors’ Report Remuneration Report – Audited (continued) 1 Principles of Compensation (continued) (a) Short-term incentives (i) Cash and equity settled short term incentive Certain executives receive short term incentives (STI) in cash and/or shares based on achievement of key performance indicators (KPIs). Each year the RN&D Committee considers the appropriate targets and KPIs and the alignment of individual rewards to the Group’s performance. These targets may include measures related to the annual performance of the Group and/or specified parts of the Group and are measured against actual outcomes. The RN&D Committee is responsible for assessing whether the KPIs meet the criteria set out at the beginning of the year. No bonus is awarded where performance falls below the minimum level of performance. The RN&D Committee recommends the total incentive to be paid to the individuals for approval by the Board. The number of shares issued to executives is based on the accrued equity settled STI value divided by the weighted average share price on the date the shares are granted. (b) Long-term incentives (i) Quickstep Employee Incentive Plan (EIP) The Company previously established the Quickstep Employee Incentive Plan (EIP). Under the EIP, the Board may grant options to selected Quickstep employees on such terms as it determines appropriate. Participation in the EIP is open to all employees of the Group, with the Board determining those employees eligible to participate in each grant under the EIP. Each option is a conditional right to one Quickstep ordinary share, subject to the satisfaction of the applicable performance conditions and payment of the exercise price (if any). The EIP provides sufficient flexibility for the Board to grant short-term or long-term incentives to eligible employees. That is, the performance conditions set by the Board may apply over the period of time the Board determines appropriate in the circumstances. It is currently intended that the “short-term” grants under the EIP will be in the form of an equity retention incentive, with the applicable performance condition based on the key performance indicators set under the Company’s short term incentive program, and that the “long term” grants will be subject to performance against the ASX’s all ordinaries accumulation index over a minimum three year period. In general, the options will not vest until the performance criteria specified by the Board at the time of the grant have been achieved and provided the participant remains a Group employee. If the performance criteria are not satisfied at the end of the applicable performance period the options will lapse. The options may lapse in other circumstances provided for in the EIP rules, including forfeiture where the employee engages in dishonest or fraudulent conduct, where there is a change in control and where the employee ceases employment. Subject to the rules and the term of the grant, options will lapse on the seventh anniversary of their grant date. The options granted from the EIP are subject to performance conditions based on achieving pre-set absolute Total Shareholder Return (TSR) targets over the applicable performance period. In summary, TSR combines share price appreciation over a period and dividends paid during that period to show the total return to shareholders over that period. For the purposes of the performance conditions attached to the options, TSR will be calculated as the 45 day volume weighted average price (VWAP) of Quickstep shares as at a test date (30 June or 31 August). The options vest on the day after the test date. This calculation has been adopted bearing in mind Quickstep’s market capitalisation and to ensure the performance hurdle and testing process remain appropriate in all the circumstances. All options are subject to a minimum three year performance condition from their grant date and are tested annually until they lapse seven years after grant date. At each re-testing date TSR hurdles are increased by an annual growth rate as set out in the table below. The specific TSR targets for each Option Tranche are as follows; Remuneration Report – Audited (continued) 1 Principles of Compensation (continued) (b) Long term incentives (continued) (i) Quickstep Employee Incentive Plan (EIP) (continued) If the Threshold hurdle of TSR is achieved at a test date, 25% of the Options in the tranche will vest. If the Target hurdle of TSR is achieved at a test date in any given year, 50% of Options in the tranche will vest. If the Stretch hurdle of TSR is achieved at a test date in any given year 100% of Options in the tranche will vest. After the initial vesting period, re-testing of the performance conditions occurs annually. Re-testing will occur annually until the options lapse and against the higher TSR hurdle. Grant Earliest vesting date TSR Hurdle VWAP as at Tranche 3 Tranche 4 01/07/12 01/07/11 30 June 30 June 2012 2011 2010 Year 2011 Year 2012 Year 31/08/15 01/09/2014 01/07/13 31 Aug 31 Aug 30 June 2015 2014 2013 % Annual Growth (TP) % Vesting Initial value Threshold Target Stretch 5 8 12 25 50 100 $0.165 $0.188 $0.204 $0.227 $0.250 $0.290 $0.315 $0.352 $0.326 $0.378 $0.410 $0.458 $0.228 $0.264 $0.287 $0.320 $0.169 $0.196 $0.214 $0.239 If an employee ceases employment with the Group due to death, disability, bona fide redundancy or any other reason which may meet with the approval of the Board, the Board may determine that any unvested options they hold will vest as at the date of cessation, having regard to such factors as the Board considers relevant, including pro rata performance against the performance condition over the period from the grant date to the date of cessation. If an employee ceases employment in these circumstances and hold vested options they may exercise those options within the 12 month period following the date of cessation (or, the remaining period until the expiry of the options, if less than 12 months). If an employee ceases employment for any other reason any unvested options they hold will lapse on the date of cessation unless the Board determines otherwise, and any vested options must be exercised within three months. (ii) Quickstep Incentive Rights Plan (IRP) During the year the Company established the Quickstep Incentive Rights Plan (IRP). The IRP has been designed to facilitate the Company moving towards best practice remuneration structures for executives. The IRP authorises the granting of Rights to executives of the Company, in the form of Performance Rights (PRs) and/ or Deferred Rights (DRs) (together, Rights). These rights represent an entitlement on vesting to fully paid ordinary shares in the issued capital of the Company (Shares) and cash with the total value of cash and Shares being equal to the value of vested Rights (number of vested Rights x market value of a Share). PRs may vest if Performance Conditions are satisfied. DRs may vest if service conditions are satisfied. The 2013-14 offer to Mr P Odouard consisted of PRs only. The Board has the discretion to set the terms and conditions on which it will offer PRs under the IRP, including the performance conditions and modification of the terms and conditions as appropriate to ensuring the IRP operates as intended. All PRs offered will be subject to performance conditions which are intended to be challenging. 14   15   26 27 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014                         Directors’ Report Directors’ Report (continued) Remuneration Report - Audited (continued) 1 Principles of compensation (continued) (b) Long term incentives (continued) (ii) Quickstep Incentive Rights Plan (IRP) (continued) The PRs are subject to a performance condition based on achieving Total Shareholder Return (TSR) targets over the performance period. In summary, TSR combines share price appreciation over a period and dividends paid during that period (assuming that they are reinvested into Shares) to show the total return to shareholders over that period. When calculating Quickstep's TSR, its share price at the beginning and end of the performance period will be calculated as the 45 day volume weighted average price of Shares as at the relevant date. The performance period is three years from 1 September 2013 for the current year’s offer. For vesting to occur the Company's TSR over the performance period must be positive (i.e. if shareholders have not gained then PRs will not vest) relative to the All Ordinaries Accumulation Index (AOAI). The AOAI measures performance of securities in the All Ordinaries Index taking into account income as well as share price movement and assumes dividends are reinvested. If the Company's TSR is positive but the AOAI movement is negative over the performance period then vesting, if any, will be at the discretion of the Board (i.e. only applies if the Company has outperformed a general fall in the market by protecting against a similar fall in the Company's Share price). If the Company's TSR is positive and the movement in the AOAI is also positive then the following vesting scale will apply: Performance Level Company’s TSR relative to AOAI movement over the performance period Vesting % Below threshold Threshold Target < Increase in the AOAI = Increase in the AOAI > 100% of AOAI increase & < 110% of AOAI increase 110% of AOAI increase > 110% of AOAI increase & < 120% of AOAI increase Stretch and above 120% of AOAI increase 0% 25% Pro-rata 60% Pro-rata 100% Testing of the TSR hurdle will occur on the third anniversary of the commencement of the performance period (i.e. 31 August 2016) and then semi-annually until the rights lapse or the fifth anniversary of the commencement of the performance period. Once a right has vested it may not become unvested based on performance at a subsequent test date. If at a test date some rights have previously vested and the Company's performance at the test date is higher than at previous test dates then additional rights will vest. Such vesting will apply on the basis that the total number of rights that have vested from a tranche (previous and current vesting) is equal to the number that would have vested at the current test date had no vesting occurred earlier. Upon the satisfaction of the performance conditions, the value of PRs granted under the IRP will be evaluated. The Board has discretion to vary vesting if it considers it to be appropriate to do so given the circumstances that prevailed over the performance period. This provision aims to address situations where vesting may otherwise be inconsistent with shareholder expectations. If the value that vests is greater than nil, vesting will give rise to a $1,000 cash payment with the remainder of the value to be converted into Shares based on the then market value of a Share. The IRP contains provisions concerning the treatment of vested and unvested rights in the event that a participant ceases employment. Unless the Board determines otherwise, if a participant ceases employment in other than special circumstances (death, total and permanent disablement, retrenchment, redundancy, permanent retirement from full-time work with the consent of the Board or other circumstances determined by the Board), all unvested rights held by the participant will lapse. Unless the Board determines otherwise, if a participant ceases employment under special circumstances, rights that were granted to the participant during the financial year in which the termination occurred will be forfeited in (continued) the same proportion as the remainder of the financial year bears to the full year. All remaining rights for which performance conditions have not been satisfied as at the date of cessation of employment will then remain "on 1 Principles of Compensation (continued) (b) Long term incentives (continued) (iii) Other Equity-based compensation Other incentives may be provided to key management personnel as rights over ordinary shares of the Company. These rights have been provided as: loyalty bonuses as an incentive for continuity of employment; and • • Executive performance and retention bonuses (EPRB) for performance against objectives relating to the Company’s relocation objectives and continuity of employment such as the transfer of manufacturing to NSW. (c) Non Executive Directors’ fees Total remuneration for all Non Executive Directors, last voted upon by shareholders at the 2010 Annual General Meeting, is not to exceed $600,000 per annum. Fees are set with reference to fees paid to Non Executive directors of comparable companies. Directors are entitled to receive a fee which covers all main Board activities and membership of committees. In 2013 a fee for membership of a committee of $2,500 p.a. was introduced and the fee for Chairing a committee was increased from $5,000 to $10,000 pa. The table below indicates the maximum annual fees based on directors responsibilities at the date of this report. Non-Executive directors do not receive performance related compensation. Non Executive Directors T Quick (1) N Ampherlaw (appointed 8/7/13) P Cook B Griffiths M Jenkins E McCormack D Singleton Fees 126,000 60,000 60,000 60,000 60,000 84,000 60,000 Committee Membership (2) N/A 10,000 10,000 2,500 2,500 2,500 5,000 (1) Mr T Quick has been appointed on an interim basis from 29/5/2014 as Executive Chairman at a rate of $2,000 a day. (2) Committee Membership fees were approved by the RND Committee on 23 September 2013 and effective from 1 October 2013. The directors were awarded the fees on a pro rata basis for FY14 from 1 October 2013 (i.e. all directors received 75% of annual entitlement). (d) Consequences of performance on shareholder wealth In considering the Group’s performance and benefits for shareholder wealth, the remuneration committee has regard to the following indices in respect of the current financial year and the previous four financial years. Loss attributable to owners of the company Dividends paid Operating income Change in share price Return on capital employed 2014 2013 2012 2011 2010 $(11,181,401) $(16,985,894) $(11,801,601) $(13,734,713) $(11,508,702) $nil $12,001,752 35.7% $nil $2,562,621 (17.6%) $nil $503,168 (34.6%) $nil $471,524 13% $nil $448,322 35.3% (66.4%) (95.9%) (60.9%) (52.5%) (39.3%) The reduction in overall loss is one of the financial performance targets considered in setting the STI. Loss amounts have been calculated in accordance with Australian Accounting Standards (AASBs). Return on capital employed is calculated as EBIT divided by Total Assets less Current Liabilities. The overall level of compensation takes into account the performance of the Group over a number of years. Over the past five years the Group’s loss from ordinary activity after income tax has remained relatively consistent at the group has worked towards achieving commercialization. 16   17   1 Principles of Compensation (continued) (b) Long term incentives (continued) (iii) Other Equity-based compensation 28 Other incentives may be provided to key management personnel as rights over ordinary shares of the Company. These rights have been provided as: • loyalty bonuses as an incentive for continuity of employment; and • Executive performance and retention bonuses (EPRB) for performance against objectives relating to the Company’s relocation objectives and continuity of employment such as the transfer of manufacturing to NSW. (c) Non Executive Directors’ fees Total remuneration for all Non Executive Directors, last voted upon by shareholders at the 2010 Annual General Meeting, is not to exceed $600,000 per annum. Fees are set with reference to fees paid to Non Executive directors of comparable companies. Directors are entitled to receive a fee which covers all main Board activities and membership of committees. In 2013 a fee for membership of a committee of $2,500 p.a. was introduced and the fee for Chairing a committee was increased from $5,000 to $10,000 pa. The table below indicates the maximum annual fees based on directors responsibilities at the date of this report. Non-Executive directors do not receive performance related compensation. Non Executive Directors N Ampherlaw (appointed 8/7/13) T Quick (1) P Cook B Griffiths M Jenkins E McCormack D Singleton $2,000 a day. Fees 126,000 60,000 60,000 60,000 60,000 84,000 60,000 Committee Membership (2) N/A 10,000 10,000 2,500 2,500 2,500 5,000 (1) Mr T Quick has been appointed on an interim basis from 29/5/2014 as Executive Chairman at a rate of (2) Committee Membership fees were approved by the RND Committee on 23 September 2013 and effective from 1 October 2013. The directors were awarded the fees on a pro rata basis for FY14 from 1 October 2013 (i.e. all directors received 75% of annual entitlement). (d) Consequences of performance on shareholder wealth In considering the Group’s performance and benefits for shareholder wealth, the remuneration committee has regard to the following indices in respect of the current financial year and the previous four financial years. Loss attributable to owners of the company Dividends paid Operating income Change in share price Return on capital employed 2014 2013 2012 2011 2010 $(11,181,401) $(16,985,894) $(11,801,601) $(13,734,713) $(11,508,702) $nil $nil $12,001,752 $2,562,621 35.7% (66.4%) (17.6%) (95.9%) $nil $503,168 (34.6%) $nil $471,524 13% $nil $448,322 35.3% (60.9%) (52.5%) (39.3%) The reduction in overall loss is one of the financial performance targets considered in setting the STI. Loss amounts have been calculated in accordance with Australian Accounting Standards (AASBs). Return on capital employed is calculated as EBIT divided by Total Assets less Current Liabilities. The overall level of compensation takes into account the performance of the Group over a number of years. Over the past five years the Group’s loss from ordinary activity after income tax has remained relatively consistent at the group has worked towards achieving commercialization. 17   29 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014                     Directors’ Report Directors’ Report (continued) Remuneration Report - Audited (continued) 1 Principles of Compensation (continued) (e) Service agreements     Name Initial agreement date Duration Notice period Termination benefits STI cap as a % of TFR (1) LTI cap as a% of TFR(2) Mr T Quick 29 May 2014 Open 1 week None - - Mr P M Odouard 13 Oct 2008 Open 6 months Mr D E Brosius 1 Sept 2005 30 Sep 2014 3 months Mr J Johnson 1 Apr 2011 Open 3 months 12 months annual salary and pro-rated annual bonus (at Board’s discretion) 6 months of annual salary package; Any cash bonus due but not paid; and Pro-rated current year cash bonus (in accordance with contract).   6 months of annual salary package; Pro-rated annual bonus (at Board’s discretion). 30 50(3) 20(4) - 20 20 Dr J Schlimbach 1 Jan 2012 Fixed term   external contractor   3 months n/a 20 20 Ms Tracy Swinley 26 Nov 2012 Open 3 months Mr M Schramko 25 Jul 2011 Open 3 months Ms Nicole Sharman 17 Feb 2014 Open 1 week 3 months of annual salary package; and Pro-rated annual bonus (at Board’s discretion). 3 months of annual salary package; and Pro-rated annual bonus (at Board’s discretion) 3 months of annual salary package; and Pro-rated annual bonus (at Board’s discretion) 20 20 20 20 20 20 (1) STI (Short Term Incentive) is determined on performance against key performance indicators (KPIs) set and reviewed by the RN&D Committee or the Board as appropriate. The STI cap refers to the maximum amount payable in cash as a percentage of Total Fixed Remuneration. The KPIs include company financial objectives, such as order intake, profit and cash flow, and personal objectives including control of responsibility center, expenditure and functional outcomes aligned to the annual strategic plan. The share based element of STI is discussed at (2) below. (2) LTI (Long Term Incentive) is determined on the Group’s performance against relative Total Shareholder Return for 2015 Financial Year. This is the measure currently used in the IRP applicable to Mr P Odouard in the 2014 financial year as per (3) below. For the purpose of this table, the LTI % also includes the share based payments element of STI. LTI determined on performance against relative Total Shareholder Return. to a maximum of US$30,000. 18   (3) (4) 30 ) d e u n i t n o c ( ) d e u n i t n o c ( d e t i d u A – t r o p e R n o i t a r e n u m e   R n o i t a r e n u m e R f o s l i a t e D 2 . r a e y l i a c n a n i f i s u o v e r p d n a t n e r r u c e h t r o f p u o r G e h t f o l e n n o s r e p t n e m e g a n a m y e k e h t d n a s r o t c e r i D e h t i y b d e v e c e r n o i t a r e n u m e r e h t f o s l i a t e d w o h s l s e b a t g n w o i n o i t a r e n u m e r d e t a l e r P B S f o e u l a V n o i t r o p o r p s a f o f o n o i t r o p o r P n o i t a r e n u m e r e c n a m r o f r e p l a t o T $ % 9 1 - % 0 3 % 3 1 % 4 1 ) % 8 ( - - - - - - - - - ) % 7 ( % 3 1 % 0 2 ) % 6 1 ( % 6 1 % 5 1 % 7 1 % 3 - 0 0 0 , 6 2 9 7 7 , 3 8 5 0 0 0 , 6 2 1 0 0 5 , 7 6 6 7 0 , 9 6 5 7 8 , 1 6 5 7 8 , 1 6 5 7 8 , 5 8 0 5 7 , 3 6 3 5 2 , 1 9 8 6 , 7 9 1 5 9 7 , 9 1 2 5 8 4 , 8 2 3 0 0 0 , 8 4 9 0 2 , 4 1 1 8 5 4 , 7 3 2 8 0 7 , 1 7 2 4 8 8 , 4 2 2 9 8 4 , 3 8 1 2 4 4 , 4 7 - - - - - - - - - d e s a B e r a h S s t n e m y a P s n o i t p O & ) 2 ( s t h g i r $ - 3 0 6 , 3 1 1 y t i u q E d e s a b m r e t t r o h s ) 1 ( e v i t n e c n i $ 1 8 4 , 7 2 2 5 3 , 4 2 0 1 0 , 1 8 9 2 , 1 2 - - - - - - 1 4 ) 5 7 3 , 9 ( 3 0 6 , 8 1 5 3 8 , 9 1 0 7 6 , 8 1 2 6 5 , 2 6 4 8 , 8 2 - t s o P s t i f e n e B t n e m y o p m E l - r e p u S s t i f e n e b $ y v e l $ n o i t a n m r e T i n o i t a u n n a l a t o T $ - 1 6 0 , 7 2 - - - 5 1 7 , 5 9 4 8 , 5 1 7 2 , 7 8 9 3 , 5 6 0 1 - - 7 9 8 , 5 1 7 4 9 , 3 2 - 0 7 8 , 5 - 2 7 2 , 1 2 4 3 6 , 6 1 3 0 3 , 6 9 1 0 0 0 , 6 2 5 1 1 , 3 4 4 0 0 0 , 6 2 1 5 8 7 , 1 6 7 2 2 , 3 6 5 7 8 , 1 6 5 7 8 , 1 6 4 0 6 , 8 7 2 5 3 , 8 5 7 4 1 , 1 9 8 6 , 7 9 1 7 0 4 , 5 7 1 8 8 8 , 8 5 2 0 0 0 , 8 4 8 6 8 , 8 8 5 5 8 , 8 1 2 1 0 6 , 0 3 2 0 8 5 , 9 8 1 6 8 8 , 0 8 1 9 3 1 , 8 6 l s t i f e n e B e e y o p m E m r e t - t r o h S - n o N y r a t e n o m s t i f e n e b $ I T S h s a c s u n o b ) 3 ( $ / y r a l a S s e e f $ - 0 9 8 , 0 6 0 0 0 , 6 2 5 2 2 , 2 8 3 - - - - - - - - 0 0 0 , 6 2 1 5 8 7 , 1 6 7 2 2 , 3 6 5 7 8 , 1 6 5 7 8 , 1 6 4 0 6 , 8 7 2 5 3 , 8 5 7 4 1 1 , - 0 1 0 1 , 8 9 2 , 1 2 ) 8 6 2 3 1 ( , 7 5 9 , 0 1 2 7 9 3 , 4 7 1 0 9 5 , 7 3 2 0 0 0 , 8 4 ) 5 7 3 9 ( , 3 4 2 , 8 9 - 2 9 1 , 9 1 6 5 7 , 9 1 0 7 6 , 8 1 0 0 1 3 , 3 6 6 , 9 9 1 5 4 8 , 0 1 2 0 1 9 , 0 7 1 6 8 7 , 7 7 1 9 3 1 , 8 6 ) 4 ( ) 4 1 / 5 / 9 2 d e t n o p p a ( i i k c u Q T r M s r o t c e r i D e v i t u c e x E s r o t c e r i D e v i t u c e x e - n o N d r a u o d O M P r M i k c u Q T r M i d e t n o p p a ( w a l r e h p m A N r M O A k c a m r o C c M J E l a h s r a M r i A ) 5 ( k o o C C P r M r M s h t i f f i r G B r M i s n k n e J B M ) 3 1 / 7 / 8 l n o t e g n S D i r M ) 4 1 / 3 / 1 3 d e n g s e r ( e i l l i b d o G S r M i d e n g s e r ( n o s t r e b o R P r M n o s n h o J F J r M i o t n P J r M ) 3 1 / 7 / 5 d e r i t e r ( s l l i W E D r M i s u s o r B E D r M s e v i t u c e x E h c a b m i l h c S J r D o k m a r h c S M r M ) 3 1 / 1 1 / 5 2 l i y e n w S T s M ) 4 1 / 6 / 2 1 d e n g s e r ( i i r a a s r e h V A i r M i d e t n o p p a ( n a m r a h S N s M ) 4 1 / 3 / 1 1 31 l l o f e h T 4 1 0 2 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014                                                                                                                                                                                                                                                                                                       Directors’ Report Directors’ Report Remuneration Report – Audited (continued) 2 Details of Remuneration (continued) (continued) (1) Equity based STI includes: a. Accrual adjustments b. Accrual of estimated STI relating to the current year to be settled through share based payments (2) Options and rights include: a. The accounting expense attributable to the current year of: i. Employee Incentive Plan (EIP) Incentive Rights Plan (IRP) ii. iii. Performance and retention bonuses (EPRB) iv. Loyalty bonuses (3) The Short Term Incentive (STI) is comprised of an accrued cash bonus plus adjustment to the accrued STI for actual amounts paid during the prior financial year. This adjustment results in a negative expense appearing in the tables above in relation to executives for whom the prior year accrual exceeded the payment made in the current year in respect of FY13. (4) Mr Quick has been appointed on an interim basis as Executive Chairman to manage the day to day growth of the organization in addition to his role as Chairman of the Board. Includes $1,576 back pay relating to payment errors over a three year period (5) - - - - - - - - % 4 3 % 8 2 - % 7 % 4 % 4 % 5 % 8 - - - - - - - % 4 1 % 7 3 % 7 2 - % 4 1 % 0 1 % 7 % 0 1 % 0 1 0 0 5 , 2 5 0 0 0 , 0 6 2 1 7 , 3 2 0 0 0 , 2 0 1 7 9 9 , 3 8 0 0 0 , 0 6 8 4 2 , 1 6 4 7 9 , 8 2 2 - - - - - - - - - - - - - - - - - 0 0 0 , 2 3 2 4 9 , 1 3 1 6 9 4 , 9 7 1 9 7 7 , 9 2 2 5 1 9 , 9 8 - - - - - 1 2 9 , 9 6 1 7 1 0 , 5 1 - 5 7 3 , 9 6 4 6 , 7 5 4 5 , 8 5 2 6 , 4 ) 6 0 9 ( 0 5 8 , 2 6 3 7 4 5 , 6 1 1 6 5 5 , 8 9 2 2 , 9 7 3 6 5 4 , 8 1 1 ) 5 0 5 , 1 1 ( - - - - - - - - - - - - - - - - - ) d e u n i t n o c ( n o i t a r e n u m e r d e t a l e r P B S f o e u l a V f o n o i t r o p o r P n o i t r o p o r p s a n o i t a r e n u m e r f o e c n a m r o f r e p & s n o i t p O m r e t n o i t a n m r e T i n o i t a u n n a l a t o T $ ) 2 ( s t h g i r ) 1 ( e v i t n e c n i s t i f e n e b $ $ $ y v e l $ l a t o T $ d e s a B e r a h S s t n e m y a P y t i u q E t r o h s d e s a b - t s o P s t i f e n e B t n e m y o p m E l - r e p u S % 8 2 % 4 3 6 2 4 , 8 0 5 0 4 3 , 1 4 1 6 3 4 , 1 3 0 5 6 , 5 3 3 0 0 5 , 2 5 0 0 0 , 0 6 2 1 7 , 3 2 0 0 0 , 2 0 1 1 6 0 , 7 7 5 4 0 , 5 5 1 9 1 , 6 5 - - - - - - - - 2 5 8 , 7 1 2 2 9 3 , 9 4 2 0 0 0 , 2 3 1 2 2 , 3 1 1 0 5 8 , 1 7 1 0 5 6 , 2 0 2 0 3 6 , 8 7 0 1 8 , 5 5 1 - - - - - - - - 0 7 6 , 0 2 2 2 1 1 , 6 - - - - - - - 9 0 4 , 1 3 0 4 9 , 0 1 ) 0 0 9 , 4 ( - 5 7 3 , 9 9 5 7 , 9 3 6 5 , 8 5 2 6 , 4 6 8 1 , 3 0 0 5 , 2 5 0 0 0 , 0 6 2 1 7 , 3 2 0 0 0 , 2 0 1 1 6 0 , 7 7 5 4 0 , 5 5 1 9 1 , 6 5 9 4 1 , 3 8 1 2 1 9 , 6 0 2 2 9 2 , 4 5 2 0 0 0 , 2 3 6 4 8 , 3 0 1 1 9 0 , 2 6 1 7 8 0 , 4 9 1 5 0 0 , 4 7 4 2 6 , 2 5 1 - n o N y r a t e n o m s t i f e n e b $ h s a c I T S ) 3 ( s u n o b $ s e e f / y r a l a S $ 2 3 9 , 9 2 8 1 7 , 5 0 3 l s t i f e n e B e e y o p m E m r e T - t r o h S 3 1 0 2 ) d e u n i t n o c ( d e t i d u A – t r o p e R n o i t a r e n u m e R ) d e u n i t n o c ( n o i t a r e n u m e R f o s l i a t e D 2 - - - - 6 3 9 , 6 5 5 9 , 4 7 5 0 , 5 4 0 3 , 8 5 9 8 , 9 1 6 8 8 , 2 2 - 6 4 3 , 9 - 4 8 5 , 8 1 0 6 6 , 6 - 0 2 s r o t c e r i D e v i t u c e x e - n o N s r o t c e r i D e v i t u c e x E d r a u o d O M P r M k o o C C P r M s h t i f f i r G B r M i k c u Q T r M i s n k n e J B M r M O A k c a m r o C c M J E l a h s r a M r i A l n o t e g n S D i r M ) 4 1 / 3 / 1 3 d e n g s e r ( e i l l i b d o G S r M ) 3 1 / 7 / 5 d e r i t e r ( s l l i W E D r M i s u s o r B E D r M s e v i t u c e x E n o s n h o J F J r M i o t n P J r M ) 3 1 / i 1 1 / 5 2 d e n g s e r ( n o s t r e b o R P r M h c a b m i l h c S J r D o k m a r h c S M r M ) 4 1 / 6 / 2 1 d e n g s e r ( i i r a a s r e h V A i r M 21   l i y e n w S T s M 32 33 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014                                                                               Directors’ Report Directors’ Report (continued) (continued) Remuneration Report - Audited (continued) 3 Share Based Compensation (a) Short Term Incentives (i) Equity settled short term incentive Remuneration Report - Audited (continued) 3 Share Based Compensation (continued) (b) Long Term Incentives (continued) (ii) Quickstep Incentive Rights Plan Short term performance incentives accrued in the prior year have been settled through share based payments during the year, valued at the market value on the day of issue: At 30 June 2014 Mr P Odouard is the only employee to be granted rights pursuant to the IRP. Movements in IRP rights during the year are set out below: Name Mr S Godbille Ms T Swinley Mr J Johnson Dr J Schlimbach Mr M Schramko Mr A Vihersaari Mr P Salvati Total No of shares granted and vested during FY14 in respect of FY13 performance Fair value $ Total fair value $ 62,087 41,106 98,147 84,270 88,518 76,759 20,161 471,048 $0.217 $0.217 $0.217 $0.217 $0.217 $0.217 $0.217 13,473 8,920 21,298 18,287 19,208 16,657 4,374 102,217 Equity settled short term incentives accrued in the current year for FY14 performance are expected to be settled through share based payments during the next financial year, valued at the market value on the day of issue. (b) Long Term Incentives (i) Quickstep Employee Incentive Plan (EIP) Name Tranche Grant date FV per right at grant date (a) Balance at 30 June 2013 Granted during the year (b) Lapsed/ cancelled during the year Balance at 30 June 2014 Cumulative vesting level at end of year $ No No No No % Mr P Odouard 2013 year 22/11/2013 $0.152 - 802,000 - 802,000 0% (a) The fair value of rights granted was calculated using a Monte Carlo simulation analysis (b) The fair value of rights granted in the year is $121,904. The total value of the rights is allocated to remuneration over the vesting period (iii) Executive performance and retention bonus (EPRB) Mr Godbille and Mr Johnson were granted, as compensation during the 2012 reporting period, rights to shares offered through a performance and retention bonus scheme. The rights vested on 31 December 2013 upon achievement of performance of criteria related to the Company’s relocation objectives. Movements in EPRB rights are set out below: At 30 June 2014, Mr P Odouard is the only employee to be granted options pursuant to the EIP. No options were granted during the 2014 financial year under the EIP, which has been replaced by the Incentive Rights Plan (IRP) as set out at (ii) below. Movement in EIP options during the year are set out below: Name Grant date Name Tranche Grant date FV per option at grant date (a) Balance at 30 June 2013 Exercised / vested during the year (b) Lapsed/ cancelle d during the year Balance at 30 June 2014 Cumulative vesting level at end of year $ No No No No % Mr P Odouard Tranche 3 30/03/2010 $0.315 925,926 (306,480) Mr P Odouard Tranche 4 30/03/2010 $0.270 471,698 Mr P Odouard 2010 Year 26/11/2010 $0.362 471,337 Mr P Odouard 2011 Year 23/11/2011 $0.173 706,373 Mr P Odouard 2012 Year 22/11/2012 $0.125 987,739 - - - - - - - - - 619,446 33% 471,698 471,337 706,373 987,739 0% 0% 0% 0% (a) (b) The fair value of options granted was calculated using a Monte Carlo simulation analysis Vesting is conditional on continuing employment and certain TSR hurdles. Refer to section 1 of this remuneration report for details. The value of options exercised during the year is $64,361. This is calculated as the market price of shares of the company as at close of trading on the date the options were exercised. FV per right at grant date (a) Balance at 30 June 2013 Exercised/ vested during the year (b) Lapsed/ cancelled during the year (c) Balance at 30 June 2014 Cumulative vesting level at end of year $ No No No No % Mr S Godbille 10/02/2012 $0.17 764,818 (669,216) (95,602) Mr J Johnson 10/02/2012 $0.17 688,337 (602,295) (86,042) - - 87.5% 87.5% (a) The fair value of rights was calculated using a Monte Carlo simulation analysis (b) The market price of shares of the company as at close of trading on the date the rights were exercised was $0.23 per share (c) The value of the rights cancelled during the year is $30,879. This is calculated at the date the right was cancelled using the fair value of the right that assumed the performance criteria had been achieved. (iv) Loyalty Bonus Rights have been issued to a number of key management personnel in prior years as retention incentives. The rights vest in two tranches provided the employee remains employed with the Group. 1/3 vest 2 years from the date granted, 2/3 vest 3 years from the date granted. 22   23   34 35 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014           Directors’ Report Directors’ Report (continued) (continued) Remuneration Report - Audited (continued) 3 Share Based Compensation (continued) (b) Long Term Incentives (continued) (iv) Loyalty bonus (continued) Movements in the loyalty bonus rights during the year are set out below: Name Tranche Grant date FV per right at grant date (a) Balance at 30 June 2013 Exercised / vested during the year (b) Lapsed/can celled during the year Balance at 30 June 2014 Cumulative vesting level at end of year $ No No No No % Mr S Godbille Mr J Johnson Mr A Vihersaari 2 2 2 12/07/2010 $0.260 178,403 (178,403) 01/04/2011 $0.270 166,667 (166,667) 01/07/2010 $0.265 314,465 (314,465) - - - - - - 100% 100% 100% (a) (b) The fair value of rights was calculated using a Monte Carlo simulation analysis The market price of shares of the company as at close of trading on the date the rights were exercised was $0.22 per share Modification of terms of equity-settled share-based payment transactions No terms of equity-settled share-based payment transactions (including options and rights granted as compensation to a key management person) have been altered or modified by the issuing entity during the reporting period or the prior period. 4 Analysis of Bonuses Included in Remuneration Details of the vesting profile of the short-term incentive cash bonuses awarded as remuneration to each director of the Company and each of the named Company Executives and relevant Group Executives and other key management personnel of the Group are detailed below: Short-term Incentive Bonus 2014 Included in remuneration $ (1) % vested in year(2) % forfeited in year (2) Directors Mr P Odouard Executives Mr D Brosius Mr S Godbille Mr J Johnson Mr P Robertson Dr J Schlimbach Mr M Schramko Ms T Swinley Mr A Vihersaari 60,890 - 2,020 42,596 - 37,795 39,591 37,340 5,662 50% 0% 50% 50% 0% 50% 50% 50% 50% 50% 100% 50% 50% 100% 50% 50% 50% 50% (1) Amounts included in remuneration for the financial year represent the amount that vested in the financial year based on achievement of Group and/or personal goals and satisfaction criteria. No amounts vest in future financial years in respect of the bonus schemes for the 2014 year. This represents the accounting expense in FY14, which includes an accrual of estimated STI relating to the current year and in addition accrual adjustments in relation to FY13. (2) The amounts forfeited are due to the Group performance, personal performance or service criteria not being met in relation to the current financial year. This represents estimated achievement level in respect to FY14. FY14 actual performance will be finalised October 2014. 24   Remuneration Report - Audited (continued) 5 Services from Remuneration Consultant During FY14 Quickstep engaged Godfrey Remuneration Group Pty Limited (GRG) to provide advice in relation to the CEO’s employment agreement and long term incentive plan. The fees were $19,000 + GST. The board is satisfied that the remuneration recommendations made by GRG were free from undue influence by members of the key management personnel about whom the recommendations may relate, and GRG has provided the RND committee with a written statement to this effect. The work was undertaken directly with a non-executive director and no communication occurred between GRG and the CEO. This report is made in accordance with a resolution of Directors on 30/9/2014. Mr T Quick Executive Chairman Sydney, New South Wales 30 September 2014 25   36 37 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014                           Corporate Governance Statement Corporate Governance Statement Corporate Governance Statement This statement outlines the main corporate governance practices in place throughout the financial year, which comply with the ASX Corporate Governance Council recommendations Edition 3, unless otherwise stated. Principle 1: Lay solid foundations for management and oversight A listed entity should establish and disclose the respective roles and responsibilities of its board and management and how their performance is monitored and evaluated. Status     Recommendation 1.1 A listed entity should disclose: (a) (b) the respective roles and responsibilities of its board and management; and The Board Charter is contained in the corporate Governance section of the website those matters expressly reserved to the board and those delegated to management. Included in the Board Charter 1.1(a) Recommendation 1.2 A listed entity should: undertake appropriate checks before appointing a person, or putting forward to security holders a candidate for election, as a director; and This is undertaken. See Policy and Procedure for Selection and Appointment of Directors at http://www.quickstep.com.au/Investors- Media/Corporate-Governance (a) (b) provide security holders with all material information in its possession relevant to a decision on whether or not to elect or re- elect a director. The company seeks to provide full information to all security holders as part of the papers for each AGM. See Policy and Procedure for Selection and Appointment of Directors at http://www.quickstep.com.au/Investors- Media/Corporate-Governance Contracts of appointment are in place with all directors and contracts of employment are in place with all management staff. The Company Secretary is accountable directly to the Board, through the chair, on all matters. The Diversity Policy is available at http://www.quickstep.com.au/Investors- Media/Corporate-Governance Recommendation 1.3     A listed entity should have a written agreement with each director and senior executive setting out the terms of their appointment. Recommendation 1.4     The company secretary of a listed entity should be accountable directly to the board, through the chair, on all matters to do with the proper functioning of the board. Recommendation 1.5     A listed entity should:     (a) have a diversity policy which includes requirements for the board or a relevant committee of the board to set measurable objectives for achieving gender diversity and to assess annually both the objectives and the entity’s progress in achieving them; 26   (b) disclose that policy or a summary of it; and (c) disclose as at the end of each reporting period the measurable objectives for achieving gender diversity set by the board or a relevant committee of the board in accordance with the entity’s diversity policy and its progress towards achieving them, and either: (1) (2) the respective proportions of men and women on the board, in senior executive positions and across the whole organisation (including how the entity has defined “senior executive” for these purposes); or if the entity is a “relevant employer” under the Workplace Gender Equality Act, the entity’s most recent “Gender Equality Indicators”, as defined in and published under that Act. Recommendation 1.6 A listed entity should: (a) have and disclose a process for the periodically performance of its committees and individual directors; and the board, evaluating The Diversity Policy is available at http://www.quickstep.com.au/Investors- Media/Corporate-Governance A report on diversity is available at http://www.quickstep.com.au/Investors- Media/Corporate-Governance The Board has a process for evaluating the Board and the performance of Committees (b) disclose, in relation to each reporting period, whether a performance evaluation was undertaken in the reporting period An evaluation took place in March 2014 Recommendation 1.7 A listed entity should: (a) have and disclose a process for the senior evaluating of periodically performance executives; and its of performance The Board has a process for evaluating all Senior the Management on an Annual basis as detailed in the Executive remuneration policy. http://www.quickstep.com.au/Investors- Media/Corporate-Governance (b) disclose, in relation to each reporting period, whether a performance evaluation was undertaken in the reporting period in accordance with that process. The performance evaluation was undertaken in the first quarter of the financial year. 38 39 27   Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014                       Corporate Governance Statement Corporate Governance Statement Recommendation 2.4 Recommendation 2.5 Recommendation 2.6 A majority of the board of a listed entity should be independent directors. The chair of the board of a listed entity should be an independent director and, in particular, should not be the same person as the CEO of the entity. A listed entity should have a program for inducting new directors and provide appropriate professional development opportunities for directors to develop and maintain the skills and knowledge needed to perform their role as directors effectively. Achieved, see Directors’ report The Chair is independent but acting as the Executive Chair for an interim period. This is addressed through the letter of appointment and Induction Policy both of which are available at http://www.quickstep.com.au/Investors- Media/Corporate-Governance Principle 3: Act ethically and responsibly A listed entity should act ethically and responsibly. Recommendation 3.1 A listed entity should: (a) have a code of conduct for its directors, senior executives and employees; and (b) disclose that code or a summary of it. The Company has developed separate Non-executive Director (NED) and Employee Codes of Conduct. These to all directors, managers, apply employees and contractors. Both the NED and Employee Codes of conduct are available at http://www.quickstep.com.au/Investors- Media/Corporate-Governance Principle 2: Structure the board to add value A listed entity should have a board of an appropriate size, composition, skills and commitment to enable it to discharge its duties effectively. Recommendation 2.1 The board of a listed entity should: (a) have a nomination committee which: (1) has at least three members, a majority of whom are independent directors; and (2) is chaired by an independent director, and disclose: (3) the charter of the committee; (4) the members of the committee; and (5) as at the end of each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings. (a) The Board has a Remuneration, Nomination and Diversity Committee. (1) The Committee is comprised of three non-executive independent directors as per the Directors’ report (2) The Chair is independent as per the Directors’ report (3) The Committee Charter is at http://www.quickstep.com.au/Inves tors-Media/Corporate-Governance (4) The members of the Committee are detailed in the Directors’ report (5) The details of meetings held and attended is listed in the Directors’ report. (b) if it does not have a nomination N/A committee, disclose that fact and the processes it employs to address board succession issues and to ensure that the board has the appropriate balance of skills, knowledge, experience, independence and diversity to enable it to discharge its duties and responsibilities effectively. Recommendation 2.2 A listed entity should have and disclose a board skills matrix setting out the mix of skills and diversity that the board currently has or is looking to achieve in its membership. The Board skills matrix is detailed in the Policy and Procedure for Selection and Appointment of Directors http://www.quickstep.com.au/Investors- Media/Corporate-Governance Recommendation 2.3 (a) See Directors’ report (b) see Directors’ report A listed entity should disclose: (a) the names of the directors considered by the board to be independent directors; (b) if a director has an interest, position, association or relationship that might cause doubts about the independence of a director, but the board is of the opinion that it does not compromise the independence of the director, the nature of the interest, position, association or relationship in question and an explanation of why the board is of that opinion; and (c) the length of service of each director. (c) see Directors’ report 40 41 28   29   Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014         Corporate Governance Statement Corporate Governance Statement Principle 4: Safeguard integrity in corporate reporting Principle 5: Make timely and balanced disclosure A listed entity should have formal and rigorous processes that independently verify and safeguard the integrity of its corporate reporting. A listed entity should make timely and balanced disclosure of all matters concerning it that a reasonable person would expect to have a material effect on the price or value of its securities. Recommendation 4.1 The board of a listed entity should: Recommendation 5.1 A listed entity should: (a) have an audit committee which: (1) has at least three members, all of whom are non-executive directors and a majority of whom are independent directors; and (2) is chaired by an independent director, who is not the chair of the board, and disclose: (3) the charter of the committee; (4) the relevant qualifications and experience of the members of the committee; and (5) in relation to each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings; or (b) if it does not have an audit committee, disclose that fact and the processes it employs that independently verify and safeguard the integrity of its corporate reporting, including the processes for the appointment and removal of the external auditor and the rotation of the audit engagement partner. The board of a listed entity should, before it approves the entity’s financial statements for a financial period, receive from its CEO and CFO a declaration that, in their opinion, the financial records of the entity have been properly maintained and that the financial statements comply with the appropriate accounting standards and give a true and fair view of the financial position and performance of the entity and that the opinion has been formed on the basis of a sound system of risk management and internal control which is operating effectively. A listed entity that has an AGM should ensure that its external auditor attends its AGM and is available to answer questions from security holders relevant to the audit. (a) The Board has an Audit, Risk and Compliance committee (1) The Committee is comprised of four non executive independent directors, see Directors report (2) The Chair is an independent director, see Director’s report (3) The Charter is available at http://www.quickstep.com.au/I nvestors-Media/Corporate- Governance (4) The members of the Committee are detailed in the Directors’ report (5) The details of meetings held and attended is listed in the Directors’ report (b) N/A This is achieved noting that the risk management and internal controls processes are being evolved in line with the growth of the business The external auditor will attend the AGM and be available to answer questions from security holders Recommendation 4.2 Recommendation 4.3 (a) have a written policy for complying with its continuous disclosure obligations under the Listing Rules; and (b) disclose that policy or a summary of it. The Company has a policy which covers continuous disclosure. The Policy is available at http://www.quickstep.com.au/Investors- Media/Corporate-Governance Principle 6: Respect the rights of security holders A listed entity should respect the rights of its security holders by providing them with appropriate information and facilities to allow them to exercise those rights effectively. Recommendation 6.1 A listed entity should: provide information about itself and its governance to investors via its website. http://www.quickstep.com.au/Investors- Media/Corporate-Governance Recommendation 6.2 A listed entity should: implement an design and investor relations program to facilitate effective two-way communication with investors. The Company has a policy for stakeholder communication Recommendation 6.3 A listed entity should: disclose the policies and processes it has in place to facilitate and encourage participation at meetings of security holders. Recommendation 6.4 A listed entity should: to give security holders receive communications from, and send communications to, the entity and its security registry electronically. the option The Policy is available at http://www.quickstep.com.au/Investors -Media/Corporate-Governance This is covered in the policy for stakeholder communication at http://www.quickstep.com.au/Investors -Media/Corporate-Governance 42 43 30   31   Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014         Corporate Governance Statement Corporate Governance Statement Principle 7: Recognise and manage risk A listed entity should establish a sound risk management framework and periodically review the effectiveness of that framework. Recommendation 7.1 The board of a listed entity should: (a) The Board has an Audit, Risk and Compliance committee (1) The Committee is comprised of four non executive independent directors, see Directors’ report (2) The Chair is an independent director, see Directors’ report (3) The Charter is available at http://www.quickstep.com.au/I nvestors-Media/Corporate- Governance (4) The members of the Committee are detailed in the Directors’ report (5) The details of meetings held and attended is listed in the Directors’ report (a) have a committee or committees to oversee risk, each of which: (1) has at least three members, a majority of whom are independent directors; and is chaired by an independent (2) director, and disclose: (3) the charter of the committee; the members of the (4) committee; and (5) as at the end of each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings; or N/A (b) if it does not have a risk committee or committees that satisfy (a) above, disclose that fact and the processes it employs for overseeing the entity’s risk management framework. Recommendation 7.2 The board or a committee of the board should: (a) review the entity’s risk management framework at least annually to satisfy itself that it continues to be sound; and The risk management framework is evolving. Because of the nature of Quickstep’s manufacturing contracts, considerable attention was initially focussed on managing manufacturing and related risks. The organisation is now in the process of implementing the appropriate risk management framework for non-manufacturing risks. (b) disclose, in relation to each reporting period, whether such a review has taken place. As set out above, this is evolving and expected to be subject to annual reviews from 2015. Recommendation 7.3 A listed entity should disclose: No (a) (b) if it has an internal audit function, how the function is structured and what role it performs; or if it does not have an internal audit function, that fact and the processes it employs for evaluating and continually improving the effectiveness of its risk management and internal control processes. Recommendation 7.4 A listed entity should disclose whether it has any material exposure to economic, environmental and social sustainability risks and, if it does, how it manages or intends to manage those risks. The nature and size of Quickstep’s operations do not warrant a separate internal audit function. Given the low volume of transactions, the external audit work and management oversight is considered sufficient to identify any material breakdown in the control environment. The Board will periodically review the need for an internal audit function. The Company does not have any material exposure to economic, environmental and social sustainability risks. 44 45 32   33   Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014         Corporate Governance Statement Financial Statements Equity Consolidated statement of profit or loss and other comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements — 1 Segment information — 2 Revenue and income Expenses — 3 Finance income and expense — 4 Loss per share — 5 Income tax expense — 6 — 7 Financial assets and liabilities — 8 Non-financial assets and liabilities — 9 — 10 Cash flow information — 11 Financial instruments – fair values and risk management — 12 Group entities — 13 Capital and other commitments — 14 Subsequent events — 15 Related party transactions — 16 Share-based payments — 17 Remuneration of auditors — 18 Parent entity financial information — 19 Significant accounting policies — 20 Determination of fair values Directors’ declaration Lead auditor’s independence declaration Independent auditor’s report to the members 48 49 50 51 52 52 54 54 55 55 56 57 61 64 67 67 72 73 73 74 75 78 79 80 89 90 91 92 Principle 8: Remunerate fairly and responsibly A listed entity should pay director remuneration sufficient to attract and retain high quality directors and design its executive remuneration to attract, retain and motivate high quality senior executives and to align their interests with the creation of value for security holders. Recommendation 8.1 The board of a listed entity should: (a) have a remuneration committee which: (1) has at least three members, a majority of whom are independent directors; and (2) is chaired by an independent director, and disclose: (3) the charter of the committee; (4) the members of the committee; and (5) as at the end of each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings; or (a) The Board has a Remuneration, Nomination and Diversity Committee. (1) The Committee is comprised of three non-executive independent directors as per Directors’ report (2) The Chair is independent as per Director’s report (3) The Committee charter is at http://www.quickstep.com.au/Inves tors-Media/Corporate-Governance (4) The members of the Committee are detailed in the Directors’ report (5) The details of meetings held and attended is listed in the Directors’ report N/A (b) if it does not have a remuneration committee, disclose that fact and the processes it employs for setting the level and composition of remuneration for directors and senior executives and ensuring that such remuneration is appropriate and not excessive. Recommendation 8.2 A listed entity should separately disclose its policies and practices regarding the remuneration of non- executive directors and the remuneration of executive directors and other senior executives. Recommendation 8.3 A listed entity which has an equity-based remuneration scheme should: (a) have a policy on whether participants are permitted to enter into transactions (whether through the use of derivatives or otherwise) which limit the economic risk of participating in the scheme; and (b) disclose that policy or a summary of it. 34   The Company’s practices regarding the remuneration of non-executive directors and the remuneration of executive directors and other senior executives are outlined in the Remuneration report. The Company’s remuneration policies are available at http://www.quickstep.com.au/Investors- Media/Corporate-Governance This is addressed by the Executive Incentive Rights Plan and Executive Remuneration Policy. The Plan rules and policy is available at http://www.quickstep.com.au/Investors- Media/Corporate-Governance 46 47 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014     Consolidated statement of profit or loss and other comprehensive income For the year ended 30 June 2014 Consolidated statement of profit or loss and other comprehensive income for the year ended 30 June 2014 Consolidated statement of financial position Consolidated statement of financial position As at 30 June 2014 as at 30 June 2014 Consolidated statement of financial position As at 30 June 2014 Revenue Cost of sales of goods Gross loss Government grant income Other income Operational expenses Marketing Corporate and administrative expenses Research and development expenses Other Loss from operating activities Finance income Finance expenses Net financing costs Loss before income tax Income tax benefit Net loss Other comprehensive income/(loss) net of income tax Item that may be reclassified to profit or loss Notes 2 2 2 3(a) 4 4 6 2014 $ 2013 $ 12,001,752 2,562,621 (13,781,109) (2,722,373) (1,779,357) 5,329,751 457,107 (159,752) 3,725,596 502,585 (2,435,981) (8,581,401) (595,083) (860,211) (6,764,245) (5,748,934) (3,019,459) (224,871) (3,770,178) (1,228,556) (9,032,138) 142,642 (2,291,905) (16,120,851) 355,157 (1,220,200) (2,149,263) (865,043) (11,181,401) - (16,985,894) - (11,181,401) (16,985,894) Foreign currency translation difference for foreign operations 221,602 162,102 Total comprehensive income for the period (10,959,799) (16,823,792) Earnings per share Basic loss per share (cents) Diluted loss per share (cents) 5 5 (2.93) (2.93) (5.25) (5.25) The above consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes. ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories Other financial assets Other current assets Assets classified as held for sale Total current assets Non-current assets Property, plant and equipment Intangible assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Deferred income Loans and borrowings Employee benefits Total current liabilities Non-current liabilities Trade and other payables Deferred income Loans and borrowings Employee benefits Total non-current liabilities Total liabilities Net assets EQUITY Share capital Reserves Accumulated losses Total equity Notes 2014 $ 2013 $ 7(a) 7(b) 8(a) 7(c) 7(d) 8(b) 565,583 6,180,827 8,260,333 3,848,833 394,718 445,385 1,393,320 4,564,303 1,650,674 390,400 387,430 1,878,000 19,695,679 10,264,127 8(c) 8(d) 13,454,853 36,557 13,799,229 65,422 13,491,410 13,864,651 33,187,089 24,128,778 7(e) 7(f) 7(g) 8(e) 7(e) 7(f) 7(g) 8(e) 5,290,832 13,809,490 7,394 473,720 2,569,237 2,795,014 1,696,785 261,289 19,581,436 7,322,325 - - 10,456,325 61,337 654,118 6,086,391 9,773,722 26,668 10,517,662 16,540,899 30,099,098 23,863,224 3,087,991 265,554 9(a) 9(b) 9(c) 88,228,474 3,489,536 74,754,828 2,959,344 (88,630,019) (77,448,618) 3,087,991 265,554 The above consolidated statement of financial position should be read in conjunction with the accompanying notes. 36   37   48 49 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014                                                     Consolidated statement of changes in equity For the year ended 30 June 2014 d e t i i i l m L s g n d o H p e t s k c i u Q 4 1 0 2 e n u J 0 3 d e d n e r a e y e h t r o F y t i u q e n i s e g n a h c f o t n e m e t a t s d e t a d i l o s n o C 3 0 8 , 4 1 6 , 6 1 ) 4 2 7 , 2 6 4 , 0 6 ( 6 5 9 , 3 1 6 , 2 ) 7 5 2 , 1 9 2 ( 8 2 8 , 4 5 7 , 4 7 l a t o T y t i u q e $ d e t a l u m u c c A d e s a b - e r a h S n o i t a l s n a r T $ $ $ $ s e s s o l s t n e m y a p e v r e s e r l a t i p a c e r a h S s e t o N ) 4 9 8 , 5 8 9 , 6 1 ( ) 4 9 8 , 5 8 9 , 6 1 ( 2 0 1 , 2 6 1 - ) 2 9 7 , 3 2 8 , 6 1 ( ) 4 9 8 , 5 8 9 , 6 1 ( - - - - 2 0 1 , 2 6 1 2 0 1 , 2 6 1 3 4 5 , 4 7 4 3 4 5 , 4 7 4 4 5 5 , 5 6 2 - - 3 4 5 , 4 7 4 3 4 5 , 4 7 4 - - ) 8 1 6 , 8 4 4 , 7 7 ( 9 9 4 , 8 8 0 , 3 ) 5 5 1 , 9 2 1 ( 8 2 8 , 4 5 7 , 4 7 - - - - - 4 5 5 , 5 6 2 ) 8 1 6 , 8 4 4 , 7 7 ( 9 9 4 , 8 8 0 , 3 ) 1 0 4 , 1 8 1 , 1 1 ( ) 1 0 4 , 1 8 1 , 1 1 ( - - 0 9 5 , 8 0 3 6 4 6 , 3 7 4 , 3 1 1 9 9 , 7 8 0 , 3 6 3 2 , 2 8 7 , 3 1 - - - 2 0 6 , 1 2 2 - ) 9 9 7 , 9 5 9 , 0 1 ( ) 1 0 4 , 1 8 1 , 1 1 ( - - - 0 9 5 , 8 0 3 0 9 5 , 8 0 3 - - 2 0 6 , 1 2 2 2 0 6 , 1 2 2 ) 9 1 0 , 0 3 6 , 8 8 ( 9 8 0 , 7 9 3 , 3 7 4 4 , 2 9 - - - 6 4 6 , 3 7 4 , 3 1 6 4 6 , 3 7 4 , 3 1 4 7 4 , 8 2 2 , 8 8 ) c ( 9 ) b ( 9 ) b ( 9 ) c ( 9 ) b ( 9 ) a ( 9 ) a ( 9 y t i u q e n i s e g n a h c f o t n e m e t a t s d e t a d i l o s n o   C 4 1 0 2 e n u J 0 3 d e d n e r a e y e h t r o f e m o c n i e v i s n e h e r p m o c r e h t O s s o l t e N 2 1 0 2 y l u J 1 t a e c n a l a B e c n e r e f f i d n o i t l a s n a r t y c n e r r u c n g e r o F i : s r e n w o s a y t i c a p a c r i e h t n i s r e n w o h t i w s n o i t c a s n a r T t n e m y a p d e s a b e r a h S d o i r e p e h t r o f e m o c n i e v i s n e h e r p m o c l a t o T 3 1 0 2 e n u J 0 3 t a e c n a l a B : s r e n w o s a y t i c a p a c r i e h t n i s r e n w o h t i w s n o i t c a s n a r T s t s o c n o i t c a s n a r t f o t e n s e r a h s i y r a n d r o f o e u s s I d o i r e p e h t r o f e m o c n i e v i s n e h e r p m o c l a t o T 4 1 0 2 e n u J 0 3 t a e c n a l a B s t n e m y a p d e s a b e r a h S e c n e r e f f i d n o i t l a s n a r t y c n e r r u c n g e r o F i i . s e t o n g n y n a p m o c c a e h t h t i w n o i t c n u n o c n j i d a e r e b d u o h s l y t i u q e n i s e g n a h c f o t n e m e t a t s d e t a d i l o s n o c e v o b a e h T Consolidated statement of cash flows For the year ended 30 June 2014 Consolidated statement of cash flows for the year ended 30 June 2014 Cash flows from operating activities Cash receipts in course of operations Interest received Interest paid Research and development tax incentive and government grants Cash payments in the course of operations Net cash (outflow) from operating activities Cash flows from investing activities Acquisition of plant, equipment and intangibles Proceeds from sale of plant and equipment Receipts from (Investment in) restricted cash and term deposit Net cash (outflow) from investing activities Cash flows from financing activities Net proceeds from issues of shares Proceeds from borrowings Repayment of borrowings Payment of borrowing costs Finance lease payments Consolidated statement of cash flows For the year ended 30 June 2014 Notes 2014 $ 2013 $ 15,601,190 10,732,977 97,430 (96,579) 95,829 (140,868) 5,226,829 4,763,093 (27,502,511) (18,495,694) (3,044,663) (6,673,641) 10 8(c) (1,263,810) (4,006,642) 189,501 - (3,458,433) 300,000 (4,532,742) (3,706,642) 12,625,293 - - 8,353,192 (1,750,405) (2,822,835) (421,724) (340,835) (16,693) (39,441) 10,436,471 5,150,081 (769,912) (1,601,224) (57,825) 1,393,320 565,583 (6,128) 3,000,672 1,393,320 Net cash inflow from financing activities Net (decrease) in cash and cash equivalents Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at the end of the financial year 7(a) 8 3 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 39   50 51 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014                                                                       Notes to the consolidated financial statements Notes to the consolidated financial statements (continued) 1 Segment information (a) Description of segments The Group has two operating segments, Manufacturing and Quickstep Systems. The following summary describes the operations in each of the Group’s reportable segments: Manufacturing - Targeting manufacturing contracts utilising a range of manufacturing solutions including traditional manufacturing technologies such as autoclaves and ‘next generation’ technologies such as the patented “Quickstep Process”. Quickstep Systems - Licensing our “Quickstep Process” technology to Original Equipment Manufacturers (OEM’s) and their suppliers, and providing them with Quickstep machines and support services. (b) Segment results 2014 External revenues Other income Depreciation, amortisation and impairment Interest expense Reportable segment loss before income tax Reportable segment assets Reportable segment liabilities Reportable capital expenditure 2013 External revenues Other income Depreciation, amortisation and impairment Interest expense Reportable segment loss before income tax Reportable segment assets Reportable segment liabilities Reportable capital expenditure (c) Understanding the segment results Reconciliation of reportable segment loss Total loss for reportable segments Unallocated amount: other corporate expenses Consolidated loss before income tax Manufacturing $ Quickstep Systems $ Total $ 11,955,593 3,292,333 2,236,083 987,468 46,159 2,393,514 195,842 130,662 12,001,752 5,685,847 2,431,925 1,118,130 (4,933,805) 23,671,724 (2,104,508) 6,376,586 (7,038,313) 30,048,310 23,810,203 1,217,643 4,260,905 21,493 28,071,108 1,239,136 Manufacturing $ Quickstep Systems $ Total $ 2,225,997 1,982,433 2,908,176 960,807 336,624 2,245,748 372,358 224,948 2,562,621 4,228,181 3,280,534 1,185,755 (7,598,330) 17,381,122 20,913,124 3,160,200 (2,604,877) 5,097,790 1,177,744 321,924 (10,203,207) 22,478,912 22,090,868 3,482,124 2014 $ 2013 $ (7,038,313) (4,143,088) (10,203,207) (6,782,687) (11,181,401) (16,985,894) 1 Segment information (continued) (c) Understanding the segment results (continued) Reconciliation of reportable segment assets Total assets for reportable segments Unallocated: Other corporate assets Consolidated total assets Reconciliation of reportable segment liabilities Total liabilities for reportable segments Unallocated: Other corporate liabilities Consolidated total liabilities (d) Major customers (continued) 2014 $ 2013 $ 30,048,310 22,478,912 3,138,779 33,187,089 1,649,866 24,128,778 28,071,108 22,090,868 2,027,990 30,099,098 1,772,356 23,863,224 The revenues reported by the manufacturing segment include amounts primarily attributable to the following customers: Northrop Grumman ISS Int, Inc Lockheed Martin Aeronautics $6,267,326 $5,676,668 (e) Geographical information The Manufacturing and Quickstep Systems segments are managed at Quickstep’s head office in Australia. 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. 2014 Australia Germany United States of America Total 2013 Australia Germany United States of America Total Revenue $ Non-current assets $ 46,600 12,995,613 8,980 11,946,172 426,603 69,194 12,001,752 13,491,410 Revenue $ Non-current assets $ 3,300 13,233,270 53,972 2,505,349 544,855 86,526 2,562,621 13,864,651 41   42   52 53 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014               Notes to the consolidated financial statements Notes to the consolidated financial statements 2 Revenue and income Sales revenue Sale of goods Government grant income R & D tax incentive Climate ready grant SADI program grant Other government grant income NACC Total government grant income Other income Profit on sale of assets Other income 3 Expenses (a) Other expenses Amortisation of intangibles Loss on disposal of assets Impairment charge of assets held for sale (b) Personnel expenses Wages and salaries Defined contribution plan expense Other associated personnel expenses Increase in leave liabilities Share based payments expense (continued) 2014 $ 2013 $ 12,001,752 2,562,621 4,463,253 - 157,326 481,453 227,719 5,329,751 3,310,882 (1,451) 128,695 287,470 - 3,725,596 - 457,107 457,107 1,200 501,385 502,585 Notes 2014 $ 2013 $ 8(d) 8(b) 16 53,795 171,076 - 209,060 11,785 1,007,711 224,871 1,228,556 9,379,829 6,949,944 857,769 1,422,536 247,100 308,590 599,779 987,249 107,029 474,543 12,215,824 9,118,544 4 Finance income and expense Interest income Change in fair value of deferred income through profit or loss Gain on settlement of debt by equity instruments Foreign currency gains Finance income Finance lease interest paid Borrowing cost Interest expense on liabilities measured at amortised cost Foreign currency losses Other Finance expenses Net financing costs Recognised in other comprehensive income Foreign currency translation difference for foreign operations Finance income recognised in other comprehensive income, net of tax (continued) 2014 $ 2013 $ 103,918 (201,460) 173,497 66,687 142,642 83,445 201,460 - 70,252 355,157 (1,606) - (3,003) (3,227) (1,118,130) (1,185,755) (1,038,675) - (133,494) (28,215) (2,291,905) (1,220,200) (2,149,263) (865,043) 221,602 221,602 162,102 162,102 5 Loss per share The calculation of basic loss per share at 30 June 2014 was based on the loss attributable to ordinary shareholders of $11,181,401 (2013: $16,985,894) and a weighted average number (W.A.N.) of ordinary shares outstanding during the financial year ended 30 June 2014 of 381,291,850 (2013: 323,412,485) calculated as follows: 2014 2013 Note Actual No. W.A.N. Actual No. W.A.N. Issued ordinary shares 1 July Effect of shares issued on exercise of rights and options to Executives as remuneration Effect of shares issued Effect of shares issued for debt settlement   Issued ordinary shares at 30 June 9(a) 9(a) 323,845,045 323,845,045 322,748,630 322,748,630 2,982,117 1,128,030 1,096,415 663,855 66,640,000 53,891,754 - - 3,990,372 - 397,457,534 381,291,850 323,845,045 323,412,485 2,427,021 - Potential ordinary shares on issue are not considered to be dilutive and therefore the diluted loss per share equals the basic loss per share. Weighted average number of ordinary shares (basic and diluted) 381,291,850 323,412,485 Basic and diluted loss (cents per share) (2.93) (5.25) 2014 2013 54 43   44   55 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014                                     Notes to the consolidated financial statements Notes to the consolidated financial statements (continued) (continued) 6 Income tax expense (a) Income tax expense Current tax Deferred tax Adjustments for current tax of prior periods Income tax benefit reported in the consolidated income statement (b) Numerical reconciliation of income tax expense to prima facie tax payable Loss from continuing operations before income tax expense Tax at the Australian tax rate of 30.0% (2013 - 30.0%) Expenditure not allowable for income tax purposes Effect of different tax rate for overseas subsidiaries Income not assessable Deferred tax asset not brought to account Income tax expense 2014 $ 2013 $ - - - - - - - - (11,181,401) (3,354,420) 2,496,813 108,711 (1,295,611) 2,044,507 - (16,985,894) (5,095,768) 2,719,443 28,981 (1,060,499) 3,407,843 - (c) Tax losses not brought to account The gross balance of unused tax losses for which no deferred tax asset has been recognised. 59,957,561 54,997,902 (d) Temporary differences not brought to account Deferred tax assets/(liabilities): Prepayments Other provisions Borrowing costs Deductible capital raising costs and black hole expenditure Property, plant and equipment Intangibles Deferred tax assets relating to temporary differences not recognised - 844,765 29,174 273,315 1,166,332 207,754 (2,521,340) (3,213) 964,532 43,535 221,000 927,123 207,754 (2,360,731) - - The deductible temporary differences and tax losses do not expire under current tax legislation. Deferred tax assets have not been recognised in respect of these items because it is not probable at this time that future taxable profit will be available against which the Group can utilise such benefits. (e) Tax consolidation legislation Quickstep Holdings Limited and its 100% owned Australian resident subsidiaries have formed a tax consolidated group effective from 1 July 2010. 7 Financial assets and liabilities (a) Cash and cash equivalents Current assets Cash at bank and in hand 2014 $ 2013 $ 565,583 565,583 1,393,320 1,393,320 Cash and cash equivalents of $397,929 have been pledged as collateral against a secured bank loan (refer to Note 7(g)). (b) Trade and other receivables Trade receivables Other receivables: R&D tax incentive and government grants receivable GST and VAT receivable Accrued interest Payroll tax refund receivable Other receivables 2014 Non- current $ Current $ Total $ Current $ 2013 Non- current $ Total $ 2,326,468 - 2,326,468 1,087,096 - 1,087,096 3,500,000 58,622 8,462 278,530 - 3,500,000 3,395,130 - 58,622 38,521 2,237 8,462 - - - 278,530 - 3,395,130 - 38,521 2,237 - - - 8,745 - 8,745 41,319 - 41,319 6,180,827 - 6,180,827 4,564,303 - 4,564,303 Trade and other receivables of $913,640 have been pledged as collateral against a secured bank loan (refer Note 7(g)). (c) Other financial assets Current assets Restricted cash deposits Held to maturity term deposits 2014 $ 2013 $ 3,069,433 779,400 3,848,833 - 390,400 390,400 Restricted cash deposits as at 30 June 2014 include an amount of 2.120m EURO deposited with ANZ Banking Group, the company’s bankers, as guarantee for an advance customer payment pending delivery of goods related to the ORPE Contract. This contract is for the construction and delivery of a “Quickstep Process” machine. Completion of this contract is planned for April 2015. (f) R&D tax offset incentive Held to maturity term deposit comprises of interest bearing term deposits: An R&D tax offset incentive of $3,510,000 (2013: $3,310,882) has been recorded as a receivable as at 30 June 2014 based on eligible expenditure incurred during the year of tax. -­‐-­‐-­‐   -­‐-­‐-­‐   -­‐-­‐-­‐   $115,000 maturing on 7 July 2014 $274,000 maturing on 26 September 2014 $390,400 maturing on 10 May 2015 45   46   56 57 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014           Notes to the consolidated financial statements Notes to the consolidated financial statements (continued) (continued) 2014 $ 2013 $ 340,454 54,264 394,718 359,425 28,005 387,430 7 Financial assets and liabilities (continued) (g) Loans and borrowings Secured bank loan Capitalised interest facility Finance lease liability Short term facility agreement Prepaid borrowing cost 2014 Non- current $ Current $ - - 7,394 - - 10,000,000 1,062,801 8,712 - (615,188) Total $ Current $ 2013 Non- current $ Total $ 10,000,000 1,062,801 16,106 (615,188) - 10,000,000 10,000,000 600,156 - 22,927 6,821 - 1,750,405 - 1,750,405 (842,540) (902,981) (60,441) 600,156 16,106 7 Financial assets and liabilities (continued) (d) Other current assets Current assets Prepayments Other (e) Trade and other payables Trade payables Sundry payables and accrued expenses Royalties payable (i) 2014 Non- current $ Current $ 4,374,324 916,508 - Current $ Total $ - 4,374,324 - - - 738,837 916,508 1,460,178 370,222 2013 Non- current $ Total $ 738,837 - - 1,460,178 654,118 1,024,340 5,290,832 - 5,290,832 2,569,237 654,118 3,223,355 (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. In December 2013, the company issued 3,990,372 Quickstep shares at $0.2126 to VCAMM Limited as full and final repayment of the Heads of Agreement. (f) Deferred income Deferred income 2014 Non- current $ Total $ Current $ 2013 Non- current $ Total $ - 13,809,490 2,795,014 6,086,391 8,881,405 - 13,809,490 2,795,014 6,086,391 8,881,405 Current $ 13,809,490 13,809,490 The amounts reported as deferred income includes amounts received as a 90% prepayment of the first 24 ship sets of C-130J wing flaps to be sold to Lockheed Martin, scheduled to be completed and therefore income recognized by February 2015. It also includes a 70% prepayment received on the contract with ORPE Technologiya for sale and delivery of the company's first “Quickstep Process” machine, scheduled to be delivered and therefore income recognized in April 2015. (i) Term and debt repayment schedule 7,394 10,456,325 10,463,719 1,696,785 9,773,722 11,470,507 2014 2013 Effective interest rate % Year of maturity Maximum facility value Carrying amount Maximum facility value Carrying amount $ $ $ $ Secured bank loan Capitalised Interest Short agreement term facility Finance lease liabilities 9.131 9.131 19.897 8.397 (ii) Secured bank loan 2021 10,000,000 10,000,000 10,000,000 10,000,000 2021 3,333,333 1,062,801 3,333,333 600,156 2013 2014 - n/a - 2,400,000 1,750,405 16,106 n/a 22,297 On 1 November 2011 Quickstep Technologies Pty Ltd, a subsidiary Company of the Group, executed an Export Finance Facility Agreement with Australian and New Zealand Banking Group Limited (ANZ) (Financier) and Export Finance and Insurance Corporation (Efic)(Guarantor) to fund certain capital expenditure. The Agreement provides for a loan facility of up to $10,000,000 plus capitalised interest of up to $3,333,333. At 30 June 2014 the facility had been fully drawn to $10,000,000 together with capitalised interest of $1,062,801. Interest is to be capitalised for the first five years of the facility after which it is payable half yearly in arrears. Loan repayments commence in the fifth year of the facility, with the final repayment due in year 10. The interest rate on the facility comprises a variable base rate, a fixed margin payable to the Financier and a fixed guarantee fee payable to the Guarantor. Unused limit fees are payable to both the Financier and the Guarantor on the undrawn principal balance. The facility includes an interest rate cap that limits the maximum rate applicable to the base rate for the duration of the capitalisation period to 5.03%. This cap ensures that the interest accruing on the facility remains within the capitalised interest limit. The cost of the cap ($680,400) has been recorded as prepaid borrowing cost and is recognised in the profit and loss through the effective interest rate method. Efic has agreed to guarantee certain of the subsidiary’s obligations under the facility. The subsidiary has provided Efic with a fixed and floating charge over its assets and undertakings. The carrying value of total assets pledged as collateral at 30 June 2014 is $24,333,395 which represents the cash and cash equivalents, plant and equipment, inventory and other assets owned by Quickstep Technologies Pty Ltd. 47   48   58 59 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014                             Notes to the consolidated financial statements Notes to the consolidated financial statements (continued) (continued) 8 Non-financial assets and liabilities (a) Inventories Current assets Raw materials and consumables Work in progress 2014 $ 2013 $ 5,162,989 3,097,344 8,260,333 1,404,184 246,490 1,650,674 Inventories of $6,905,757 (2013:$1,557,009) have been pledged as collateral against a secured bank loan (refer to Note 7(g)). (b) Assets classified as held for sale During the previous financial year, following the decommissioning of the Company’s North Coogee facility, the company identified $2,885,711 of plant and equipment which were deemed surplus to the needs of the Company and classified as held for sale. After recognition of $1,007,711 impairment, the fair value and carrying value of these assets was $1,878,000 at 30 June 2013. During the current financial year the Company reassessed the benefits of the surplus assets to the Company in facilitating future growth against the benefits to be derived from the sale of these assets. It was decided that the majority of the surplus assets should be utilised for the JSF Project and were reclassified as plant and equipment. The fair value less cost to sell the remaining assets held for sale at 30 June 2014 is $445,385. The fair value measurement for assets held for sale of $445,385 has been categorized as a Level 2 fair value, based on other observable market transactions for assets of a similar age and condition. 7 Financial assets and liabilities (continued) (g) Loans and borrowings (continued) (ii) Secured bank loan (continued) Under this agreement, Quickstep Technologies Pty Ltd (Chargor) has agreed to the following restrictions on title on any of the assets (Secured Property) that Efic (Chargee) has a fixed charge over. Without the consent of the Chargee, the Chargor may not: • • • dispose of the Secured Property; or lease or license the Secured Property or any interest in it, or deal with any existing lease or licence; or part with possession of the Secured Property; or • waive any of the Chargor’s rights or release any person from its obligations in connection with the Secured Property; or • deal in any other way with the Secured Property or any interest in it, or allow any interest in it to arise or be varied. Quickstep Holdings Limited has entered into a subordination agreement which subordinates certain intercompany debts due to it from Quickstep Technologies Pty Ltd to the amounts due under the Export Finance Facility. The face value of this subordinated intercompany debt at 30 June 2014 is $87,355,883 and its carrying value net of impairment is $47,976,213. (iii) Short term facility agreement On 29 October 2012 Quickstep Holdings Limited executed a Facility Agreement which provided for a loan facility of up to $2,400,000 and was secured against the Australian Taxation Office R&D Tax Offset receivable (note 7(b)). On 9 October 2013, the loan facility was repaid in full and the Facility Agreement was terminated. (iv) Finance lease liabilities Future minimum lease payments Less than one year Between one and five years Interest Less than one year Between one and five years Present value of minimum lease payments Less than one year Between one and five years 2014 $ 2013 $ 8,427 9,129 17,556 8,426 17,555 25,981 2014 $ 2013 $ 1,033 417 1,450 7,394 8,712 16,106 1,605 1,449 3,054 6,821 16,106 22,927 49   50   60 61 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014               Notes to the consolidated financial statements Notes to the consolidated financial statements (continued) (continued) 8 Non-financial assets and liabilities (continued) (c) Property, plant and equipment 8 Non-financial assets and liabilities (continued) (d) Intangible assets At 1 July 2012 Cost or fair value Accumulated depreciation Net book amount Year ended 30 June 2013 Opening net book amount Additions Disposals Transfers Assets held for sale (ii) Effect of movements in exchange rates Depreciation for the year Closing net book amount At 30 June 2013 Cost or fair value Accumulated depreciation Net book amount Year ended 30 June 2014 Opening net book amount Additions Disposals Transfers Assets held for sale (ii) Effect of movements in exchange rates Depreciation for the year Closing net book amount At 30 June 2014 Cost (i) Accumulated depreciation Net book amount Plant and equipment $ Assets under construction $ Office furniture & equipment $ Total $ 19,188,703 (4,694,171) 14,494,532 1,661,307 - 1,661,307 687,036 (351,529) 335,507 21,537,046 (5,045,700) 16,491,346 14,494,532 870,742 (32,641) 2,132,319 (2,885,711) 53,380 (2,874,587) 11,758,034 1,661,307 2,376,201 - (2,587,199) - 1,960 - 1,452,269 335,507 235,181 (121,980) 454,880 - 36,778 (351,440) 588,926 16,491,346 3,482,124 (154,621) - (2,885,711) 92,118 (3,226,027) 13,799,229 17,432,426 (5,674,392) 11,758,034 1,452,269 - 1,452,269 1,309,995 (721,069) 588,926 20,194,690 (6,395,461) 13,799,229 11,758,034 264,403 (163,565) 2,086,492 1,432,615 (7,680) (2,453,055) 12,917,244 1,452,269 866,146 - (2,225,892) - 797 - 93,320 588,926 108,587 (197,012) 139,400 - 5,967 (201,579) 444,289 13,799,229 1,239,136 (360,577) - 1,432,615 (916) (2,654,634) 13,454,853 22,103,601 (9,186,357) 12,917,244 93,320 - 93,320 1,071,002 (626,713) 444,289 23,267,923 (9,813,070) 13,454,853 (i) (ii) Refer to Note 7(g) (ii) for details of fixed and floating charges over certain of the above assets. Refer to note 8(b) for details regarding assets held for sale. At 1 July 2012 Cost Accumulation amortisation and impairment Net book amount Year ended 30 June 2013 Opening net book amount Additions Disposals Effect of movement in exchange rates Amortisation for the year Closing net book amount At 30 June 2013 Cost Accumulation amortisation and impairment Net book amount Year ended 30 June 2014 Opening net book amount Additions Disposals Effect of movement in exchange rates Amortisation for the year Closing net book amount At 30 June 2014 Cost Accumulated amortisation Net book amount (e) Employee benefits Patents & rights $ Royalty buy- back $ Computer software $ Total $ 646,908 (634,491) 12,417 94,419 (84,194) 10,225 739,398 (531,264) 208,134 1,480,725 (1,249,949) 230,776 12,417 - - - (12,417) - 10,225 - - - (10,225) - 208,134 44,730 (2,599) 1,575 (186,418) 65,422 230,776 44,730 (2,599) 1,575 (209,060) 65,422 646,908 (646,908) - 94,419 (94,419) - 689,003 (623,581) 65,422 1,430,330 (1,364,908) 65,422 - - - - - - - - - - - - 65,422 24,674 - 256 (53,795) 36,557 65,422 24,674 - 256 (53,795) 36,557 646,908 (646,908) - 94,419 (94,419) - 714,422 (677,865) 36,557 1,455,749 (1,419,192) 36,557 Liability for annual leave Liability for long service leave 2014 Non- current $ Current $ 473,720 Total $ Current $ 2013 Non- current $ Total $ - 473,720 261,289 - 261,289 - 61,337 61,337 - 26,668 26,668 473,720 61,337 535,057 261,289 26,668 287,957 51   52   62 63 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014                         Notes to the consolidated financial statements Notes to the consolidated financial statements 9 Equity (a) Share capital (i) Share capital 9 Equity (continued) (a) Share capital (continued) (iii) Options Options granted during the year Ordinary shares - fully paid 397,457,534 323,845,045 88,228,474 74,754,828 Expiry date Exercise price Number of options 2014 Shares 2013 Shares 2014 $ 2013 $ During the financial year, the Company granted options as follows. (continued) (continued) (ii) Movements in ordinary share capital Details Opening balance 1 July 2012 Shares issued on exercise of rights Shares issued to employees as remuneration Balance 30 June 2013 Opening balance 1 July 2013 Shares issued on exercise of rights Shares issued to employees as remuneration Shares issued on exercise of options Shares issued for debt settlement Issue of ordinary shares, net of costs Balance 30 June 2014 Notes Number of shares $ (a) (a) (a) (a) (a) (b) (c) 322,748,630 769,130 327,285 74,754,828 - - 323,845,045 74,754,828 323,845,045 2,204,589 471,048 306,480 3,990,372 66,640,000 74,754,828 - - - 848,353 12,625,293 397,457,534 88,228,474 (a) During the year, the Company issued 2,982,117 (2013: 1,096,415) shares pursuant to share-based payment arrangements with certain management personnel. (b) At 30 June 2013 Quickstep Holdings Limited (QHL) and Quickstep Technologies Pty Ltd (QTPL) had an agreement with VCAMM (Victorian Centre for Advanced Materials Manufacturing). This agreement had been in place since 2005. The agreement identified the value for future royalties to be attributed to services provided to the Group by VCAMM and the mechanism for paying those royalties. The balance owing at 30 June 2013 was $1,043,749. In December VCAMM agreed to a full and final settlement of all outstanding amounts by way of shares in QHL. A total of 3,990,372 shares were issued at a value of $848,353 ($0.2126/share). (c) During August and September 2013 QHL raised a total of $12,625,293 in additional capital (after costs of $702,798). The transactions involved raised a total of $5,539,010 across 2 institutional placements and $7,086,238 from the Share Purchase Plan. The Company does not have authorised capital or par value in respect of its issued shares. All issued shares are fully paid. The holders of ordinary shares are entitled to receive dividends as declared from time to time, and are entitled to one vote per share at meetings of the Company. All shares rank equally with regard to the Company’s residual assets. 22 November 2019 $0.00 Unissued shares under option 2014 - 2013 987,739 At 30 June, unissued ordinary shares of the Company under option are: Expiry date Exercise price Number of options 30 March 2017 26 November 2017 23 November 2018 22 November 2019 $0.00 $0.00 $0.00 $0.00 2014 1,091,144 471,337 706,373 987,739 2013 1,397,624 471,337 706,373 987,739 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 year 306,480 (2013: Nil) options were exercised. Lapse of options During the current and prior financial years no options lapsed. 53   54   64 65 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014                     Notes to the consolidated financial statements Notes to the consolidated financial statements 9 Equity (continued) (a) Share capital (continued) (iv) Rights (continued) 10 Cash flow information At 30 June 2014, unissued ordinary shares of the Company under rights totalled 802,000 (2013: 2,425,310). The rights are issued pursuant to: • Executive services agreements, which rights vest at various times in the future according to years of service completed. Offers under the Quickstep Incentive Rights Plan (IRP)., which rights vest at various times in the future upon satisfaction of performance conditions The exercise price of the rights is nil and the rights are forfeited if employment is terminated prior to the vesting date (Refer to Note 16.) During the year 2,204,589 shares (2013: 769,130 shares) were issued as a result of the exercise of rights. 220,720 rights were forfeited in the current year (2013: 434,847). (b) Reserves Balance at 1 July 2012 Grant of rights to shares to employees Grant of options to key management personnel Issue of shares to key management personnel Foreign currency translation differences At 30 June 2013 Balance at 1 July 2013 Grant of rights to shares to key management personnel Grant of options to key management personnel Issue of shares to key management personnel Foreign currency translation differences At 30 June 2014 (c) Retained earnings / (Accumulated losses) Balance 1 July Net loss for the year Balance 30 June Share- based payments $ 2,613,956 278,219 141,340 54,984 - 3,088,499 3,088,499 89,469 87,035 132,086 - 3,397,089 Foreign currency translation $ Total $ (291,257) 2,322,699 278,219 141,340 54,984 162,102 (129,155) 2,959,344 - - - 162,102 (129,155) 2,959,344 89,469 87,035 132,086 221,602 92,447 3,489,536 - - - 221,602 2014 $ (77,448,618) (11,181,401) (88,630,019) 2013 $ (60,462,724) (16,985,894) (77,448,618) Reconciliation of cash flows from operating activities to loss after income tax; Loss for the year Adjustments for: Amortisation of intangibles Depreciation Interest income Share based payment expense Loss on disposal of assets Non-cash finance costs Impairment / (writeback) - - - - - - - - Gain on settlement of debt by equity instruments Foreign currency losses - - Foreign currency gains - Other finance expense - Present value on deferred income Operating loss before changes in working capital Change in operating assets and liabilities: (Increase)/decrease in trade and other receivables Increase in inventories Increase in other current assets Increase/(decrease) in trade and other payables Increase/(decrease) in employee benefits Increase in deferred income (Increase)/decrease in prepaid interest Net cash used in operating activities (continued) 2014 $ 2013 $ (11,181,401) (16,985,894) 53,795 2,654,634 (103,918) 308,590 171,076 1,118,130 (27,898) (173,497) 1,038,675 (66,687) 133,494 (201,460) (6,276,467) (1,615,524) (6,609,659) (7,288) 2,308,947 247,100 4,928,085 351,165 (6,673,641) 209,060 3,226,027 - 474,543 - 1,185,755 1,007,711 - - - - 201,460 (10,681,338) 351,675 (1,232,083) (61,129) (65,999) (5,004) 8,881,405 (232,190) (3,044,663) 11 Financial instruments - fair values and risk management (a) Overview The Group has exposure to the following risks from their use of financial instruments: • • credit risk; liquidity risk; and • market risk. This note presents information about the 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 these financial statements. 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 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 Group’s activities. The Group, through training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The Group’s Audit, Risk and Compliance Committee oversees how management monitors compliance with the 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 Group. 55   56   66 67 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014         Notes to the consolidated financial statements Notes to the consolidated financial statements (continued) (continued) 11 Financial instruments - fair values and risk management (continued) 11 Financial instruments - fair values and risk management (continued) (b) Credit risk (c) Liquidity 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 and deposits. (i) Trade receivables The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. However, management also considers other characteristics including the demographics of the Group’s customer base, the default risk of the industry and country in which customers operate, as these factors may have 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. (ii) Cash balances and deposits 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 A+ from Standard & Poor’s. Given these high credit ratings, management has assessed the risk that counterparties fail to meet their obligations as low. As at the reporting date, no financial assets are neither past due or impaired. (iii) 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 cash equivalents Held-to-maturity financial assets Trade and other receivables Restricted cash deposits 2014 $ 565,583 779,400 6,180,827 3,069,433 2013 $ 1,393,320 390,400 4,564,303 - 10,595,243 6,348,023 As at 30 June 2014, no financial asset was considered past due (2013: nil). As at 30 June 2014, no financial asset was considered impaired (2013: nil). The Group’s maximum exposure to credit risk for trade and other receivables at the reporting date by geographic region was: Australia Germany USA 3,882,803 1,286,625 1,011,399 6,180,827 3,441,686 38,686 1,083,931 4,564,303 Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquid assets 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 or funds otherwise reasonably available to it from fundraising activities to meet expected operational expenses, including the servicing of financial obligations; this excludes the potential impact of circumstances that cannot reasonably be predicted. Further details are set out in note 19(d). (i) Maturities of financial liabilities The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements: Contractual maturities of financial liabilities Contractual Between 1 Between 2 Trade and other payables Finance lease liabilities Secured bank loan 5,290,832 16,106 (5,290,832) (5,290,832) (4,213) (17,555) - (4,213) - (8,427) - (702) - - 10,447,613 (15,550,315) (150,000) (150,000) (1,020,445) (8,309,809) (5,920,061) 15,754,551 (20,858,702) (5,445,045) (154,213) (1,028,872) (8,310,511) (5,920,061) At 30 June 2013 VCAMM royalties payable Trade and other payables Finance lease liabilities Secured bank loan Short term facility agreement (d) Market risk 1,024,340 2,199,015 22,927 (1,043,749) (183,989) (2,199,015) (2,199,015) (4,213) (150,000) (25,982) 9,757,616 (15,978,578) (183,989) - (4,213) (150,000) (675,771) - (8,427) - - (9,129) (300,000) (6,177,885) - - - (9,200,693) 1,689,964 (1,878,455) (1,878,455) - - - - 14,693,862 (21,125,779) (4,415,672) (338,202) (984,198) (6,187,014) (9,200,693) 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. (i) Interest rate risk The Group is exposed to interest rate risk predominantly on cash balances and deposits. Given the relatively short investment horizon for these, management has not found it necessary to establish a policy on managing the exposure of interest rate risk. 57   58   68 69 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014                                 Notes to the consolidated financial statements (continued) Notes to the consolidated financial statements (continued) 11 Financial instruments - fair values and risk management (continued) 11 Financial instruments - fair values and risk management (continued) (d) Market risk (continued) The Group has entered into a variable rate secured loan agreement for a period of 10 years. The facility includes an allowance to defer interest payments up to $3,333,333 over the first 5 years of the loan, with interest to be accrued on the deferred amount. Interest is re-set on a monthly basis in accordance with the 30 days bank bill rate. The facility includes an interest rate cap which limits the bank bill rate component of the variable rate to a maximum of 5.03%. This limit will ensure that the interest to be capitalised will not exceed the capitalisation limit. Profile At the reporting date the interest rate profile of the Group’s interest-bearing financial assets/(liabilities) was: Fixed rate instruments Held-to-maturity term deposits Finance lease liabilities Variable rate instruments Cash and cash equivalents Secured bank loan Short term facility agreement 2014 $ 2013 $ 779,400 (16,106) 763,294 390,400 (22,927) 367,473 565,583 (11,062,801) - 1,393,320 (10,600,156) (1,750,405) (10,497,218) (10,957,241) Cash includes funds held in short term deposits during the year, which earned a weighted average interest rate of 1.6% (2013: 3.19%). The interest rates applicable to the Group’s finance leases are 8.40% (2013: 12.99%). Financial assets held-to-maturity includes three security deposits as follows; • • • $115,000 with an interest rate of 2.0%, maturing on 7 July 2014 $274,000 with an interest rate of 3.08%, maturing on 26 September 2014 $390,400 with an interest rate of 3.35%, maturing on 10 May 2015 The secured loan balance (inclusive of capitalised interest) incurs a variable rate of interest, inclusive of a base rate plus margin. The Group has purchased an interest rate cap which limits the base rate for the first five years of the loan to 5.03%. The base rate plus margin of this facility was 4.26% at 30 June 2014. The short term facility agreement incurred a rate of interest of the higher of 12.5% or the aggregate of the BBR on the first day of the interest period and 9% per annum. This facility was repaid in full in September 2013 (refer Note 7(g)(iii)). 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. 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 in the following table. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis for 2013. (d) Market risk (continued) Effect in AUD Variable rate instruments - increase by 100 basis points Variable rate instruments - decrease by 100 basis points Cash flow sensitivity (net) (ii) Currency risk 2014 $ (104,972) 104,972 - 2013 $ (13,933) 13,933 - 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), Euro (EUR) and US Dollar (USD). The currencies in which these transactions primarily are denominated are AUD, EUR and 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 investments in its German and USA subsidiaries are not hedged as the currency positions are considered to be long-term in nature. Exposure The Group's exposure to foreign currency risk at the end of the reporting period, expressed in Australian dollar, was as follows: Receivables Cash Trade payables 30 June 2014 30 June 2013 USD $ 3,251,010 132,646 (279,849) EUR $ 1,429,419 46,261 (120,460) 3,103,807 1,355,220 USD $ 20,531 186,904 (80,538) 126,897 EUR $ 54,462 621,601 (24,249) 651,814 The following significant exchange rates applied during the year: AUD v USD AUD v EUR Sensitivity analysis Average rate Reporting date spot rate 2014 2013 2014 2013 0.9184 0.6770 1.0270 0.7936 0.9420 0.6906 0.9275 0.7095 A 10 percent movement of the Australian dollar against the Euro and US Dollar at 30 June would have increased (decreased) profit or loss and equity on balances denominated in foreign currencies by the amounts shown in the following table. This analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for 2013. 59   60   70 71 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014               Notes to the consolidated financial statements Notes to the consolidated financial statements (continued) (continued) 11 Financial instruments - fair values and risk management (continued) (d) Market risk (continued) Index US/AUD exchange rate - increase (10%) US/AUD exchange rate - decrease 10% EUR/AUD exchange rate - increase (10%) EUR/AUD exchange rate - decrease 10% (e) Capital management Increase/(decrease) in loss Increase/(decrease) in equity 2014 $ 299,537 (366,101) 178,398 (218,042) (106,208) 2013 $ (38,146) 46,623 (32,042) 39,162 2014 $ (391,873) 478,956 (329,611) 402,858 2013 $ (118,127) 144,378 (235,335) 287,632 15,597 160,330 78,548 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 and borrowings so as to fund its working capital and commercialisation of technology requirements. There were no changes in the Group’s approach to capital management during the year. The Company and its subsidiaries were subject to the requirement in the new Efic loan facility that the net asset position at 30 June, 2014 exceeded $3,000,000. Fair value hierarchy As at the reporting date, all financial instruments held by Quickstep Holdings Limited are considered level 1 in the fair value hierarchy. Quickstep Holdings Limited’s financial instruments are primarily made up of cash and cash equivalents and trade receivables and payables, to which there is active market to ascertain its value. During the year, there have been no transfers from levels in the fair value hierarchy. 12 Group entities Name of entity Parent entity Quickstep Holdings Limited Controlled entities Quickstep Technologies Pty Ltd Quickstep Operations Pty Ltd Quickstep GmbH Quickstep Composites LLC Quickstep Australia Pty Ltd Commercial Aerospace Composites Australia Pty Ltd Country of incorporation Ownership interest 2013 2014 % % Australia 100.0 100.0 Australia Australia Germany USA Australia Australia 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 13 Capital and other commitments (a) Non-cancellable operating leases Non-cancellable operating lease contracted for but not capitalised in the financial statements payable as follows: - Within one year - - Later than one year but not later than five years Later than five years 2014 $ 2013 $ 1,234,730 8,096,621 7,253,238 998,662 7,685,481 8,852,388 16,584,589 17,536,531 The Company's operating lease commitments comprise of four property leases, and three capital finance agreements for IT equipment. The first property lease relates to premises at Bankstown, NSW. It is a non-cancellable lease with a ten year term with two options to renew for five years each. This lease contains provision for rent reviews on an annual basis. The second property lease relates to premises at Bankstown, NSW. It is a non-cancellable with a ten year term with two options to renew for five years each. It contains provision for rent reviews on an annual basis. The third property lease relates to premises at Ottobrunn, Germany. It is a non-cancellable with a ten year term with two options to renew for five years each. It contains provision for rent reviews on an annual basis. The fourth property lease relates to premises at Dayton, Ohio which is leased on a monthly basis. (b) Capital commitments The Group’s commitments in respect of plant and equipment contracted for but not provided for are set out below: Payable - within one year 14 Subsequent events Since the end of the financial year the Group: 2014 $ 2013 $ - - 588,401 588,401 • Secured support from Efic for the bonds of $3m, disclosed within Other Financial Assets, associated with the ORPE program. This has allowed the Group access to the previously restricted funds; and • Secured from Efic a $2.5m working capital guarantee facility to support the anticipated growth in production volumes; and • Received a customer advance payment of $2.3m; and • Commenced the process of closing down the US office and is in the advanced stages of transferring the activities to a licensee. Other than the matters referred to above, 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 2014. 61   62   72 73 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014             Notes to the consolidated financial statements Notes to the consolidated financial statements (continued) (continued) 15 Related party transactions (a) Key management personnel compensation The key management personnel compensation included in “Personnel expenses” in note 3(b) is as follows: Short-term employee benefits Post-employment benefits Share-based payments Termination benefits 2014 $ 2,638,893 141,323 238,080 28,846 2013 $ 2,387,006 145,265 435,873 81,120 3,047,142 3,049,264 Individual Directors and Executives compensation (key management personnel remuneration) disclosures Information regarding individual Directors’ and Executives’ compensation and some equity instruments disclosures as required 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. (b) Disposal of equity accounted investments 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. During the financial year, this investment was sold to London Wall Investments Pty Limited, of which Mark Jenkins is a director. 16 Share-based payments (a) Quickstep Employee Incentive Plan The Company previously established the Quickstep Employee Incentive Plan (EIP). Under the EIP, the Board may grant options to selected Quickstep employees on such terms as it determines appropriate. Participation in the EIP is open to all employees of the Group, with the Board determining those employees eligible to participate in each grant under the EIP. Each option is a conditional right to one Quickstep ordinary share, subject to the satisfaction of the applicable performance conditions and payment of the exercise price (if any). Further details regarding the EIP are set out in the Remuneration Report. At 30 June 2014, Mr P Odouard is the only employee to be granted options pursuant to the EIP. No options were granted during FY14 under the EIP, which has been replaced by the Incentive Rights Plan (IRP) as set out at Note 16 (b) below. The number and weighted average exercise prices (WAEP) of options issued under the EIP are as follows: Employee Incentive Plan As at 1 July Granted during the year Exercised during the year As at 30 June Exercisable as at 30 June 2014 2013 Number WAEP Number WAEP 3,563,073 - (306,480) 3,256,593 - $0.00 - $0.00 $0.00 $0.00 2,575,334 987,739 - 3,563,073 - $0.00 $0.00 - $0.00 $0.00 The weighted average share price at the date of exercise for share options exercised in FY14 was $0.21 (2013: no options exercised). Details of the fair value of unvested options granted are set out below Grant Tranche 3 Tranche 4 2010 year 2011 year 2012 year Total No. of options Fair value per option at the grant date Total fair value $ 619,446 471,698 471,337 706,373 987,739 3,256,593   $0.3150 $0.2700 $0.3620 $0.1730 $0.1250 $195,125 $127,358 $170,624 $122,203 $123,467 $738,777 During 2014, an expense of $87,035 (2013:$141,340) has been recognized in the financial statements in respect of the portion of the fair value of options attributable to the current financial year as required by accounting standards. A Monte-Carlo simulation has been used to value Tranche 3 and 4 and the 2010 year, 2011 year and 2012 year grants that had a future vesting condition at the grant date of the options. Assumptions used in the valuation of the options in Tranche 3, 4 and 2010 year, 2011 year and 2012 year at grant date included the following: Grant date First testing date Expiry date Share price at grant date Exercise price Expected life (years) Volatility Risk free interest rate Dividend yield 30/03/2010 30/06/2011 30/03/2017 $0.35 Nil 1.3 80% 4.66% 0% 30/03/2010 30/06/2012 30/03/2017 $0.35 Nil 2.3 80% 5.01% 0% 26/11/2010 30/06/2013 26/11/2017 $0.41 Nil 2.9 75% 5.07% 0% 23/11/2011 31/08/2014 23/11/2018 $0.21 Nil 3.1 75% 3.08% 0% 22/11/2012 31/082015 23/11/2019 $0.17 Nil 3.0 55% 2.68% 0% 63   64   74 75 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014           Notes to the consolidated financial statements Notes to the consolidated financial statements (continued) (continued) 16 Share-based payments (continued) (b) Quickstep Incentive Rights Plans During the year the Company established the Quickstep Incentive Rights Plan (IRP). The IRP has been designed to facilitate the Company moving towards best practice remuneration structures for executives. The IRP authorises the granting of Rights to executives of the Company, in the form of Performance Rights (PRs) and/ or Deferred Rights (DRs) (together, Rights). These rights represent an entitlement on vesting to fully paid ordinary shares in the issued capital of the Company (Shares) and cash with the total value of cash and Shares being equal to the value of vested Rights (number of vested Rights x market value of a Share). PRs may vest if Performance Conditions are satisfied. DRs may vest if service conditions are satisfied. The 2013-14 offer to Mr P Odouard consisted of PRs only. Further details regarding the IRP are set out in the Remuneration Report. At 30 June 2014 Mr Odouard is the only employee to be granted rights pursuant to the IRP. Details of the fair value of unvested rights are set out below. Grant 2013 year No. of rights Fair value per right at the grant date Total fair value $ 802,000 $0.1520 $121,904 Total $121,904 During FY14 an expense of $26,569 (2013: nil) has been recognized in the financial statements in respect of the portion of the fair value of rights attributable to the current financial year as required by accounting standards. 802,000 A Monte-Carlo model was used to value the rights per dollar issued. The model’s key assumptions were as follows: 2013 year 31/08/2013 30/08/2016 30/08/2018 $0.195 Nil 3.3 years 55% 15% 0% Tranche Grant date First testing date Expiry date Share price at grant date Exercise price Expected life (years) Volatility of QHL Volatility of AOAI Dividend yield Movements in the IRP are as follows: Incentive Rights Plan As at 1 July Granted during the year As at 30 June Exercisable as at 30 June 2014 Number 2013 Number - 802,000 802,000 - - - - - (c) Executive performance and retention bonus During the 2012 financial year the Company granted rights over 2,200,621 shares with a fair value of $547,840 through an Executive performance and retention bonus scheme. The rights were due to vest on 31 December 2013 subject to performance of criteria related to the Company’s relocation objectives, and were conditional upon continued employment. In the event that the share price of the Company at the exercise date was below $0.18, the number of shares to be issued was to be increased by the percentage variation of the share price from $0.18. The rights were valued at fair value based on a Monte Carlo simulation at the issue date. An expense of $62,275 (2013:$210,413) has been included in the financial statements as the portion of the offer attributable to the current financial year as required by accounting standards. 16 Share-based payments (continued) (c) Executive performance and retention bonus (continued) A Monte-Carlo model was used to value the rights per dollar issued. The model’s key assumptions were as follows: Input / assumption Valuation/Grant date Maturity date Share price at grant date Volatility Risk free rate Dividend yield Trigger price Issue price Value 10 February 2012 31 December 2013 $0.17 70% 3.55% Nil $0.18 $0.2092 The performance conditions relating to these rights were partially satisfied, and the rights vested on 31 December 2013. 1,545,054 shares were subsequently issued and allotted to executives under the scheme who had also fulfilled their employment conditions; being a 12.5% reduction on the full amount granted. The share price at the date of allotment was $0.175. All rights under this scheme have either vested or been forfeited as at 30 June 2014, and all shares issued as required. Movements in performance and retention bonus rights during the year were as follows: Executive performance and retention bonus Performance rights on issue July 1 Performance rights exercised Performance rights forfeited Performance rights on issue 30 June (d) Loyalty bonus 2014 Number 2013 Number 1,765,774 (1,545,054) (220,720) - 2,200,621 - (434,847) 1,765,774 Rights have been issued to a number of key management personnel in prior years as long term retention incentives. The rights were to vest in two tranches, provided the employee remained employed with the Group, with 1/3 vesting 2 years from the date granted and 2/3 vesting 3 years from the date granted. The rights were valued at the market value of the Group’s shares on the date of issue of the rights. An expense of $625 (2013: $104,509) has been included in the financial statements as the portion of the offer attributable to the current financial year as required by accounting standards. 659,535 rights vested (2013: 769,131 rights vested) during the period. The weighted average share price at the date of vesting of the 656,535 rights was $0.22. All rights under this scheme have vested as at 30 June 2014 and all shares issued as required. Movements in loyalty bonus rights during the year were as follows: Loyalty bonus Performance rights on issue July 1 Performance rights exercised Performance rights granted Performance rights on issue 30 June 2014 Number 2013 Number 659,535 (659,535) - - 1,173,303 (769,131) 255,363 659,535 65   66   76 77 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014               Notes to the consolidated financial statements Notes to the consolidated financial statements (continued) 16 Share-based payments (continued) (e) Equity settled short term incentive Certain executives receive short term incentives (STI) in cash and/or shares based on achievement of key performance indicators (KPIs). Each year the RN&D Committee considers the appropriate targets and KPIs and the alignment of individual rewards to the Group’s performance. These targets may include measures related to the annual performance of the Group and/or specified parts of the Group and are measured against actual outcomes. The number of shares issued to executives is based on the accrued equity settled STI value divided by the weighted average share price on the date the shares are granted. 471,048 shares (2013: nil) were issued to employees as consideration for $102,217 of short term incentives paid in respect of short term incentive achievement in the previous financial year. Incentives accrued for in the current year of $125,673 (2013: $95,804) are expected to be settled through share based payments during the next financial year. (f) Employee expenses The expense recorded in the financial report for the portion attributable to the current financial year as required by accounting standards is: Equity settled short term incentive IRP, performance and retention and loyalty bonus share rights granted EIP options 17 Remuneration of auditors (a) KPMG (i) Audit and other assurance services Amounts received or due and receivable by the auditor for: Audit services KPMG - current year KPMG - under accrual from prior year 2014 $ 132,086 89,469 87,035 2013 $ 101,307 231,896 141,340 308,590 474,543 2014 $ 2013 $ 179,600 30,000 209,600 171,100 100,667 271,767 18 Parent entity financial information (a) Summary financial information As at, and throughout, the financial year ending 30 June 2014 the parent company of the Group was Quickstep Holdings Limited. (continued) Results of the parent entity Loss for the period Other comprehensive income Financial position of the parent entity at year end Current assets Total assets Current liabilities Total liabilities Net Assets Total equity of the parent entity comprises of: Share capital Share based payments reserve Accumulated losses Total Equity 2014 $ 2013 $ (43,737,897) 221,602 1,694,792 162,102 (43,516,295) 1,856,894 4,217,115 4,217,115 3,869,695 35,541,672 640,207 640,207 2,358,178 2,358,178 3,576,908 33,183,494 88,228,474 3,334,983 74,754,874 2,677,272 (87,986,549) (44,248,652) 3,576,908 33,183,494 67   68   78 79 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014               Notes to the consolidated financial statements Notes to the consolidated financial statements 19 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 2014 comprise the Company and its subsidiaries (together referred to as the “Group” and individually as “Group Entities”). The Group is a for-profit entity and is primarily involved in the manufacture of composite components for the aerospace industry, and licensing its “Quickstep Process” technology to Original Equipment Manufacturers and suppliers, and providing them with Quickstep machines and support services. (continued) (b) Basis of preparation Statement of compliance The consolidated financial statements are general purpose financial statements, which have been prepared in accordance with the Australian Accounting Standards (AASBs) adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The consolidated financial statements of the Group comply with the International Financial Reporting Standards (IFRS) adopted by the International Accounting Standards Board (IASB). The consolidated financial statements were authorised for issue by the Board of Directors on 30 September 2014. Basis of measurement The financial statements are prepared on the historical cost basis. These consolidated financial statements are presented in Australian dollars, which is the Company’s functional currency. (continued) 19 Significant accounting policies (continued) (d) Going concern The Group has incurred a loss after tax for the year ended 30 June 2014 of $11,181,401 (2013: loss after tax of $16,985,894). The loss reflects the ongoing commercialisation of the Group which was largely completed in the 2014 financial year. This activity was funded through a combination of advanced payments from customers (which have been recognized as deferred income in the financial statements), equity raisings and loan facilities. The level of production of JSF components and C-130J wing flaps increased in the 2014 financial year, and Management and the Directors expect this to continue as the Group has received orders to the value of $49 million with more than 50% of these orders to be fulfilled in 2015. Consequently, the Directors expect the Group to become cash flow positive in 2015. The revenue (and cash flow) of the Group however, is materially dependent on continuing firm orders for the JSF project and C-130J wing flaps and the continued payment profile of those orders and that cash flows arising from these payments are sufficient to fund ongoing operations. Should this not occur, the ability of the Group to continue as a going concern in the ordinary course of business and to achieve its business growth strategies and objectives would be dependent on the Group securing additional funding. The Directors consider that there are reasonable grounds to expect the Group will be able to meet its commitments and accordingly, the financial report has been prepared on the basis of a going concern. This basis presumes that orders and prepayments for the JSF project and C-130J wing flaps will continue and will fund operations and that the realisation of assets and settlement of liabilities will occur in the normal course of business. However, should the flow of orders and prepayments for the JSF project and C-130J wing flaps not continue as anticipated, there is some uncertainty as to whether the Group would continue as a going concern. Use of estimates and judgements (e) Basis of consolidation The preparation of financial statements 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. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. 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 19 (d) - Financial position and going concern; • Note 8 (b) - Recoverable amount of assets held for sale; • Note 8 (c) - Recoverable amount of property, plant and equipment; • Note 7 (e) - Royalties payable; and • Note 16 - Share-based payments (c) 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. The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Quickstep Holdings Limited (“Company” or “parent entity”) as at 30 June 2014 and the results of all subsidiaries for the year then ended. Quickstep Holdings Limited and its subsidiaries together are referred to in the financial statements as the consolidated entity or the Group. A subsidiary is any entity controlled by the Company. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group, and de-consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. 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 unless there is appropriate evidence to the contrary. 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. 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 zero 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. 69   70   80 81 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014         Notes to the consolidated financial statements Notes to the consolidated financial statements (continued) (continued) 19 Significant accounting policies (continued) (f) Foreign currency translation 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 at that date. Foreign exchange differences arising on translation are recognised in profit and loss. 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. 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 in other comprehensive income, and presented in the foreign currency translation reserve (translation reserve) in equity. When a foreign operation is disposed of, in part or in full, the relevant amount in the FCTR is transferred to the statement of comprehensive income. 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. (g) Financial instruments (i) Non-derivative financial assets The Group initially recognises loans and receivables and deposits on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. The Group de-recognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset of liability. (ii) Non-derivative financial liabilities All financial liabilities (including liabilities designated at fair value through profit or loss) are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. The Group de- recognises a financial liability when its contractual obligations are discharged or cancelled or expire. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. The Group has the following non-derivative financial liabilities recorded at amortised cost: • Trade and other payables • Royalties payable (refer note 7 (e). • Loans and borrowings, including a secured loan facility from the ANZ Bank of $10 million plus capitalised interest facility of $3.3 million. A secured loan from Macquarie Bank for the R&D factoring facility was repaid in full during the year. 19 Significant accounting policies (continued) (g) Financial instruments (continued) (iii) 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. (iv) Compound financial instruments 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. (h) Property, plant and equipment Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling the items and restoring the site on which they are located and capitalised borrowing costs. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. The gain or loss on disposal of an item of property, plant and equipment is determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and is recognised net within other income/other expense in profit or loss. Government grants that compensate the Group for the cost of an asset are recognised as a deduction in arriving at the carrying value of the asset. Depreciation Depreciation is based on the cost of an asset less its residual value. Significant components of individual assets are assessed and if a component has a useful life that is different from the remainder of the asset, that component is depreciated separately. Depreciation is recognised in profit and loss on a reducing balance basis over the estimated useful lives of each component of an item of property plant and equipment. The depreciation rates used for each class of depreciable asset for the current and prior years are: Class of depreciable asset Depreciation rate Plant and factory equipment 6.67% to 37.50% Office equipment 6.67% to 50.00% 71   72   82 83 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014         Notes to the consolidated financial statements Notes to the consolidated financial statements (continued) (continued) 19 Significant accounting policies (continued) 19 Significant accounting policies (continued) (i) Intangible assets (i) Research and development Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised in the statement of comprehensive income as an expense as incurred. Development activities involve a plan or design of new or substantially improved products and processes. Development expenditure is only capitalised if development costs can be measured reliably, the product or process is technically or commercially feasible, future economic benefits are probable and the Group intends to and has sufficient resources to complete development and to use or sell the asset. The expenditure capitalised includes the cost of materials, direct labour and overheads costs that are directly attributable to preparing the asset for its intended use and capitalised borrowing costs. Capitalised development expenditure is measured at cost less accumulated amortisation and accumulated impairment losses. (ii) Other Intangible Assets Other intangible assets that are acquired by the Group and have finite useful lives are measured at cost less accumulated amortisation and accumulated impairment losses. (iii) Amortisation Amortisation is based on the cost of an asset less its residual value. Amortisation is recognised in profit and loss on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill, from the date that they are available for use. The estimated useful lives in the current and comparative periods are as follows: (i) Intangible assets (continued) Licences, patents and rights to technology Royalty buy-back Capitalised development costs Software (j) Leased assets 10 years 10 years 5 – 10 years 2 ½ years 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 statement of financial position. (k) Inventories Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the first in first out principle, and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based on normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. (l) Impairment (i) Non-Derivative Financial assets A financial asset not carried at fair value through profit and loss is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event has a negative effect on the estimated future cash flows of that asset that can be measured reliably. 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. (ii) 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 (the value in use of the asset in the cash generating unit (CGU) to which it relates) is estimated each year at the same time. An impairment loss is recognised if the carrying amount of an asset exceeds its estimated recoverable amount. Impairment losses are recognised in the statement of comprehensive income 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 statement of comprehensive income. 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. 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. 73   74   84 85 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014         Notes to the consolidated financial statements (continued) Notes to the consolidated financial statements 19 Significant accounting policies (continued) (m) Employee entitlements Wages, salaries, annual leave and non-monetary benefits Liabilities for wages and salaries, including non-monetary benefits, annual leave and accumulating sick leave expected to be settled within 12 months after the end of the period in which the employees render the related service are recognised in respect of employee's services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. The liability for annual leave and accumulating sick leave is recognised in the provision for employee benefits. All other short-term employee benefit obligations are presented as payables. The liabilities for long service leave and annual leave are not expected to be settled wholly within 12 months after the end of the period in which the employees render the related service. They are therefore recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting period using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the end of the reporting period of government bonds with terms and currencies that match, as closely as possible, the estimated future cash outflows. Remeasurements as a result of experience adjustments and changes in actuarial assumptions are recognised in profit or loss. Share-based payment transactions An expense is recognised for all equity-based remuneration and other transactions, including shares, rights and options issued to employees and directors. The fair value of equity instruments 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 equity instruments granted is measured using a generally accepted valuation model, taking into account the terms and conditions upon which the equity instruments were granted. The fair value of shares, options and rights granted is measured based on relevant market prices at the grant date. (n) Revenue Revenue from sale of goods is recognised in the profit and loss when persuasive evidence exists, usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the buyer, recovery of consideration is probable, the associated costs and possible return of the goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably. 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 statement of comprehensive income 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. (continued) 19 Significant accounting policies (continued) (o) Government grants Government grants that compensate the Group for expenses incurred 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 and are recognised in profit or loss as other income on a systematic basis in the same periods in which the expenses are recognised. Grants that compensate the Group for the cost of an asset are recognised as a deduction in arriving at the carrying value of the asset. (p) Lease payments Payments made under operating leases are recognised in the statement of comprehensive income on a straight- line basis over the term of the lease. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Determining whether an arrangement contains a lease At inception of an arrangement, the Group determines whether such an arrangement is or contains a lease. A specific asset is the subject of a lease if fulfilment of the arrangement is dependent on the use of that specified asset. An arrangement conveys the right to use the asset if the arrangement conveys to the Group the right to control the use of the underlying asset. (q) Finance income and finance costs Finance income comprises interest income on funds invested (including available-for-sale financial assets), dividend income, gains on the disposal of available-for-sale financial assets and fair value gains on financial assets at fair value through profit and loss. Interest income is recognised as it accrues in profit and loss, using the effective interest method. Finance costs comprise interest expense on borrowings calculated using the effective interest method, 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 profit and loss using the effective interest method. (r) Income tax Income tax expense comprises current and deferred tax. Current tax and deferred tax is recognised in profit and loss except to the extent that it related to a business combination, or items recognised directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantially enacted at reporting date, and any adjustment to tax payable in respect of previous years. Current tax payable also includes any tax liability arising from the declaration of dividends. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill. Deferred income tax is also not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. 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. 75   76   86 87 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014         Notes to the consolidated financial statements Notes to the consolidated financial statements (continued) 19 Significant accounting policies (continued) (r) Income tax (continued) 19 Significant accounting policies (continued) (v) New accounting standards and interpretations not yet adopted (continued) Quickstep Holdings Limited and its subsidiaries 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. Adoption of these standards and interpretations has not resulted in any material changes to the Group’s financial statements. (s) Goods and Services Tax (GST) New accounting standards (continued) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the consolidated balance sheet. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flows. (t) Earnings per share (i) Basic earnings per share Basic earnings per share is calculated by dividing: • • the profit attributable to owners of the Company, excluding any costs of servicing equity other than ordinary shares by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year and excluding treasury shares. (ii) Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account: • • the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares, and the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. (u) Segment reporting Determination and presentation of operating segments An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. All operating segments’ operating results are regularly reviewed by the Group’s CEO to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Segment results that are reported to the CEO include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate assets (primarily the Company’s headquarters), head office expenses, and income tax assets and liabilities. Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment, and intangible assets other than goodwill. (v) New accounting standards and interpretations not yet adopted The Group has adopted all new and amended Australian Accounting Standards and Australian Accounting Standards Board (AASB) interpretations that are mandatory for the current reporting period and relevant to the Group. Several new accounting standards have been published that are not mandatory for this reporting period and have not yet been adopted by the Group. • AASB 9 Financial Instruments (2010); The impact of these changes are still being fully assessed, however, initial assessments indicate that there will be no significant impact on the Group’s financial statements. (w) Changing Comparatives Where necessary, comparative disclosures have been reclassified to conform with current year presentation.   20 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. (a) Trade and other receivables The fair value of trade and other receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. This fair value is determined for disclosure purposes. (b) Non-derivative financial liabilities Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. In respect of the liability component of convertible notes and loans, the market rate of interest is determined by reference to similar liabilities that do not have a conversion option. For finance leases the market rate of interest is determined by reference to similar lease agreements. (c) Share-based payment transactions The fair value of the Employee Incentive Plan (EIP) is measured using Monte Carlo Simulation. The fair value of the share rights is measured using the Black-Scholes formula. Measurement inputs include share price on measurement date, the exercise price of the instrument, expected volatility (based on weighted average historic volatility adjusted for expected changes expected due to publicly available information), expected term of the instruments (based on historical experience and general option holder behaviour), expected dividends, and the risk-free interest rate (based on government bonds). In the case of the EIP, market performance conditions attaching to the grant are taken into account in the Monte Carlo Simulation in determining fair value. Service and non-market performance conditions attached to the EIP transactions are not taken into account in determining fair value. (d) Derivatives The fair value of forward exchange contracts is based on their quoted market price, if available. If a quoted market price is not available, then fair value is estimated by discounting the difference between the contractual forward price and the current forward price for the residual maturity for the contract using a risk-free interest rate. 77   78   88 89 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014         Directors’ declaration Lead Auditor’s Independence Declaration Directors’ declaration for the year ended 30 June 2014 In the Directors' opinion: (a) the financial statements and notes set out on pages 47 to 89 are in accordance with the Corporations Act 2001, including: (i) (ii) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements, and giving a true and fair view of the consolidated entity's financial position as at 30 June 2014 and of its performance for the year ended on that date, and there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable, and at the date of this declaration, there are reasonable grounds to believe that the members of the extended closed group will be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the deed of cross guarantee. (b) (c) The level of production of JSF components and C-130J wing flaps increased in the 2014 financial year, and Management and the Directors expect this to continue as the Group has received orders to the value of $49 million with more than 50% of these orders to be fulfilled in 2015. Consequently, the Directors expect the Group to become cash flow positive in 2015. The revenue (and cash flow) of the Group, however, is materially dependent on continuing firm orders for the JSF project and C-130J wing flaps and the continued payment profile of those orders. Should this not occur, the ability of the Group to continue as a going concern in the ordinary course of business and to achieve its business growth strategies and objectives would be dependent on the Group securing additional funding. Further information can be found in Note 19 (d) Note 19(b) confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The Directors have been given the declarations by the chief executive officer and chief financial officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of Directors. Mr. Tony Quick Director Sydney, New South Wales 30 September 2014 79   90 91 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014     Independent Auditor’s Report to the Members of Quickstep Holdings Limited Independent Auditor’s Report to the Members of Quickstep Holdings Limited 92 93 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014Shareholder information Shareholder information DETAILS OF SHARES AND OPTIONS AS AT 26 SEPTEMBER 2014 Voting rights The voting attaching to ordinary shares are: • On a show of hands every member present in person or by proxy shall have one vote • 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  associated  have  a  relevant  interest  are  set  out  below:   Substantial Shareholder No. Of Shares % Washington H Soul Pattinson and Company Limited 68,172,570 Brickworks Limited State One Capital Group 68,172,570 21,248,389 17.71%1 17.71%2 6.09%3 1. Details included on substantial shareholder notice dated 24 September 2013 2. Details included on initial substantial shareholder notice dated 20 December 2013. Shares held by Brickworks Limited represent a technical relevant interest as a result of Brickworks Limited’s shareholding in Washington H. Soul Pattinson and Company Limited 3. Details included on substantial shareholder notice dated 29 August 2013 On Market buy back There is no current on-market buy back. Distribution Schedules Distribution of each class of security as at 26 September 2014 Ordinary fully paid shares Range 1 1,001 5,001 10,001 100,000 Total 1,000 5,000 10,000 100,000 Over Holders Units 430 1,051 906 2,677 558 5,622 130,426 3,446,697 7,618,299 100,135,106 286,127,006 397,457,534 Options exerciseable at $0.00 on or before 30 March 2017 Options exerciseable at $0.00 on or before 26 November 2017 Options exerciseable at $0.00 on or before 23 November 2019 - - - - - - - - - - - - - - - - % 0.03 0.87 1.92 25.19 71.99 100.00 % - - - - 100.00 100.00 % - - - - 100.00 100.00 % - - - - 100.00 100.00 % - - - - 100.00 100.00 83   Unmarketable parcels Holdings less than a marketable parcel of ordinary shares (being 2,942 shares at $0.17 per share). Holders 886 Units 1,065,720 84   94 95 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014                                                                                                                     Shareholder information Corporate Directory Quickstep Holdings Limited Shareholder information 30 June 2014 Top Holders The 20 largest registered holder of each class of quoted security as at 26 September 2014 were: Rank Holder Name Securities % Washington H Soul Pattinson And Company Limited 68,172,570 17.15 Decta Holdings Pty Ltd WSF Pty Ltd Romadak Pty Ltd National Nominees Ltd State One Holdings Pty Ltd HSBC Custody Nominees (Australia) Limited Mirrabooka Investments Ltd Vcamm Ltd State One Stockbroking Pty Ltd Best Holding Pty Ltd Philippe Odouard Sandhurst Trustees Ltd Yarraandoo Pty Ltd Sols Super Pty Ltd Prunelle Holding Pty Ltd Equilibrium Pensions Limited Gellatly DC + EMR Citicorp nominees Pty Ltd Code Nominees Pty Ltd Total Top 20 12,611,891 10,333,235 8,597,976 5,697,422 3,930,977 3,783,134 3,500,000 3,114,757 3,090,641 2,928,846 2,440,685 2,347,543 2,271,576 2,109,567 2,077,692 2,003,450 1,900,000 1,810,597 1,778,000 3.17 2.60 2.16 1.43 0.99 0.95 0.88 0.78 0.78 0.74 0.61 0.59 0.57 0.53 0.52 0.50 0.48 0.46 0.45 144,500,559 36.34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 96 Directors Mr T Quick Executive Chairman Mr P M Odouard Executive Director Mr N Ampherlaw Independent Non-Executive Director Mr P Cook Independent Non-Executive Director Mr B Griffiths Independent Non-Executive Director Mr M B Jenkins Independent Non-Executive Director Mr E J McCormack Independent Non-Executive Director Mr D Singleton Independent Non-Executive Director Secretary Mr J Pinto Principal Office 361 Milperra Road Bankstown Airport New South Wales 2200 Australia Telephone: +61 2 9774 0300 Facsimile: +61 2 9771 0256 Email: info@quickstep.com.au www.quickstep.com.au Registered Office Level 2, 160 Pitt Street Sydney New South Wales 2000 Auditor KPMG Chartered Accountants 10 Shelley Street Sydney Australia 2000 Solicitors Clifford Chance Level 7, 190 St Georges Terrace Perth Western Australia 6000 Patent Attorney Watermark Building 1, Binary Centre Level 3, 3 Richardson Place North Ryde New South Wales 2113 Share Registry Security Transfer Registrars Pty Ltd 110 Stirling Highway Applecross Western Australia 6153 Stock Exchange Australian Securities Exchange Limited Exchange Centre, 20 Bridge Street Sydney New South Wales 2000 ASX Code QHL 85   97 Quickstep Holdings Limited I Annual Report 2014Quickstep Holdings Limited I Annual Report 2014         www.quickstep.com.au 

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